Tuesday, 

August 3, 2004 

Part II 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 403, 411, 417, and 423 

Medicare Program; Medicare Prescription 

Drug Benefit; Proposed Rule 

46632 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 403, 411, 417, and 423 

[CMS–4068–P] 

RIN 0938–AN08 

Medicare Program; Medicare 

Prescription Drug Benefit 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement the new Medicare 

Prescription Drug Benefit. This new 

voluntary prescription drug benefit 

program was enacted into law on 

December 8, 2003, in section 101 of the 

Medicare Prescription Drug, 

Improvement and Modernization Act of 

2003 (MMA). The addition of a 

prescription drug benefit to Medicare 

represents a landmark change to the 

Medicare program that will significantly 

improve the health care coverage 

available to millions of Medicare 

beneficiaries. The MMA specifies that 

the prescription drug benefit program 

will become available to beneficiaries 

beginning on January 1, 2006. Please see 

the executive summary in the 

SUPPLEMENTARY INFORMATION section for 

further synopsis of this rule. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on October 4, 2004. 

ADDRESSES: In commenting, please refer 

to file code CMS–4068–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

three ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments to http:// 

www.cms.hhs.gov/regulations/ 

ecomments (attachments should be in 

Microsoft Word, WordPerfect, or Excel; 

however, we prefer Microsoft Word). 

2. By mail. You may mail written 

comments (one original and two copies) 

to the following address only: Centers 

for Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–4068–P, P.O. 

Box 8014, Baltimore, MD 21244–8014. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7197 in advance to schedule your 

arrival with one of our staff members. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection of 

Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Lynn Orlosky (410) 786–9064 or Randy 

Brauer (410)786–1618 (for issues related 

to eligibility, elections, enrollment, 

including auto-enrollment of dual 

eligible beneficiaries, and creditable 

coverage). 

Wendy Burger (410) 786–1566 (for 

issues related to marketing and user 

fees). 

Vanessa Duran-Scirri (214) 767–6435 

(for issues related to benefits and 

beneficiary protections, including Part D 

benefit packages, Part D covered drugs, 

coordination of benefits in claims 

processing and tracking of true-out-ofpocket costs, pharmacy network access 

standards, plan information 

dissemination requirements, and 

privacy of records). 

Craig Miner, RPh. (410) 786–1889 or 

Tony Hausner (410) 786–1093 (for 

issues of pharmacy benefit cost and 

utilization management, formulary 

development, quality assurance, 

medication therapy management, and 

electronic prescribing). 

Mark Newsom (410) 786–3198 (for 

issues of submission, review, 

negotiation, and approval of risk and 

limited risk bids for PDPs and MA–PD 

plans; the calculation of the national 

average bid amount; determination and 

collection of enrollee premiums; 

calculation and payment of direct and 

reinsurance subsidies and risk-sharing; 

and retroactive adjustments and 

reconciliations.) 

Jim Owens (410) 786–1582 (for issues 

of licensing and waiver of licensure, the 

assumption of financial risk for 

unsubsidized coverage, and solvency 

requirements for unlicensed sponsors or 

sponsors who are not licensed in all 

States in the region in which it wants to 

offer a PDP.) 

Terese Klitenic (410) 786–5942 (for 

issues of coordination of Part D plans 

with providers of other prescription 

drug coverage including Medicare 

Advantage plans, state pharmaceutical 

assistance programs (SPAPs), Medicaid, 

and other retiree prescription drug 

plans; also for issues related to 

eligibility for and payment of subsidies 

for assistance with premium and costsharing amounts for Part D eligible 

individuals with lower income and 

resources; for rules for states on 

eligibility determinations for lowincome subsidies and general state 

payment provisions including the 

phased-down state contribution to drug 

benefit costs assumed by Medicare). 

Frank Szeflinski (303) 844–7119 (for 

issues related to conditions necessary to 

contract with Medicare as a PDP 

sponsor, as well as contract 

requirements, intermediate sanctions, 

termination procedures and change of 

ownership requirements; employer 

group waivers and options; also for 

issues related to cost-based HMOs and 

CMPS offering Part D coverage.) 

John Scott (410) 786–3636 (for issues 

related to the procedures PDP sponsors 

must follow with regard to grievances, 

coverage determinations, and appeals.) 

Tracey McCutcheon (410) 786–6715 

(for issues related to solicitation, review 

and approval of fallback prescription 

drug plan proposals; fallback contract 

requirements; and enrollee premiums 

and plan payments specific to fallback 

plans.) 

Jim Mayhew (410) 786–9244 (for 

issues related to the alternative retiree 

drug subsidy.) 

Joanne Sinsheimer (410) 786–4620 

(for issues related to physician selfreferral prohibitions.) 

Brenda Hudson (410) 786–4085 (for 

issues related to PACE organizations 

offering Part D coverage.) 

Julie Walton (410) 786–4622 or 

Kathryn McCann (410) 786–7623 (for 

issues related to provisions on Medicare 

supplemental (Medigap) policies.) 

For general questions: Please call 

(410) 786–1296. 

SUPPLEMENTARY INFORMATION: 

Executive Summary. Generally, 

coverage for the prescription drug 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46633 

benefit will be provided under private 

prescription drug plans (PDPs), which 

will offer only prescription drug 

coverage, or through Medicare 

Advantage prescription drug plans 

(MA–PDs), which will offer prescription 

drug coverage that is integrated with the 

health care coverage they provide to 

Medicare beneficiaries under Part C of 

Medicare. PDPs must offer a basic 

prescription drug benefit. MA–PDs must 

offer either a basic benefit or broader 

coverage for no additional cost. If this 

required level of coverage is offered, the 

PDP or MA–PD plan may also offer 

supplemental benefits through 

enhanced alternative coverage for an 

additional premium. All organizations 

offering drug plans will have flexibility 

in the design of the prescription drug 

benefit. Consistent with the MMA, this 

proposed rule provides for subsidy 

payments to sponsors of qualified 

retiree prescription drug plans. 

We intend to implement the drug 

benefit to permit and encourage a range 

of options for Medicare beneficiaries to 

augment the standard Medicare 

coverage for drug costs above the initial 

coverage limit ($2250 in 2006) and 

below the annual out-of-pocket 

threshold ($5100 in 2006). In addition to 

the coverage established by the statute 

for low-income beneficiaries, we seek 

comments on the best way to support 

options for expanding beneficiaries’

drug coverage. Potential options include 

facilitating coverage through employer 

plans, MA–PD plans and/or high-option 

PDPs, as well as through charity 

organizations and State pharmaceutical 

assistance programs. We specifically 

seek comments on ways to maximize 

the continued use of non-Medicare 

resources (private contributions, 

employer/union contributions, state 

contributions, health plan contributions, 

and other sources) that currently 

provide at least partial coverage for 

three-fourths of Medicare beneficiaries. 

See sections II.C, II.J, and II.P, and II R 

of this preamble for further details on 

these issues. We are also considering 

establishing a CMS demonstration to 

evaluate possible ways of achieving 

such extended coverage, and we 

welcome all suggestions in this regard. 

Throughout the preamble, we identify 

options and alternatives to the 

provisions we propose. We strongly 

encourage comments and ideas on our 

approach and on alternatives to help us 

design the Medicare Prescription Drug 

Benefit Program to operate as effectively 

and efficiently as possible in meeting 

the needs of Medicare beneficiaries. 

Although this proposed rule specifies 

most of the requirements for 

implementing the new prescription drug 

program, readers should note that we 

are also issuing a closely related 

proposed rule that concerns Medicare 

Advantage plans, which will usually 

combine medical and prescription drug 

coverage. In addition, although this 

proposed rule specifies requirements 

related to PDP regions it does not 

designate those regions. Regional 

boundary decisions will be made 

through a separate process. Additional 

non-regulatory guidance on this and 

other topics will also be forthcoming. 

We have considered and, in some 

places, have identified how this 

proposed rule intersects with other 

Federal laws, such as the Health 

Insurance Portability and 

Accountability Act (HIPAA) of 1996 

Certification of Creditable Coverage and 

the HIPAA Privacy Rule. We are 

interested in learning how this proposed 

rule may interact with other legal 

obligations to which the PDP sponsors 

and MA–PD plans may be subject and 

intend to make appropriate changes in 

the final rule to address such issues. 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. Comments will be most useful 

if they are organized by the section of 

the proposed rule to which they apply. 

You can assist us by referencing the file 

code [CMS–4068–P] and the specific 

‘‘issue identifier’’ that precedes the 

section on which you choose to 

comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. After the close of the 

comment period, CMS posts all 

electronic comments received before the 

close of the comment period on its 

public Web site. 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, phone 410–786–

7197. 

Copies: To order copies of the Federal 

Register containing this document, send 

your request to: New Orders, 

Superintendent of Documents, P.O. Box 

371954, Pittsburgh, PA 15250–7954. 

Specify the date of the issue requested 

and enclose a check or money order 

payable to the Superintendent of 

Documents, or enclose your Visa or 

Master Card number and expiration 

date. Credit card orders can also be 

placed by calling the order desk at (202) 

512–1800 (or toll-free at 1–888–293–

6498) or by faxing to (202) 512–2250. 

The cost for each copy is $10. As an 

alternative, you can view and 

photocopy the Federal Register 

document at most libraries designated 

as Federal Depository Libraries and at 

many other public and academic 

libraries throughout the country that 

receive the Federal Register. This 

Federal Register document is also 

available from the Federal Register 

online database through GPO Access, a 

service of the U.S. Government Printing 

Office. The Web site address is: http:// 

www.access.gpo.gov/fr/index.html. 

I. Background 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Background’’ at the beginning of your 

comments.) 

A. Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 

Section 101 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) amended Title XVIII of the 

Social Security Act (the Act) by 

redesignating Part D as Part E and 

inserting a new Part D, which 

establishes the Voluntary Prescription 

Drug Benefit Program. (For ease of 

reference, we will refer to the new 

prescription drug benefit program as 

Part D of Medicare and the Medicare 

Advantage Program as Part C of 

Medicare.) We believe that the new Part 

D benefit constitutes the most 

significant change to the Medicare 

program since its inception in 1965. The 

addition of outpatient prescription 

drugs to the Medicare program reflects 

Congress’ recognition of the 

fundamental change in recent years in 

how medical care is delivered in the 

U.S. It recognizes the vital role of 

prescription drugs in our health care 

delivery system, and the need to 

modernize Medicare to assure their 

availability to Medicare beneficiaries. 

This proposed rule is designed to ensure 

broad participation in the new benefit 

both by organizations that offer 

prescription drug coverage and by 

eligible beneficiaries. In conjunction 

with complementary improvements to 

the Medicare Advantage program, these 

changes should significantly increase 

the coverage and choices available to 

Medicare beneficiaries. Effective 

January 1, 2006, the new program 

46634 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

establishes an optional prescription 

drug benefit for individuals who are 

entitled to or enrolled in Medicare 

benefits under Part A and/or Part B. 

Beneficiaries who qualify for both 

Medicare and Medicaid (full-benefit 

dual eligibles) will automatically 

receive the Medicare drug benefit. The 

statute also provides for assistance with 

premiums and cost sharing to eligible 

low-income beneficiaries. 

In general, coverage for the new 

prescription drug benefit will be 

provided through private prescription 

drug plans (PDPs) that offer drug-only 

coverage, or through Medicare 

Advantage (MA) (formerly known as 

Medicare+Choice) plans that offer 

integrated prescription drug and health 

care coverage (MA–PD plans). PDPs 

must offer a basic drug benefit. MA–PDs 

must offer either a basic benefit or 

broader coverage for no additional cost. 

If this required level of coverage is 

offered, the PDP or MA–PD plan may 

also offer supplemental benefits through 

enhanced alternative coverage for an 

additional premium. 

All organizations offering drug plans 

will have flexibility in terms of benefit 

design, including the authority to 

establish a formulary to designate 

specific drugs that will be available 

within each therapeutic class of drugs, 

and the ability to have a cost-sharing 

structure other than the statutorily 

defined structure, subject to certain 

actuarial tests. The plans also may 

include supplemental drug coverage 

such that the total value of the coverage 

offered exceeds the value of basic 

prescription drug coverage. The specific 

sections of the Act that address the 

prescription drug benefit program are 

the following: 

1860D–1 Eligibility, enrollment, and 

information. 

1860D–2 Prescription drug benefits. 

1860D–3 Access to a choice of 

qualified prescription drug coverage. 

1860D–4 Beneficiary protections for 

qualified prescription drug coverage. 

1860D–11 PDP regions; submission of 

bids; plan approval. 

1860D–12 Requirements for and 

contracts with prescription drug plan 

(PDP) sponsors. 

1860D–13 Premiums; late enrollment 

penalty. 

1860D–14 Premium and cost-sharing 

subsidies for low-income individuals. 

1860D–15 Subsidies for Part D eligible 

individuals for qualified prescription 

drug coverage. 

1860D–16 Medicare Prescription Drug 

Account in the Federal 

Supplementary Medical Insurance 

Trust Fund. 

1860D–21 Application to Medicare 

Advantage program and related 

managed care programs. 

1860D–22 Special rules for employersponsored programs. 

1860D–23 State pharmaceutical 

assistance programs. 

1860D–24 Coordination requirements 

for plans providing prescription drug 

coverage. 

1860D–41 Definitions; treatment of 

references to provisions in Part C. 

1860D–42 Miscellaneous provisions. 

Specific sections of the MMA that 

also relate to the prescription drug 

benefit program are the following: 

Sec. 102 Medicare Advantage 

Conforming Amendments 

Sec. 103 Medicaid Amendments 

Sec. 104 Medigap 

Sec. 109 Expanding the work of 

Medicare Quality Improvement 

Organizations to include Parts C and 

D. 

B. Organizational Overview of Part 423 

The regulations set forth in this 

proposed rule will be codified in the 

new 42 CFR part 423—Prescription 

Drug Benefit Program. There are a 

number of places in which statutory 

provisions in Part D incorporate by 

reference specific sections in Part C of 

Medicare (the Medicare Advantage 

program). The MA regulations appear at 

42 CFR part 422. Since the same 

organizations that offer MA coordinated 

care plans will also be required to offer 

MA–PD plans, we believe it is 

appropriate to adopt the same 

organizational structure as part 422. MA 

coordinated care plans (defined in 

§ 1851(a)(2)(A)) are a type of Medicare 

Advantage plan. For example, 

requirements relating to eligibility, 

election, and enrollment would be set 

forth in subpart B of new part 423, just 

as they now are set forth in subpart B 

of part 422. Therefore, wherever 

possible, we have modeled the proposed 

prescription drug regulations on the 

parallel provisions of the part 422 

regulations. 

The major subjects covered in each 

subpart of part 423 are as follows: 

Subpart A, General Provisions: Basis 

and scope of the new part 423, 

Definitions and discussion of important 

concepts used throughout part 423, and 

sponsor cost-sharing in beneficiary 

education and enrollment-related costs 

(user fees). 

Subpart B, Eligibility, Election, and 

Enrollment: Eligibility for enrollment in 

the Part D benefit, enrollment periods, 

disenrollment, application of the late 

enrollment penalty, approval of 

marketing materials and enrollment 

forms, and the meaning and 

documentation of creditable coverage. 

(Please note that other, related topics, 

are discussed in the following subparts: 

Subpart P, eligibility and enrollment for 

low-income individuals; Subpart S, 

provisions relating to the phase-down of 

state contributions for dual-eligible drug 

expenditures; Subpart F, calculation 

and collection of late enrollment fees; 

Subpart C, plan disclosure; Subpart Q, 

eligibility and enrollment for fallback 

plans; and Subpart T, the definition of 

a Medicare supplemental (Medigap) 

policy.) 

Subpart C, Benefits and Beneficiary 

Protections: Prescription drug benefit 

coverage, service areas, network and 

out-of-network access, formulary 

requirements, dissemination of plan 

information to beneficiaries, and 

confidentiality of enrollee records. 

(Please note that actuarial valuation of 

the coverage offered by plans, as well as 

the submission of the bid, is discussed 

in subpart F. Access to negotiated prices 

is discussed in subpart C, while the 

reporting of negotiated prices is 

discussed in subpart G. Formularies are 

discussed in subpart C, while the 

appeals of formularies are discussed in 

subpart M. Incurred costs toward true 

out-of-pocket (TrOOP expenditures) are 

discussed in subpart C, while the 

procedures for determining whether a 

beneficiary’s Part D out-of-pocket costs 

are actually reimbursed by insurance or 

another third-party arrangement are 

discussed in subpart J. Information that 

plans must disseminate to beneficiaries 

is discussed in subpart C, while Part D 

information that CMS must disseminate 

to beneficiaries is discussed in subpart 

B.) 

Subpart D, Cost Control and Quality 

Improvement Requirements for 

Prescription Drug Benefit Plans: 

Utilization controls, quality assurance, 

medication therapy, and fraud, waste 

and abuse, as well as rules related to 

identifying enrollees for whom 

medication therapy management is 

appropriate, consumer satisfaction 

surveys, and accreditation as a basis for 

deeming compliance. 

Subpart E, Reserved. 

Subpart F, Submission Of Bids and 

Monthly Beneficiary Premiums; Plan 

Approval: Bid submission, the actuarial 

value of bid components, review and 

approval of plans, and the calculation 

and collection of Part D premiums. 

Subpart G, Payments To PDP 

Sponsors and MA Organizations 

Offering MA–PD Plans for All Medicare 

Beneficiaries for Qualified Prescription 

Drug Coverage: Data submission, 

payments and reconciliations for direct 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46635 

subsidies, risk adjustment, reinsurance, 

and risk-sharing arrangements. 

Subpart H, Reserved. 

Subpart I, Organization Compliance 

With State Law and Preemption By 

Federal Law: Licensure, assumption of 

financial risk, solvency, and State 

premium taxes. 

Subpart J, Coordination Under Part D 

With Other Prescription Drug Coverage: 

Applicability of Part D rules to the 

Medicare Advantage program, waivers 

available to facilitate the offering of 

employer group plans, and procedures 

to facilitate calculation of true out-ofpocket expenses and coordination of 

benefits with State pharmaceutical 

assistance programs and other entities 

that provide prescription drug coverage. 

(Please note that subpart C discusses, in 

more detail, coordination of benefits 

and the determination of which 

incurred beneficiary costs will be 

counted as TrOOP expenditures. 

Provisions relating to disenrollment for 

material misrepresentation by a 

beneficiary are discussed in subpart J 

and also referenced in subpart B.) 

Subpart K, Application Procedures 

and Contracts With PDP Sponsors: 

Application procedures and 

requirements; contract terms; 

procedures for termination of contracts; 

reporting by PDP sponsors. 

Subpart L, Effect of Change of 

Ownership or Leasing of Facilities 

During Term of Contract: Change of 

ownership of a PDP sponsor; novation 

agreements; leasing of a PDP sponsor’s 

facilities. 

Subpart M, Grievances, Coverage 

Determinations and Appeals: Coverage 

determinations by sponsors, exceptions 

procedures, and all levels of appeals by 

beneficiaries. 

Subpart N, Medicare Contract 

Determinations and Appeals: 

Notification by CMS about unfavorable 

contracting decisions, such as 

nonrenewals or terminations; 

reconsiderations; appeals. 

Subpart O, Intermediate Sanctions: 

Provisions concerning available 

sanctions for participating 

organizations. 

Subpart P, Premiums and CostSharing Subsidies for Low-Income 

Individuals: Eligibility determinations 

and payment calculations for lowincome subsidies. 

Subpart Q, Guaranteeing Access to a 

Choice of Coverage (Fallback Plans): 

Definitions; access requirements; 

bidding process; contract requirements. 

Subpart R, Payments to Sponsors of 

Retiree Prescription Drug Plans: 

Provisions for making retiree drug 

payments to sponsors of qualified 

retiree prescription drug plans. 

Subpart S, Special Rules for States—

Eligibility Determinations for Subsidies 

and General Payment Provisions: State/ 

Medicaid program’s role in determining 

eligibility for low-income subsidy and 

other issues related to the Part D benefit. 

In addition, in subpart T, this 

proposed rule also provides changes to: 

Part 403 relating to Medicare 

supplemental policies (Medigap), part 

411 relating to exclusions from 

Medicare and limitations on Medicare 

payment (the physician self-referral 

rules), part 417 relating to cost-based 

HMOs, part 460 relating to PACE 

organizations, and part 442 relating to 

Medicaid amendments. 

II. Provisions of the Proposed Rule 

A. General Provisions 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘General Provisions’’ at the beginning of 

your comments.) 

1. Overview 

Section 423.1 of subpart A specifies 

the general statutory authority for the 

ensuing regulations and indicates that 

the scope of part 423 is to establish 

requirements for the Medicare 

prescription drug benefit program. 

Section 423.4 of subpart A provides 

definitions for terms that appear in 

multiple sections of part 423 and whose 

meaning we believe should be featured 

prominently in order to aid the reader. 

Consistent with the MMA statute, we 

are in many cases proposing procedures 

that parallel those now in effect under 

the Medicare Advantage program (for 

example the regulations concerning PDP 

and MA–PD plan contract and appeal 

requirements). We anticipate receiving 

at least two categories of comments on 

such provisions: (1) Recommendations 

for changes that would impact only the 

proposed Part D provisions (based for 

example on underlying differences 

between the MA and Part D programs); 

and (2) recommendations for changes 

that would impact both the MA and Part 

D provisions. Our goal is to maintain 

consistency between these two 

programs wherever possible; thus we 

will evaluate the need for parallel 

changes in the MA final rule when we 

receive comments on provisions that 

affect both programs. 

2. Discussion of Important Concepts and 

Key Definitions (§ 423.4) 

a. Introduction 

For the most part, the definitions in 

the proposed rule are taken directly 

from section 1860D–41 of the Act. The 

definitions set forth in subpart A apply 

to all of part 423 unless otherwise 

indicated, and are applicable only for 

the purposes of part 423. For example, 

‘‘insurance risk’’ applies only to 

pharmacies that contract with PDP 

sponsors under part 423. Definitions 

that have a more limited application are 

not included in subpart A, but instead 

are set forth within the relevant subpart 

of the regulations. For example, in 

subpart F, we have included all the 

definitions related to bids and 

premiums. The detailed definitions and 

requirements related to prescription 

drug coverage are included in subpart C, 

but because of their direct relevance to 

the bidding process they are also 

referenced in subpart F. 

Following our discussion of important 

concepts, we provide brief definitions of 

terms that occur in multiple sections of 

this preamble and part 423. We believe 

that it is helpful to define these 

frequently occurring terms to aid the 

reader but that these terms do not 

require the extended discussion 

necessary in our section on important 

concepts. 

b. Discussion of Actuarial Equivalence, 

Creditable Prescription Drug Coverage, 

PDP Plan Regions, Service Area, and 

User Fees 

i. Discussion of the Meaning of 

Actuarial Equivalence 

The concept of actuarial equivalence 

is applied in different contexts in Title 

I of the MMA, including: 

Determinations related to creditable 

coverage (subpart B), determinations 

related to the value of drug coverage and 

bid components (subpart F); and 

determinations related to subsidy 

payments for employer or union 

sponsors of qualified retiree health 

plans that include prescription drugs 

(subpart R). In very general terms, 

actuarial equivalence refers to a 

determination that, in the aggregate, the 

dollar value of drug coverage for a set 

of beneficiaries under one plan can be 

shown to be equal to the dollar value for 

those same beneficiaries under another 

plan. Given the various uses for this 

term in the Part D context, we propose 

the following relatively general 

definition: 

‘‘Actuarial equivalence’’ means a state 

of equivalent values demonstrated 

through the use of generally accepted 

actuarial principles and in accordance 

with section 1860D–11(c) of the Act and 

§ 423.265(c)(3) of this part. 

This concept is discussed in further 

detail below and in those sections of 

this preamble, such as section II.F, 

where actuarial equivalence comes into 

play. 

46636 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

According to section 1860D–11(c) of 

the Act, we will develop processes and 

methods using generally accepted 

actuarial principles and methodologies 

for determining the actuarial valuation 

of prescription drug coverage. Although 

the statute sets forth specific 

requirements for actuarial equivalence 

and valuation, there is no formal 

definition of actuarial equivalence. 

Also, in each of the contexts described 

above, we must address the question of 

whether actuarial equivalence is 

determined from the perspective of the 

plan, or the beneficiary. 

In the sections dealing with actuarial 

equivalence throughout this proposed 

rule, we have tried to avoid being overly 

prescriptive, in order to maintain 

flexibility to adjust and refine the 

needed valuation processes as we gain 

more experience with the 

administration of the new benefit. Thus, 

we fully expect to provide additional 

guidance in the future on these 

provisions. 

ii. Discussion of the Meaning of 

Creditable Prescription Drug Coverage 

The types of coverage considered 

creditable prescription drug coverage in 

proposed 42 CFR 423.4 are discussed in 

the preamble to subpart B. 

In the preamble to subpart T, we 

discuss in more detail the effect of Part 

D on Medigap policies, one of the forms 

of drug coverage that may be creditable 

if it meets the actuarial equivalence test. 

iii. Prescription Drug Plan Regions 

Prescription drug plan regions are 

areas in which a contracting PDP plan 

must provide access to covered Part D 

drugs. Although we have included 

specifications for regions in § 423.112, 

the regions themselves are not set forth 

in this proposed rule. To the extent 

feasible, we intend that the PDP regions 

will be consistent with the regions 

established for the MA program (see 

§ 422.455 of the MA proposed rule). In 

establishing the regions for both 

programs, we will use the results of a 

market survey that includes the 

examination of current insurance 

markets. MMA specifically states that 

there will be no fewer than 10 regions 

and no more than 50 regions, not 

including the territories. For a further 

discussion of the PDP regions, see 

section II.C of this preamble. 

iv. Service Area 

Medicare beneficiaries are eligible to 

enroll in a PDP or an MA–PD plan only 

if they reside in the PDP’s or MA–PD 

plan’s ‘‘Service Area.’’ As noted above, 

for PDPs, this is the Region established 

by CMS pursuant to proposed § 423.112, 

within which the PDP is responsible for 

providing access to the Part D drug 

benefit in accordance with the access 

standards in proposed § 423.120. Under 

the MA program, an MA plan’s Service 

Area is defined in § 422.2. For 

coordinated care plans, the definition of 

‘‘service area’’ expressly includes the 

condition that the service area is an area 

in which access is provided in 

accordance with access standards in 

§ 422.112. 

Prior to this rulemaking, we had not 

considered how this access requirement 

in the MA plan Service Area definition 

would apply to a jail or prison within 

the boundaries of a plan Service Area. 

Beneficiaries incarcerated there clearly 

would not have access to services as 

required under § 422.112. Such an area 

thus would not meet the coordinated 

care plan definition of ‘‘Service Area,’’

which requires that such access 

standards be met. This issue never arose 

under the MA program because there 

would be no reason for an individual to 

enroll in an MA plan while 

incarcerated, since services typically are 

all covered by the jail or prison and the 

prisoner could always enroll in an MA 

plan without penalty upon being 

released. 

We have however, considered this 

issue in the context of Part D benefits. 

If a prison or jail is located within the 

boundaries of a PDP region, or an MA 

PDP-plan Service Area, a Medicareeligible individual incarcerated there 

technically would reside within the 

service area, and be eligible to enroll to 

receive Part D benefits. Under this 

scenario, such an individual then would 

have to pay a penalty for not enrolling 

while in prison if he or she enrolled in 

Part D upon being released. 

We do not believe this to be an 

equitable result, as the beneficiary 

would face the choice of paying for 

services he or she would not be 

receiving, or paying a penalty at a later 

time. We also do not believe that it 

would be appropriate for a PDP or MA–

PD plan to receive monthly Part D 

payments for such an individual, since 

drugs typically would be covered for the 

individual by the prison or jail. Such 

payments would represent an 

unwarranted ‘‘windfall’’ for services the 

PDP or MA–PD would not have to 

deliver. 

In focusing on this situation, we have 

decided to propose that for purposes of 

enrolling in Part D with a PDP, or under 

an MA–PD plan, the definition of 

Service Area that governs eligibility to 

enroll is the area within which the Part 

D access standards under § 423.120 are 

met. 

Beneficiaries in jail or prison do not 

have access to pharmacies available as 

required under § 423.120. Therefore, 

such beneficiaries would not be 

considered to be in a PDP or MA–PD 

plan’s Service Area for purposes of 

enrolling in Part D. Incarcerated 

individuals accordingly would not be 

assessed a late penalty when they enroll 

in Part D (either with a PDP or MA–PD 

plan) upon being released. 

We note that the analysis above 

would apply equally to a beneficiary 

who lives abroad, and does not reside 

within the boundaries of any PDP 

Region or MA–PD Service Area. 

v. Sponsor Cost-Sharing in Beneficiary 

Education and Enrollment Related 

Costs—User Fees (§ 423.6) 

The last section of subpart A proposes 

regulations implementing the user fees 

provided for in section 1857(e)(2) of the 

Act, as incorporated by section 1869D–

12(b)(3)(D) of the Act. These fees are 

currently required of MA plans for the 

purpose of defraying part of the ongoing 

costs of the national beneficiary 

education campaign that includes 

developing and disseminating print 

materials, the 1–800 telephone line, 

community based outreach to support 

State health insurance assistance 

programs (SHIPs), and other enrollment 

and information activities required 

under section 1851 of the Act and 

counseling assistance under section 

4360 of the Omnibus Budget 

Reconciliation Act of 1990 (Pub. L. 103–

66). 

The MMA expands the user fee to 

apply to PDP sponsors as well as MA 

plans. The expansion of the application 

of user fees recognizes the increased 

Medicare beneficiary education 

activities that we would require as part 

of the new prescription drug benefit. In 

2006 and beyond, user fees would help 

to offset the costs of educating over 41 

million beneficiaries about the drug 

benefit through written materials such 

as a publication describing the drug 

benefit, internet sites, and other media. 

In fiscal year 2006 and thereafter, the 

MMA authorizes up to $200,000,000 to 

be spent on beneficiary education and 

enrollment activities reduced by the fees 

collected from MA organizations and 

PDP sponsors in that fiscal year. In each 

year, the total amount of collected user 

fees could not exceed the estimated 

costs in the fiscal year for carrying out 

the enrollment and dissemination of 

information activities in the MA and 

Part D prescription drug programs or the 

applicable portions (described below) of 

$200,000,000, whichever is less. 

Finally, these user fee provisions 

would establish the applicable aggregate 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46637 

contribution portions for PDP sponsors 

and MA organizations. There are two 

calculations. First, we calculate the PDP 

sponsors’ applicable portion as a group; 

their portion is the estimate of the total 

proportion of expenditures under Title 

18 that are attributable to expenditures 

made to PDP sponsors for prescription 

drugs under Part D. The applicable 

portion of the user fee for MA 

organizations would be equal to the 

total expenditures for Medicare Part C, 

as well as for payments under Part D 

that are made to MA organizations, as a 

percent of Title 18 expenditures. Then, 

we calculate the fees charged to 

individual PDP sponsors and MA plans. 

c. Definitions of Frequently Occurring 

Terms 

Full-benefit dual eligible beneficiary 

means an individual who meets the 

criteria established in § 423.772 (subpart 

P), regarding coverage under both Part D 

and Medicaid. 

Insurance risk means, for a 

participating pharmacy, risk of the type 

commonly assumed only by insurers 

licensed by a State and does not include 

payment variations designed to reflect 

performance-based measures of 

activities within the control of the 

pharmacy, such as formulary 

compliance and generic drug 

substitutions, nor does it include 

elements potentially in the control of 

the pharmacy (for example, labor costs 

or productivity). 

MA means Medicare Advantage, 

which refers to the program authorized 

under Part C of the Act. 

MA–PD plan means an MA plan that 

provides qualified prescription drug 

coverage. 

Medicare prescription drug account 

means the account created within the 

Federal Supplementary Medical 

Insurance Trust Fund for purposes of 

Medicare Part D. 

Part D eligible individual means an 

individual who is entitled to or enrolled 

in Medicare benefits under Part A and/ 

or Part B. 

Prescription drug plan or PDP means 

prescription drug coverage that is 

offered under a policy, contract, or plan 

that has been approved as specified in 

§ 423.272 and that is offered by a PDP 

sponsor that has a contract with CMS 

that meets the contract requirements 

under subpart K. 

PDP region means a prescription drug 

plan region as determined by CMS 

under § 423.112. 

PDP sponsor means a 

nongovernmental entity that is certified 

under this part as meeting the 

requirements and standards of this part 

for that sponsor. 

d. Financial Relationships Between PDP 

Sponsors, Health Care Professionals and 

Pharmaceutical Manufacturers 

The financial relationships that exist 

between or among PDP sponsors, health 

care professionals (including physicians 

and pharmacists), and/or 

pharmaceutical manufacturers may be 

subject to the anti-kickback statute and, 

if the relationship involves a physician, 

the Stark statute. These financial 

relationships could potentially 

implicate the anti-kickback and 

physician self-referral statutes, 

therefore, they should be structured 

appropriately to comply with legal 

requirements. Nothing in this regulation 

should be construed as implying that 

financial relationships described in the 

regulations meet the requirements of the 

anti-kickback statute or physician selfreferral statute or any other applicable 

Federal or State law or regulation. All 

such relationships must comply with 

these laws. Therefore, PDPs are not 

prevented from paying pharmacists, for 

instance, for medication therapy 

management, provided that the PDPs do 

not violate anti-kickback and physician 

self-referral laws. 

B. Eligibility and Enrollment 

1. Eligibility To Enroll (§ 423.30) 

The MMA established section 1860D–

1 of the Act, which includes the 

eligibility criteria an individual must 

meet in order to obtain prescription 

drug coverage by enrolling in a PDP 

plan or an MA–PD plan. In accordance 

with section 1860D–1(a)(3) of the Act, a 

‘‘Part D eligible individual’’ is defined as 

an individual who is entitled to or 

enrolled in Medicare benefits under Part 

A or enrolled in Part B. In order to 

enroll in a PDP plan, the individual 

must reside in the plan’s service area, 

and cannot be enrolled in an MA plan, 

other than an MSA plan or private feefor-service plan that does not provide 

qualified prescription drug coverage. 

This residency requirement flows from 

the statute’s direction for us to use 

enrollment rules similar to MA (which 

has such a requirement) and the drug 

benefit’s basic structure, which 

designates regions within which PDPs 

are to provide services. 

Section 1860D–1(b)(1)(B)(i) requires 

that we adopt a residency requirement 

similar to the Part C residency 

requirements under section 

1851(b)(1)(A) of the Act, which 

stipulates that a beneficiary is eligible to 

enroll in a plan only if the beneficiary 

resides in the plan’s service area. 

Because a PDP’s service area may 

consist only of one or more PDP regions, 

individuals who reside outside of the 

United States would be ineligible to 

enroll in a PDP or MA–PD plan. 

Consequently, these individuals are 

ineligible to enroll in Part D. 

Under section 1860D–1(b)(1)(B)(i) of 

the Act, which incorporates into Part D 

section 1851(b)(1)(A) of the Act, the 

Secretary may provide exceptions to the 

general rule that an individual is 

eligible to enroll in a PDP serving the 

geographic area in which the individual 

resides. We note also that section 

1860D–1(b)(1)(B) of the Act directs us to 

adopt enrollment rules ‘‘similar to,’’ but 

not necessarily identical to, those under 

Part C, giving us some flexibility to 

modify the Part C enrollment rules as 

appropriate. We believe that 

incarcerated individuals should be 

ineligible to enroll in a PDP. We 

therefore provide in § 423.4 of the 

proposed rule that a PDP’s service area 

would exclude areas in which 

incarcerated individuals reside (that is, 

a correctional facility). 

Were we not to adopt these rules, 

individuals who are incarcerated or who 

live outside of the U.S. and who fail to 

enroll in a PDP or MA–PD when first 

eligible, or remain enrolled thereafter, 

would face a late enrollment penalty if 

they later decide to enroll in Part D. In 

accordance with section 1860D–13(b) of 

the Act and § 423.46 of the proposed 

rule, individuals are subject to a late 

penalty if there is a continuous period 

of eligibility of at least 63 days, 

beginning after the termination of the 

individual’s initial enrollment period, 

during which the individual was not 

enrolled in a PDP or MA–PD plan. Thus, 

in order to avoid such a penalty, these 

individuals would have to enroll in a 

PDP or MA–PD, but would not be able 

to avail themselves of the plan’s services 

while they are incarcerated or outside of 

the plan’s service area. Under our 

proposed rule, individuals residing 

outside the U.S. and incarcerated 

individuals would be ineligible to enroll 

in a PDP. Thus, there would not be a 

continuous period of eligibility of at 

least 63 days during the time of the 

individuals’ residency abroad or 

incarceration. Consequently, these 

individuals would not need to enroll in 

Part D in which they would not be able 

to receive services or benefits in order 

to avoid the late penalty. 

Generally, a Part D eligible individual 

enrolled in an MA plan that does not 

provide qualified prescription drug 

coverage (that is, an MA–PD plan) may 

not enroll in a PDP; however, there are 

two exceptions. Section 1860D–

1(a)(1)(B) of the Act permits a Part D 

eligible individual who is enrolled in 

either a MA private fee-for-service plan 

(as defined in section 1859(b)(2) of the 

46638 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Act) that does not provide qualified 

prescription drug coverage or an MSA 

plan (as defined in section 1859(b)(3) of 

the Act) to enroll in a PDP. We have 

provided for these exceptions in 

§ 423.30(b) of the proposed rule. 

Except as provided above, in 

accordance with section 1860D–

1(a)(B)(i) of the Act and as provided in 

423.30(c) of the proposed rule, a Part D 

eligible individual who is enrolled in an 

MA–PD plan must obtain prescription 

drug coverage through that plan. In 

order to enroll in an MA–PD plan, a Part 

D eligible individual must also meet the 

eligibility and enrollment requirements 

of the MA–PD plan as provided in 42 

CFR 422.50 through 422.68 of proposed 

regulations. 

As discussed in § 423.859, section 

1860D–3(a)(1) of the Act requires the 

Secretary to ensure that each Part D 

eligible individual will have available a 

choice of enrollment in at least two 

qualifying plans, at least one of which 

must be a PDP. If this choice is not 

available, in accordance with section 

1860D–2(b) of the Act, a fallback 

prescription drug plan will be made 

available and individuals will be 

eligible to enroll in that fallback plan if 

eligible for Part D. As discussed in 

§ 423.855 of the proposed rule, a 

fallback prescription drug plan is a 

prescription drug plan offered by an 

eligible fallback entity that provides 

only standard prescription drug 

coverage (without supplemental 

benefits), provides access to negotiated 

prices, and meets the requirements for 

PDP sponsors (except as otherwise 

indicated), and other requirements 

specified by CMS. 

2. Part D Enrollment Process (§ 423.34) 

Section 1860D–1(b)(1) of the Act 

requires that we establish a process for 

the enrollment, disenrollment, 

termination, and change of enrollment 

of Part D eligible individuals in 

prescription drug plans. The statute 

further requires that this process use 

rules similar to, and coordinated with, 

the enrollment, disenrollment, 

termination, and change of enrollment 

rule for MA–PD plans under certain 

provisions of section 1851 of the Act. As 

such, we have incorporated, where 

possible, the MA enrollment and 

disenrollment requirements provided 

under 42 CFR 422.50–422.80. In 

accordance with section 1860D–

1(b)(1)(C) of the Act, we would establish 

a process to automatically enroll a full 

benefit dual-eligible individual (as 

defined under section 1935(c)(6) of the 

Act) who has failed to enroll in a PDP 

or MA–PD plan by either the end of the 

individual’s initial enrollment period or 

upon becoming dual eligible after his/ 

her initial enrollment period. Prior to 

this automatic enrollment process, a 

widespread education and information 

campaign (described later in this 

subpart at § 423.48) will equip full 

benefit dual eligible individuals with 

information designed to explain options 

and encourage these individuals to take 

an active role in their enrollment rather 

than wait to be automatically enrolled. 

An full benefit dual eligible 

individual who fails to enroll in a PDP 

or MA–PD would be automatically 

enrolled into a prescription drug plan 

that has a monthly beneficiary premium 

equal to or below the subsidy amount 

available to low-income beneficiaries in 

accordance with section 1860D–

14(a)(1)(A) of the Act. This premium 

may not exceed the low-income 

benchmark premium amount 

established under section 1860D–

14(b)(2) of the Act. The calculation of 

the low-income benchmark premium is 

further described in § 423.780(a) of the 

proposed rule. 

Section 1860D–1(b)(1)(c) of the Act 

also directs us to enroll full benefit dual 

eligible individuals who fail to elect a 

PDP or MA–PD plan on a random basis 

if more than one PDP within an area has 

a monthly beneficiary premium equal to 

or below the low-income benchmark 

premium. To ensure that each full 

benefit dual eligible individual will 

have access to at least one PDP in each 

region, section 1860D–14(b)(3) of the 

Act provides that the premium subsidy 

amount for eligible individuals 

(including full benefit dual eligible 

individuals) cannot be less than the 

lowest monthly beneficiary premium for 

a PDP in a region. A more detailed 

discussion of the premium subsidy is 

found at § 423.780 of the proposed rule. 

Two major issues require resolution 

because the statutory provisions are 

inherently contradictory in their 

requirements. The first is how to 

provide qualified prescription drug 

coverage to those full benefit dual 

eligible individuals who are in an MA–

only plan and who have failed to enroll 

in a PDP or MA–PD plan. The second 

issue is how to provide qualified 

prescription drug coverage to a full 

benefit dual eligible enrolled in the 

Medicare Advantage program when the 

premium for the MA–PD plan(s) offered 

by an individual’s MA organization 

exceeds the low income benchmark 

premium. We discuss each of these 

issues below and request comments on 

how best to reconcile these conflicting 

provisions. 

A literal reading of section 1860D–

1(b)(1)(C) of the Act would seem to 

preclude automatic enrollment of full 

benefit dual eligible individuals into 

MA–PD plans. The language requires 

automatic enrollment into a 

‘‘prescription drug plan’’ whose 

premium meets the aforementioned 

requirements. However, section 1860D–

1(a)(1)(B)(ii) of the Act precludes Part D 

eligible individuals enrolled in MA (not 

MA–PD) plans (other than those in some 

private fee-for-service or MSA plans) 

from enrolling in PDPs. To reconcile 

this apparent conflict, we propose that 

that the reference in section 1860D–

1(b)(1)(C) of the Act to ‘‘prescription 

drug plans’’ be interpreted as including 

both PDPs and MA–PD plans, thereby 

allowing automatic enrollment of an 

MA full benefit dual eligible into a MA–

PD plan offered by the same MA 

organization offering his or her MA plan 

if the basic premium for such plan does 

not exceed the low-income benchmark 

premium amount. 

General principles of statutory 

interpretation require us to reconcile 

two seemingly conflicting statutory 

provisions whenever possible, rather 

than allowing one provision to 

effectively nullify the other provision. 

Consequently, when a statutory 

provision may reasonably be interpreted 

in two ways, we have an obligation to 

adopt the interpretation that harmonizes 

and gives full effect to competing 

provisions of the statute. The rationale 

for automatic enrollment is to ensure 

that full-benefit dual eligible 

individuals receive outpatient drug 

coverage under Part D because Medicaid 

will no longer provide medical 

assistance for covered Part D drugs to 

such individuals. For full benefit dual 

eligible individuals enrolled in MA 

plans, we believe this objective is best 

accomplished by enrolling them in one 

of the MA–PD plans offered by their MA 

organization. 

To the extent that the MA–only 

portion of the MA–PD plan parallels the 

coverage under a full benefit dual 

eligible individual’s MA plan, enrolling 

the individual in the MA–PD plan 

would be similar to permitting the 

individual to remain enrolled in the MA 

plan while simultaneously enrolling the 

individual in a PDP. In other words, 

enrolling the individual in a MA–PD 

plan offered by the same MA 

organization is, in effect, simply adding 

qualified prescription drug coverage to 

the individual’s MA benefits. For this 

reason, we believe the reference to 

‘‘prescription drug plans’’ in section 

1860D–1(b)(1)(C) of the Act should be 

interpreted as requiring enrollment of a 

full benefit dual-eligible into a plan that 

will provide the individual with Part D 

drug benefits in addition to any other 

benefits the individual receives under 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46639 

Medicare, whether through Medicare 

Part A and/or Part B, or through 

enrollment in the Medicare Advantage 

program under Part C. We believe this 

interpretation promotes the policies 

underlying sections 1860D–1(b)(1)(C) 

and 1860D–1(a)(1)(B)(ii) of the Act, 

giving full effect to both statutory 

provisions. However, in the above 

situation, if the basic premium for the 

MA–PD plan exceeds the low-income 

benchmark premium amount, under 

section 1860D–1(b)(1)(C) of the Act, we 

could not permit automatic enrollment 

of a full-benefit dual eligible into that 

MA–PD plan. 

One possible solution for an MA full 

benefit dual eligible enrolled in an MA 

organization in which all of its MA–PD 

premiums exceed the allowable amount 

might be to allow that individual to 

remain in the MA plan and to 

automatically enroll him or her into a 

PDP that meets the premium 

requirements. However, according to 

section 1860D–1(a)(1)(A) of the Act, 

only a part D eligible individual who is 

not enrolled in an MA plan may enroll 

in a PDP, thereby precluding this 

option. 

Another possibility would be to 

involuntarily withdraw MA full benefit 

dual eligible individuals from their MA 

plan, which would default them to 

Original Medicare and then 

automatically enroll them into a PDP. 

However, there is no statutory authority 

to involuntarily disenroll the individual 

from his or her MA plan. In fact, we 

believe doing so would violate section 

1851(c)(3)(B) of the Act, which provides 

that an individual who makes an MA 

election is considered to have continued 

to have made this election until he or 

she voluntarily changes the election, or 

the plan is discontinued or no longer 

serves the individual’s service area. 

Enrolling an MA full dual eligible 

individual whose MA organization’s 

MA–PD plan premiums exceed the 

benchmark amount into a MA–PD plan 

offered by another MA organization 

whose premiums are equal to or below 

the benchmark would be problematic as 

well since this would violate section 

1851(c)(3)(B) of the Act. In addition, this 

would not be possible if the monthly 

premium amount of any available MA–

PD plan is greater than the low-income 

benchmark premium amount. Similarly, 

we believe that requiring these full 

benefit dual eligibles to disenroll from 

the Medicare Advantage program so that 

we may automatically enroll them into 

less expensive PDPs would violate 

section 1851(c)(3)(B) of the Act. 

One last option would be to allow the 

beneficiary to go without outpatient 

prescription drug coverage unless the 

beneficiary chooses a MA–PD plan on 

his or her own accord. We do not see 

this as a reasonable option because it 

appears to violate section 1860D–

1(b)(1)(C) of the Act and would leave a 

vulnerable beneficiary without 

outpatient drug coverage. While the 

statute prescribes an automatic 

enrollment process for full benefit dual 

eligibles who fail to elect a PDP or MA–

PD plan, it is important to note that 

such full benefit dual eligible 

individuals may decline the enrollment 

or change the enrollment if they so 

choose. One option for such a process 

could be to provide notice to the 

individual to allow him or her to choose 

another option. Since the statute affords 

full benefit dual eligible individuals a 

special election period, they would be 

able to make a change in their election 

of PDP or MA–PD plans. Furthermore, 

while automatic enrollment of these 

individuals could be restricted to plans 

with premiums at or below the lowincome benchmark premium, these dual 

eligible individuals would not be 

restricted to electing only such plans. 

However, if they select a high premium 

plan, they would be responsible for 

paying the difference between the 

premium and the low-income subsidy 

amount. 

In implementing the automatic 

enrollment process for full benefit dual 

eligible individuals, we are considering 

which entity is best suited to perform 

the automatic and random enrollment 

function. The options include CMS or 

the State performing this function, or a 

contracted entity or entities on their 

behalf. If we (or a contractor on our 

behalf) performed the auto assignment, 

we would expect consistent, clear 

oversight of the process, thus making 

the process uniform nationally; this 

might also reduce the need to transmit 

data from CMS to the States. However, 

this would be highly dependent on 

receiving timely, accurate Medicaid 

eligibility data from States and would 

also make us responsible for a new 

national workload of indeterminate size. 

An alternative is for States (or their 

contracted entities) to be responsible for 

performing the automatic enrollment. 

This approach may be appropriate 

because States have experience with 

random assignments through their 

Medicaid programs and have more 

immediate access to changes in 

Medicaid eligibility. We would define 

random assignment, establish standards 

for notification, and so forth, to ensure 

consistency. If we were to pursue this 

option, we could consider this function 

as necessary for the proper and efficient 

administration of the State plan. We 

would need to provide States with 

accurate and timely Part D data. States 

could be compensated for this effort 

through Federal financial participation 

(FFP) in their administrative expenses 

or through contractual or other 

arrangements. We invite comment on 

the most appropriate method of 

performing automatic assignment of 

dual eligibles and the appropriate entity 

to do so. 

3. Part D Enrollment Periods (§ 423.36) 

a. General Enrollment Periods 

The MMA directs us to establish three 

coverage enrollment periods: (1) The 

initial enrollment period; (2) the annual 

coordinated election period; and (3) 

special enrollment periods (SEPs). 

Generally, in accordance with section 

1860D–1(b)(2)(B) of the Act, the initial 

enrollment period for Part D is the same 

as the initial enrollment period 

established for Part B. Specifically, this 

period is the seven-month period that 

begins three months before the month 

an individual first meets the eligibility 

requirements for Part B and ends three 

months after that first month of 

eligibility. However, if an individual’s 

initial enrollment period for Part B ends 

prior to May 15, 2006, his or her initial 

enrollment period under Part D will be 

extended to May 15, 2006. In addition, 

as part of the implementation of the Part 

D program, and in accordance with 

section 1860D–1(b)(2)(A) of the Act, we 

would establish an initial enrollment 

period for Part D from November 15, 

2005, until May 15, 2006, for those 

individuals who are already eligible to 

enroll in a Part D plan as of November 

15, 2005. 

Examples: 

Month individual first entitled to part A or 

enrolls in part B Initial enrollment period for part D 

June 1, 2005 ............................................................................................. November 15, 2005–May 15, 2006. 

November 1, 2005 .................................................................................... November 15, 2005–May 15, 2006. 

December 1, 2005 .................................................................................... November 15, 2005–May 15, 2006. 

46640 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Month individual first entitled to part A or 

enrolls in part B Initial enrollment period for part D 

January 1, 2006 ........................................................................................ November 15, 2005–May 15, 2006. 

February 1, 2006 ...................................................................................... November 15, 2005–May 31, 2006. 

May 1, 2006 .............................................................................................. February 1, 2006–August 31, 2006. 

June 1, 2006 ............................................................................................. March 1, 2006–September 30, 2006. 

In accordance with section 1860D–

1(b)(1)(B)(iii) of the Act, the annual 

coordinated election period for Part D is 

concurrent with the annual coordinated 

election period for the Medicare 

Advantage program under section 

1851(e) of the Act. It is during this 

annual period in which all PDP plans 

must open enrollment to Medicare 

beneficiaries. For coverage beginning in 

2006, the annual coordinated election 

period begins on November 15, 2005, 

and ends on May 15, 2006. As a result, 

the initial enrollment period for 

individuals who are eligible to enroll in 

a Part D plan as of November 15, 2005 

and the annual coordinated election 

period will run concurrently during this 

time frame. The annual coordinated 

election period for MA and MA–PD 

plans will also occur during this time. 

In accordance with section 

1851(e)(3)(B)(iv) of the Act, 

§ 423.36(b)(2) of our proposed rule 

provides that, for 2007 and subsequent 

years, the annual coordinated election 

period would be November 15 through 

December 31 for coverage beginning on 

January 1 of the following year. 

b. Special Enrollment Periods 

The MMA also establishes special 

enrollment periods (SEPs). Special 

enrollment periods allow an individual 

to disenroll from one PDP and enroll in 

another PDP. Special enrollment 

periods are available as follows: 

(i) Involuntary Loss, Reduction, or Nonnotification of Creditable Coverage 

As discussed below in § 423.56, Part 

D eligible individuals who fail to enroll 

in Part D during their initial enrollment 

period will not be subject to late 

penalties if they had creditable 

prescription drug coverage during the 

time they were not enrolled in Part D. 

Part D eligible individuals who 

involuntarily lose creditable 

prescription drug coverage, such as the 

loss of employment and associated 

health benefits, or the loss of coverage 

due to the death of a spouse, would 

have an SEP to enroll in a Part D plan, 

in accordance with section 1860D–

1(b)(3)(A) of the Act. Pursuant to section 

1860D–1(b)(3)(A)(iii) of the Act, this 

SEP does not apply when the individual 

loses creditable coverage because of his 

or her failure to pay premiums for that 

coverage, since this would be 

considered a voluntary loss of coverage 

for purposes of this section. 

The SEP would also apply if the 

individual was never informed that the 

coverage that he or she had was not 

creditable or if current creditable 

coverage was reduced so that it was no 

longer creditable coverage under this 

part. In cases where the coverage is 

reduced, the SEP applies only when the 

current creditable coverage is reduced 

by the issuer or group through which 

the individual has such coverage. 

Therefore, if the covered individual 

voluntarily reduces the coverage, for 

example, to reduce his or her premium 

costs, this SEP would not apply because 

that action is voluntary. 

(ii) Erroneous Enrollment 

Section 1860D–1(3)(B) of the Act 

provides for an SEP for an individual 

who has been subject to enrollment 

errors, similar to those provided for both 

Part A and Part B under section 1837(h) 

of the Act. We are using the same 

language provided for this SEP at 

§ 423.36(c)(3) of the proposed rule as 

provided under § 407.32, which 

establishes a special enrollment period 

for enrollment errors for Part B. 

Specifically, § 407.32 refers to 

misrepresentation, inaction, or error by 

the Federal government that affects an 

individual’s enrollment rights. 

(iii) Individuals With Medicaid 

Coverage 

Section 1860D–1(b)(3)(D) of the Act 

provides an SEP for an individual who 

is eligible for both Medicare and full 

benefits under a State’s Medicaid 

program, as those individuals are 

described in section 1935(c)(6) of the 

Act. This would be available to 

individuals who are determined full 

benefit dual eligible after the initial 

enrollment period. This would also 

provide these individuals who have 

been automatically assigned to a plan 

the opportunity to change PDPs or MA–

PDs at any time. 

(iv) Individuals Age 65 

During the Part D eligible individual’s 

initial enrollment period, the individual 

has several options available, including 

remaining in original Medicare and 

enrolling in a PDP or enrolling in an 

MA–PD plan. Section 1860D–1(b)(3)(E) 

of the Act provides an SEP to an 

individual who enrolls in a MA–PD 

plan upon first becoming eligible for 

benefits under Part A at age 65 and then 

discontinues that enrollment and elects 

coverage under original Medicare and a 

PDP at any time during the 12-month 

period beginning on the effective date of 

the MA–PD plan election. This specific 

provision applies only to an individual 

who elects an MA–PD plan during his 

or her initial enrollment period, as 

defined under section 1837(d) of the 

Act, which surrounds his or her 65th 

birthday. This SEP will only apply to 

individuals who elect an MA–PD plan, 

and does not pertain to individuals who 

elect an MA-only plan. 

(v) Exceptional Circumstances 

Finally, in addition to providing for 

special enrollment periods as 

mentioned above, section 1860D–

1(b)(3)(C) of the Act authorizes us to 

establish SEPs in exceptional 

circumstances. CMS has historically 

included in regulation those SEPs that 

have been specifically named in the 

statute and established the SEPs for 

exceptional circumstances in our 

manual instructions rather than through 

regulation. While we intend to continue 

establishing these exceptional SEPs 

through this process, we seek public 

input on other SEPs that should be 

considered through our manual process. 

In addition to those SEPs established 

by the MMA, we intend to apply certain 

SEPs established under the MA 

program. The SEPs that will be included 

from the MA program under this section 

will include the following conditions—

(1) The PDP terminates its service area 

or is terminated in the area in which the 

individual resides; 

(2) The individual moves out of the 

plan’s service area; or 

(3) The individual demonstrates to us, 

in accordance with guidelines that we 

establish, that the PDP offering the plan 

substantially violated a material 

provision of its contract with regard to 

the individual or the organization, its 

agent, representative, or the PDP 

materially misrepresented the plan’s 

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provisions in marketing the plan to the 

individual. 

There is a disconnect issue between 

the enrollment period provided for 

individuals eligible to enroll in a Part D 

plan at section 1860D–1(b)(1)(iii) of the 

Act and the open enrollment periods 

provided for MA eligible individuals 

under section 1851(e)(2) of the Act that 

we believe can be addressed through a 

special election period. Section 

1851(e)(2) of the Act provides for an 

open enrollment period for MA eligible 

individuals in which they may change 

their election once. Beginning in 2006, 

this period is limited to 6 months from 

January through June and in 2007, to 3 

months, from January through March. 

The MMA, at Section 102 (a)(6), further 

limits individuals’ elections during this 

open enrollment period to a specific 

‘‘type’’ of plan. Specifically, an 

individual who is enrolled in an MA–

PD plan may elect another MA–PD plan 

or elect original Medicare and a PDP, 

but cannot elect an MA–only plan. 

However, there is no corresponding 

enrollment period that would allow the 

individual to elect a PDP during this 

time. We propose to remedy this 

situation by establishing an SEP for 

these individuals under our 

aforementioned authority to establish 

SEPs for exceptional circumstances. 

In addition, section 1851(e)(2)(D) of 

the Act provides for a continuous open 

enrollment period for institutionalized 

individuals throughout the year. We 

also propose establishing an SEP for this 

through our exceptional circumstance 

authority in our manual instructions. 

4. Effective Dates of Coverage and 

Change of Coverage (§ 423.38) 

Section 1860D–1(b)(1)(B)(iv) of the 

Act authorizes us to apply the effective 

date requirements provided under the 

MA program at section 1851(f) of the 

Act. The three enrollment periods 

provided under Part D are the initial 

enrollment period, the annual 

coordinated election period, and special 

enrollment periods. The effective dates 

for these enrollment periods are as 

follows: 

a. Initial Enrollment Period 

In accordance with section 1851(f)(1) 

of the Act, as incorporated into Part D 

under section 1860D–1(b)(1)(B)(iv) of 

the Act, an enrollment made during the 

initial enrollment period will generally 

be effective the first day of the calendar 

month following the month in which 

the individual enrolled in Part D. An 

enrollment made prior to the month of 

entitlement to or enrollment in 

Medicare benefits under Part A and/or 

Part B is effective the first day of the 

month the individual is entitled to or 

enrolled in Part A or Part B. Since the 

Part D provisions are not effective until 

January 1, 2006, we would clarify that 

in no case may enrollment in Part D be 

effective prior to this date. We are also 

clarifying that initial enrollments made 

between November 15 and December 

31, 2005, will be effective January 1, 

2006. An enrollment made during or 

after the month of entitlement to or 

enrollment in Medicare benefits under 

Part A and/or Part B is effective the first 

day of the calendar month following the 

month in which the enrollment in Part 

D is made. We have reflected these 

provisions in § 423.38(a) of our 

proposed rule. 

b. Annual Coordinated Election Period 

In accordance with section 1851(f)(2) 

of the Act, as incorporated into Part D 

under section 1860D–1(b)(1)(B)(iv) of 

the Act, an enrollment made during the 

annual coordinated election period is 

effective as of the first day of the 

following calendar year, that is, January 

1st. We have reflected this provision in 

§ 423.38(b) of the proposed rule. 

c. Special Enrollment Period 

A special enrollment period is 

effective in a manner that we determine 

to ensure continuity of health benefits 

coverage. We have reflected this 

provision in § 423.38(c) of the proposed 

rule. 

5. Coordination of Beneficiary 

Enrollment and Disenrollment Through 

PDPs (§ 423.42) 

Section 1860D–1(b)(1)(A) of the Act 

authorizes us to establish a process for 

enrollment in and disenrollment from 

prescription drug plans. We have 

outlined the coordination of enrollment 

and disenrollment through PDP 

organizations in the regulations at 

§ 423.42. A Part D eligible individual 

who wishes to make, change, or 

discontinue an enrollment during 

applicable enrollment periods may do 

so by filing an enrollment with the PDP 

directly. We envision a paper 

enrollment form process and recognize 

the opportunity for other possible 

mechanisms that may prove secure, 

convenient for beneficiaries, and 

valuable to the efficient administration 

of the program. We request comments 

on other possible enrollment 

mechanisms that address data security 

and integrity, privacy and 

confidentiality, authentication, and 

other pertinent issues. 

We have added a provision at 

§ 423.42(e) of the proposed rule that 

would ensure that beneficiaries are not 

disenrolled from their PDP at the end of 

the calendar year. We are including this 

provision to clarify that beneficiaries 

will remain enrolled in their PDP 

without having to actively re-enroll in 

that PDP at the beginning of the 

calendar year. 

6. Disenrollment by the PDP (§ 423.44) 

Section 1860D–1(b)(1)(B) of the Act 

generally directs us to use disenrollment 

rules similar to those established under 

section 1851 of the Act. We are applying 

the provisions of section 1851(g)(3) of 

the Act that provide authority for the 

basis of terminations for MA plans. We 

codify these in 42 CFR 422.74. The 

disenrollment provisions for PDPs are 

outlined in § 423.44 of our proposed 

rules, including the basis for 

disenrollment—both optional and 

required—and guidance for notice 

requirements. 

Specifically, a PDP is required to 

disenroll an individual who dies, who 

no longer resides in the PDP’s service 

area, loses entitlement or enrollment to 

Medicare benefits under Part A and is 

no longer enrolled in Part B, or who 

knowingly misrepresents to the PDP 

that he or she has received or expects to 

receive reimbursement for covered Part 

D drugs through third-party coverage. A 

PDP is also required to disenroll an 

individual if the PDP’s contract is 

terminating. 

We are particularly interested in 

receiving comments about the 

requirement to disenroll individuals 

from a PDP if they no longer reside in 

the service area. Under the MA rules at 

42 CFR 422.74, individuals who are out 

of the service area for more than 6 

months will be disenrolled, unless the 

MA plan offers visitor or traveler 

benefits. We recognize the inherent 

difference between PDPs and MA plans 

(in particular, the range of services each 

provides) and that it may not be 

reasonable to apply the disenrollment 

requirements established under MA in 

the same way for PDPs. For example, 

while we have a limit on the length of 

time an MA enrollee may be out of the 

service area, this limit may not be 

necessary as long as there are specific 

assurances from the PDP that 

individuals will have access to PDP 

benefits while out of the area (provided 

the individual remains in the United 

States). For example, a regional PDP 

may either have a corporate or other 

relationship with a PDP in another 

region or have a network of pharmacies 

in other regions (or nationwide) that 

would provide access to prescription 

drugs outside of the region on the same 

basis as in-network pharmacies within 

the enrollee’s region of residence. We 

46642 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

would appreciate any comments on this 

area. 

In addition to providing requirements 

for disenrollments that are required by 

the PDP, we also provide under 

§ 423.44(d) of our proposed rule that 

PDPs may disenroll individuals who do 

not pay monthly premiums or whose 

behavior is disruptive. However, we 

believe there are important beneficiary 

implications for those PDPs who 

disenroll individuals for these reasons. 

An individual who is disenrolled for 

failure to pay monthly PDP premiums, 

disruptive behavior, or 

misrepresentation of third party 

reimbursement will not be provided an 

SEP permitting him or her to enroll in 

another PDP. Since the individual 

generally will not be able to enroll in 

either a PDP or an MA–PD until the next 

annual coordinated election period, he 

or she may be subject to late enrollment 

penalties under § 423.46 of the proposed 

rule. 

We plan to establish re-enrollment 

guidelines under the MA program for 

optional disenrollment for nonpayment 

of premium and disruptive behavior. 

We recognize, however, that this policy 

may not be appropriate for PDPs. If the 

individual is prohibited from reenrolling in each of the MA plans 

available in an area, original Medicare is 

always available to provide and deliver 

services to that that individual. Under 

the PDP infrastructure, if the individual 

was prohibited from re-enrolling in each 

PDP available, there is no other option 

available. We would appreciate 

comments regarding the applicability of 

prohibiting re-enrollment in a PDP. 

As with the MA program, PDP 

sponsors will be required to provide 

proper notice to the beneficiary and 

afford him or her due process in 

accordance with the procedures 

outlined in our manual instructions. For 

example, a PDP that wishes to disenroll 

a beneficiary for disruptive behavior 

must receive prior approval from CMS 

and must demonstrate to CMS’’

satisfaction that it has made a good faith 

effort to resolve the issue prior to 

requesting the disenrollment. CMS 

reviews these requests on a case-by-case 

basis, taking into account all of the facts 

and circumstances of a particular case, 

prior to making its decision. PDP 

sponsors must apply their policies for 

optional disenrollment for failure to pay 

premiums and disruptive behavior 

consistently among individuals enrolled 

in their plans, unless we permit 

otherwise, and must do so consistent 

with applicable laws regarding 

discrimination on the basis of disability. 

7. Late Enrollment Penalty (§ 423.46) 

Section 1860D–13(b) of the Act 

establishes late enrollment penalties for 

beneficiaries who fail to maintain 

creditable prescription drug coverage for 

a period of 63 days following the last 

day of an individual’s initial enrollment 

period and ending on the effective date 

of enrollment in a PDP or MA–PD. The 

calculation of the amount of the penalty 

is described in § 423.286(d)(3) of our 

proposed rule. Specifically, the penalty 

amount for a Part D eligible individual 

for a continuous period of eligibility is 

the greater of an amount that CMS 

determines is actuarially sound for each 

uncovered month in the same 

continuous period of eligibility that is 

subject to this penalty; or 1 percent of 

the base beneficiary premium for each 

uncovered month in the period. An 

uncovered month is any month in 

which individual does not have 

creditable coverage at any time during 

that month. Because Part D is a 

voluntary benefit, it is susceptible to 

selection bias, where predominantly 

sicker beneficiaries, with higher than 

average prescription drug expenses 

enroll, and healthier, less expensive 

beneficiaries defer participation. Such a 

dynamic would make the initial 

premium levels higher than Congress 

expected at the time of MMA’s 

enactment. Left unchecked, the 

selection bias would be exacerbated, 

potentially resulting in what has been 

called an insurance ‘‘death spiral.’’ To 

ensure the affordability of the Part D 

benefit and the stability of the 

associated premium, we believe there is 

a strong public policy value in creating 

an incentive for immediate, widespread 

enrollment in this new, heavily 

subsidized benefit. 

The process for documenting 

creditable coverage is discussed in 

§ 423.56 of the proposed rule. 

8. Part D Information That CMS 

Provides to Beneficiaries (§ 423.48) 

As provided under section 1860D–

1(c)(1) of the Act, we would conduct 

activities designed to broadly 

disseminate information about Part D 

coverage to individuals who were either 

eligible or prospectively eligible for Part 

D benefits. This information would be 

made available to beneficiaries at least 

30 days prior to their initial enrollment 

period as provided under § 423.38 of 

our proposed rule. The information 

dissemination activities for Part D 

would be similar to, and coordinated 

with, the information dissemination 

activities that we currently perform for 

Medicare beneficiaries under sections 

1851(d) and 1804 of the Act. 

As required under section 1860D–

1(c)(3) of the Act, we would include the 

following comparative information with 

respect to qualified prescription drug 

coverage provided by PDPs and MA–PD 

plans as part of our dissemination of 

Part D information and our efforts to 

promote informed beneficiary 

decisions—

• Benefits and prescription drug 

formularies; 

• Monthly beneficiary premium; 

• Quality and performance; 

• Beneficiary cost-sharing; and 

• Results of consumer satisfaction 

surveys. 

We would not provide information on 

quality and performance or consumer 

satisfaction surveys during—

(1) The first plan year; or 

(2) The next plan year if it were 

impracticable to obtain that information, 

or if the information were not available. 

As stated in section 1860D–1(c)(4) of 

the Act, we would also provide 

information to beneficiaries regarding 

the methodology we will use for 

determining late enrollment penalties, 

as provided in § 423.286(d) of our 

proposed rule. 

In carrying out the annual 

dissemination of Part D information, we 

anticipate conducting a significant 

public information campaign to educate 

beneficiaries about the new Medicare 

drug benefit and to ensure the broad 

dissemination of accurate and timely 

information. We would place an 

emphasis on ensuring that low-income 

individuals eligible for or currently 

enrolled in Part D benefits were aware 

of the additional benefits available to 

them and how to receive those benefits. 

In order to maximize the enrollment of 

Part D eligible individuals, this public 

information campaign would include 

outreach, information, mailings, and 

enrollment assistance with and through 

appropriate State and Federal 

agencies—including State health 

insurance assistance programs (SHIPs)—

and would coordinate with other 

Federal programs providing assistance 

to low-income individuals. In addition, 

we would undertake special outreach 

efforts to disadvantaged and hard-toreach populations, including targeted 

efforts among historically underserved 

populations, and coordinate with a 

broad array of public, voluntary, and 

private community organizations 

serving Medicare beneficiaries. 

Materials and information would be 

made available in languages other than 

English, where appropriate. 

We would require, as described in 

§ 423.48 of our proposed rule, that each 

organization offering a prescription drug 

plan or MA–PD plan provide us 

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annually with the information to 

disseminate to individuals who are 

currently or prospectively eligible for 

Part D benefits. This information would 

enable beneficiaries to make informed 

decisions regarding their Part D 

coverage options. Organizations offering 

a prescription drug plan or MA–PD plan 

would be required to provide this 

information in a format and to use 

standard terminology that we would 

specify in further operational guidance. 

Under the recently implemented 

Medicare Prescription Drug Discount 

Card and Transitional Assistance 

Program (42 CFR parts 403 and 408), we 

took the unprecedented step of 

establishing a price comparison Web 

site available through http:// 

www.medicare.gov to provide 

beneficiaries with information about 

drug card sponsors’ negotiated drug 

prices in actual dollars—including 

dispensing fee information—for the 

purpose of comparing negotiated prices 

across approved card programs. The 

prices and fees on the price comparison 

Web site reflect an estimate of the 

maximum prices beneficiaries will 

experience at the point of sale. The Web 

site also includes information about 

generic substitutes. In the interest of 

broadly disseminating information that 

promotes informed decision-making 

among Part D enrollees and prospective 

Part D enrollees, as required under 

section 1860D–1(c) of the Act, we 

propose extending the price comparison 

requirements to PDP sponsors and MA 

organizations offering MA–PD plans and 

making comparative information about 

Part D plans’ negotiated prices available 

to beneficiaries through http:// 

www.medicare.gov. Our drug card 

experience shows that providing drug 

price information can significantly 

reduce prices and we believe that 

information about negotiated drug 

prices will assist beneficiaries in 

deciding which Part D plan will offer 

them the greatest financial advantage. 

We propose building on our experience 

in implementing the drug discount card 

price comparison Web site as we 

develop requirements for the Part D 

price comparison Web site, and we are 

seeking comments on how to provide 

information in the drug benefit to help 

achieve maximum drug savings. 

Since the introduction of http:// 

www.medicare.gov in 1998, CMS has 

substantially increased the amount of 

personalized information available to 

Medicare beneficiaries, making it one of 

the government’s most comprehensive 

and customer-oriented sites available to 

the public. The Web site hosts twelve 

separate database applications to help 

individuals make their own health care 

decisions. The most significant ones are: 

the Medicare Personal Plan Finder 

(which contains costs, benefits, quality, 

satisfaction and disenrollment 

measures), Nursing Home Compare 

(which contains basic characteristics, 

staffing information and inspection 

results), the Prescription Drug and Other 

Assistance Programs application (which 

contains the most extensive, nationally 

complete listing of the Medicareapproved discount drug cards, 

including price comparisons, as well as 

other government and private programs 

designed to help with prescription drug 

costs), and the Medicare Eligibility Tool 

(which assists users in determining 

when they are eligible, how to enroll 

and what they need to consider when 

joining Medicare). Other tools providing 

customized results include: the 

Participating Physician and Supplier 

Directories, Home Health and Dialysis 

Facility Compare, Your Medicare 

Coverage, Helpful Contacts, 

Publications, and Frequently Asked 

Questions. By updating all information 

on the Web site at least once a month, 

the information provided to Medicare 

beneficiaries via http:// 

www.medicare.gov is the most reliable 

and consistent information available. 

Much of the information available 

through http://www.medicare.gov is also 

available via the 1–800–MEDICARE 

helpline. 1–800–MEDICARE is a major 

information channel for providing the 

most personalized and reliable 

information to people with Medicare. 

As a result of the Medicare 

Modernization Act (MMA), we are 

receiving the largest call volume ever for 

1–800–MEDICARE. The beneficiary can 

call 1–800–MEDICARE to find out the 

most reliable information on public and 

private programs that offer discounted 

or free medication, programs that 

provide help with other health care 

costs, and Medicare health plans that 

include prescription coverage. The 

caller can always talk to a live person 

at 1–800–MEDICARE to get the facts 

they need. When a beneficiary calls 1–

800–MEDICARE, we can send them a 

personalized brochure that allows them 

to look at discount cards based on their 

drug needs and their preferences about 

how to get their medicines, and their 

enrollment forms. We can also give the 

beneficiary personalized brochures 

containing information on their health 

plan choices, nursing homes and 

Medicare participating physicians in 

their area. 1–800–MEDICARE is 

available 24 hours a day, 7 days a week, 

to provide the one-on-one service that 

our Medicare beneficiaries need to make 

appropriate health care decisions. 

9. Approval of Marketing Materials and 

Enrollment Forms (§ 423.50) 

Section 1860D–1(b)(1)(B)(vi) of the 

Act directs CMS to use rules similar to 

those established under section 1851 of 

the Act to review PDP’s marketing 

materials and application forms. While 

all entities with which CMS does 

business with are required to adhere to 

all Federal laws, with regard to 

marketing, it is important to refer here 

to section 1140 of the Act, prohibiting 

the misuse of symbols, emblems, or 

names in reference to Social Security or 

Medicare. While we have not reiterated 

this provision in our proposed rule, we 

believe that it is important to provide 

such reference in this discussion. 

We are generally replicating the 

marketing provisions established under 

§ 422.80 for MA plans as appropriate for 

PDPs. Therefore, § 423.50(a) of our 

proposed rule would provide guidance 

for our review of marketing materials, 

definition of marketing materials, 

deemed approval, and standards for 

PDP marketing. 

While we generally replicated MA 

provisions, we recognize that the 

differences between PDPs and MA plans 

may require different marketing 

requirements. For example, while we 

prohibit enrollment forms from being 

accepted in provider offices or other 

places where health care is delivered 

under the MA rules at 42 CFR 422.80, 

this may not be appropriate to extend to 

relationships between PDP sponsors and 

pharmacies with respect to marketing a 

PDP. We invite comment regarding the 

applicability of the MA marketing 

requirements to PDPs. 

We are proposing to add § 423.50(a)(3) 

in order to establish a program that 

recognizes consistent compliance with 

marketing guidelines by providing for 

streamlined approval of marketing 

materials submitted by PDP sponsors 

that have demonstrated such 

compliance. Called the ‘‘File and Use’’

program, organizations that have 

demonstrated to us that they continually 

meet a specified standard of 

performance will have certain types of 

marketing materials (such as advertising 

materials or other materials that do not 

describe plan benefits) deemed to be 

approved by us if they are not 

disapproved within five days of 

submission to us for prior approval. 

Thus, under these circumstances, 

organizations only need submit material 

for our approval five days prior to their 

distribution. 

The advantages of File & Use are that 

the organization can decrease the time 

it takes to begin using certain marketing 

materials and improve planning and 

46644 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

budgeting for publication of these 

materials. Since PDPs will be new to the 

CMS marketing review process, we 

intend to not allow PDPs to qualify for 

the File & Use program until they have 

been in the program for a specified 

period of time, as determined by us, and 

establish consistent compliance with 

marketing guidelines. 

We are also aware that the ability to 

provide additional products (for 

example, financial services) to Medicare 

beneficiaries could provide additional 

tools to help beneficiaries manage their 

expenses and financial security, and 

could be a strong incentive for potential 

PDP sponsors to participate in Part D. 

We ask for comments on the advisability 

of allowing such products to be 

provided in conjunction with PDP 

services and the appropriate limitations 

on such activities. We note that in 

accordance with HIPAA privacy rules, 

the PDP sponsor may have to obtain 

beneficiary authorization to market 

certain products. 

10. Information Provided to PDP 

Sponsors and MA Organizations 

Section 1860D–1(b)(4)(A) of the Act 

authorizes us to provide PDP sponsors 

and MA organizations with information 

about Part D eligible individuals so that 

their organizations may facilitate the 

marketing and enrollment of 

beneficiaries in their PDP and MA–PD 

plans and is intended solely for these 

purposes. That information is intended 

to assist in the outreach to individuals 

to ensure participation in the Part D 

program, as well as to reduce costs to 

those plans. 

While the statute provides us with 

broad authority to share information 

with PDPs and MA organizations, we 

have operational questions, especially 

regarding any potential adverse impact 

on beneficiaries. To the extent we were 

to share such information with PDP 

sponsors and MA organizations, should 

beneficiaries be given the ability to 

choose not to have their information 

shared with these entities? To the extent 

that such information is shared for 

purposes of marketing, should PDP 

sponsors and MA organizations be able 

to use this information to contact 

beneficiaries only through written 

communications, or should telephone 

contacts be permitted, and, if so, under 

what circumstances? We also have 

questions as to whether such 

information should be provided by CMS 

upon request, or only at specific, 

scheduled times during the year (for 

example, just prior to the Annual 

Coordinated Election Period). Further, 

we would like to know what specific 

information we could provide to PDP or 

MA organizations that would facilitate 

their marketing and enrollment 

activities. The new authority provided 

in section 1860D–1(b)(4)(A) of the Act 

gives us the ability to permit plans to 

interact with prospective enrollees on a 

different basis. At the extreme, plans 

would be permitted to market directly to 

Medicare beneficiaries, based on contact 

information we provide, using approved 

materials, but otherwise bypassing CMS. 

At the other extreme, current rules 

regarding the marketing activities of MA 

plans would remain unchanged. 

Because Part D is an entirely new, 

voluntary benefit that would not 

otherwise be available to beneficiaries 

absent positive enrollment, there 

arguably exists a compelling difference 

in beneficiary interests relative to 

marketing under Part D (including both 

PDP and MA–PDs) versus under Part C 

(for purposes of MA only). We therefore 

encourage input from the public on 

these specific concerns and the 

provision in general. 

While this section and discussion 

may appear to raise HIPAA Privacy rule 

issues with regards to disclosure of 

information between CMS and PDPs 

sponsors or MA–PD organizations, the 

statute explicitly provides for these 

activities. Therefore, the Privacy Rule, 

including the disclosure of protected 

health information, does not apply to 

the uses provided for by this section. 

11. Procedures To Determine and 

Document Creditable Status of 

Prescription Drug Coverage (§ 423.56) 

Section 1860D–13(b)(6) of the Act 

identifies certain entities, which we 

describe in this section of our proposed 

rule, that must disclose whether the 

prescription drug coverage that they 

provide to their members who are Part 

D eligible is creditable coverage. 

Section 1860D–13(b)(4)(A)–(G) of the 

Act lists seven forms of creditable 

coverage: Coverage under a PDP or 

under an MA–PD; Medicaid; a group 

health plan (including coverage 

provided by a federal or a nonfederal 

government plan and by a church plan 

for its employees); a State 

pharmaceutical assistance program; 

veterans’ coverage of prescription drugs, 

prescription drug coverage under a 

Medigap policy; and military coverage 

(including Tricare). Many of these terms 

are defined elsewhere in Federal 

regulations; some of them are under the 

jurisdiction of other Federal agencies. 

However, the definition of a Medicare 

supplemental (Medigap) policy, is 

under CMS’ jurisdiction. This term is 

being clarified in subpart T of this 

regulation to coordinate with 

implementation of the Medicare 

prescription drug benefit. 

In addition to the forms of creditable 

coverage identified in section 1860D–

13(b)(4)(A)–(G) of the Act, section 

1860D–13(b)(4)(H) of the Act provides 

the Secretary with the flexibility to 

identify ‘‘other coverage’’ that could be 

considered to be creditable coverage. In 

42 CFR 423.56, we propose expanding 

the list of types of creditable coverage to 

include health insurance policies sold 

in the individual market (with the 

exception of policies that meet the 

definition of excepted benefits under 

section 2791 of the Public Health 

Service (PHS) Act, 42 U.S.C. 300gg–91). 

This category would include any 

policies that included prescription drug 

coverage, whether as part of a more 

comprehensive policy or as an 

independent ‘‘stand-alone’’ drug policy, 

that may have been sold to Medicare 

beneficiaries. Such stand-alone policies 

do not meet the definition of an 

excepted benefit under the Federal 

statute, even though States may regulate 

them as ‘‘limited’’ or ‘‘supplemental’’

benefit plans. It would also include 

comprehensive individual market 

policies with drug coverage that may 

have been sold to individuals before 

they became eligible for Medicare. 

It is important to include these 

policies as creditable coverage. There 

are a variety of reasons why Medicare 

beneficiaries may have had individual 

market coverage, instead of Medigap 

coverage, after becoming eligible for 

Medicare. For example, as discussed in 

the preamble for subpart T, certain 

policies which will be regulated as 

Medigap policies after January 1, 2006, 

do not meet the definition of a Medigap 

policy prior to that date. Therefore they 

do not come within the scope of the 

statutory list of types of creditable 

coverage. Similarly, if an individual 

purchased a policy with prescription 

drug coverage before becoming eligible 

for Medicare, under title XXVII of the 

PHS Act, 42 U.S.C. 300gg, et seq., the 

individual has a guaranteed right to 

continue to renew the policy. Again, 

while the policy might have met the 

definition of a Medigap policy had it 

been marketed and sold to Medicare 

beneficiaries, it does not meet those 

criteria, and does not come within the 

scope of the statutory list. 

We believe it is appropriate to give 

beneficiaries credit for this coverage, 

which does not fall within the scope of 

any of the types of creditable coverage 

listed in the statute, but which clearly 

fits within Congress’ intent to provide 

credit for prior prescription drug 

coverage, and require that the 

individuals be informed of whether 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46645 

their drug coverage is creditable and of 

the choices they will need to make 

relative to Part D enrollment. 

We are also adding coverage provided 

by the medical care program of the 

Indian Health Service, Tribe or Tribal 

organization, or Urban Indian 

organization (I/T/U) which is described 

under the Indian Health Improvement 

Act, 25 U.S.C. 1601 et seq. As a result 

of adding individual market and Indian 

Health Service coverage to the list of 

creditable coverage, beneficiaries with 

both of these types of drug coverage 

would receive notice of whether this 

coverage is creditable. We invite 

comments as to whether there are still 

more forms of coverage that we should 

consider creditable coverage. 

As discussed above in § 423.46 of the 

proposed rule, upon becoming eligible 

for Part D, beneficiaries must decide 

whether to enroll in Part D, or forego 

that opportunity and face a possible 

financial penalty should they later 

decide to enroll. Beneficiaries who 

decide not to enroll in Part D because 

they have creditable prescription drug 

coverage would not face such a penalty 

if they later decide to enroll in Part D. 

According to section 1860D–13(b)(5) of 

the Act, an enrollee who would 

otherwise be subject to a late enrollment 

penalty may avoid the penalty if his or 

her previous coverage met the standards 

of ‘‘creditable prescription drug 

coverage’’. Under section 1860D–

13(b)(5) of the Act, previous coverage 

will only meet those standards ‘‘* * * if 

the coverage is determined (in a manner 

specified by the Secretary) to provide 

coverage of the cost of prescription 

drugs the actuarial value of which (as 

defined by the Secretary) to the 

individual equals or exceeds the 

actuarial value of standard prescription 

drug coverage * * *’’

We are interpreting ‘‘to the 

individual’’ in this case as being to the 

average individual under the plan, as 

opposed to the sponsor of the plan. We 

believe that the relevant concern in this 

case is whether the beneficiary has been 

in a risk pool that on average provided 

benefits of equal value to Part D. 

Consequently, for purposes of 

determining creditable coverage, we are 

proposing to evaluate the actuarial value 

of the alternative coverage by means of 

a single test applied to all coverage: Will 

the expected plan payout on average 

under the coverage be at least equal to 

the expected plan payout under the 

standard benefit? For example, we 

propose to require sponsors of group 

health plans to determine the actuarial 

equivalency of each group health plan 

to the standard if, on average, the 

actuarial value of enrollee drug coverage 

under the plan as a whole is at least 

equal to the actuarial value of standard 

prescription drug coverage under Part D. 

(This approach set forth in Subpart R of 

this proposed rule concerning payments 

to sponsors of retiree prescription drug 

plans.) In other words, the calculation of 

actuarial equivalence would be based on 

the average plan payout across all 

benefit packages and all participants 

and beneficiaries receiving coverage 

under the sponsor’s group health plan. 

We seek comments on our assumption 

that this approach is both familiar to 

employers (and unions) and imposes 

minimum burden on sponsors. 

We are also proposing that any entity 

seeking to offer creditable prescription 

drug coverage must attest to this 

actuarial equivalence (or nonequivalence) in their notice to Medicare 

beneficiaries and in a submission to 

CMS, and must maintain documentation 

of the actuarial analysis and 

assumptions supporting the attestation. 

In other words, we would not require 

CMS approval of this analysis, but 

would require that it be submitted to 

CMS and made available to participants 

upon request. 

In coordination with the provisions 

regarding the late enrollment penalty in 

§ 423.46 of our proposed rule, we would 

establish a process under which these 

entities would disclose the creditable 

status of their prescription drug 

coverage to us and to each part D 

eligible beneficiary enrolled in such 

coverage. 

We intend to describe the process for 

providing this disclosure, including 

guidance on the content, placement, and 

timing of the disclosure. The content of 

this notice and its timely receipt will be 

important components in the decision 

making process for beneficiaries, as the 

creditable status of the beneficiary’s 

drug coverage will have a direct impact 

on the assessment of late enrollment 

penalties associated with Part D 

premiums. Equally important is the 

notification to the beneficiary of any 

subsequent changes in the creditable 

status of his or her coverage. Because 

beneficiaries have a limited time in 

which to make decisions about their 

Part D coverage without facing a 

penalty, it is important that the notice 

of creditable status be provided in a 

timely and conspicuous manner. 

However, we are also concerned about 

the potential administrative burden 

imposed by this requirement and are 

therefore soliciting comments on the 

format, placement, and timing of such a 

notice. 

There are several approaches we will 

consider. One approach would be to 

incorporate the required disclosure into 

materials these entities routinely 

disseminate to their Part D eligible 

beneficiaries. We could provide 

standard language to be inserted into 

such materials. We would benefit from 

comments regarding the types of 

materials that could provide an 

appropriate vehicle for this purpose and 

ways to ensure that the notice is 

conspicuous and readily identified by 

recipients, particularly in those 

instances where the coverage is not 

creditable. Another approach would be 

to require each entity to issue a separate 

notice to each Part D eligible enrollee. 

This type of notice would be most 

conspicuous and would therefore 

increase the likelihood that beneficiaries 

would become aware of the creditable 

status of their prescription drug 

coverage. Because beneficiaries are 

subject to financial penalties for the 

failure to maintain creditable coverage 

when they enroll in Part D, a separate 

notice may better inform beneficiaries 

and ensure that they take appropriate 

action to avoid such penalties. 

The Health Insurance Portability and 

Accountability Act of 1996 (HIPAA), 

Pub. L. 101–93, requires that certain 

entities that offer health coverage 

provide covered individuals with a 

document, called a ‘‘certificate of 

creditable coverage,’’ that establishes 

the time period during which the 

coverage was in effect. Implementing 

regulations provide a model 

‘‘Certification of Creditable Coverage.’’

Those regulations require that a 

certificate be produced and 

disseminated to individuals when their 

coverage ends. We have considered 

requiring that information about the 

creditable status of prescription drug 

coverage be included in this 

certification. However, since the 

certification required under HIPAA is 

not required to be provided until after 

such coverage has ended (or upon 

request), it would arrive too late to assist 

beneficiaries in deciding whether to 

enroll in Part D. However, the HIPAA 

certification may serve as a useful 

model and we invite comments about 

the administrative burden associated 

with producing and disseminating a 

similar notice of creditable status to 

beneficiaries. 

The timing and frequency of these 

notices is also a key consideration. The 

initial notice of creditable status could 

be coordinated with the first Annual 

Coordinated Enrollment Period for Part 

D, which begins November 15, 2005, to 

ensure that beneficiaries have this 

information when making decisions 

regarding their Part D coverage. Another 

option would be to coordinate this 

disclosure with the end of the first Part 

46646 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

D initial enrollment periods and the 

annual coordinated election period, 

both of which end May 15, 2006. 

Beneficiaries would also need to know 

about any change in the creditable 

status of existing coverage before such a 

change becomes effective so that they 

have sufficient time to decide whether 

to obtain Part D coverage. If a 

beneficiary’s creditable drug coverage 

ends or is changed to the extent that it 

is no longer creditable, the beneficiary 

has a Special Enrollment Period (SEP) 

during which the beneficiary can enroll 

in Part D without financial penalty. 

Thus, we believe that such notice 

should be provided, at a minimum, at 

these two important times, as well as 

upon the beneficiary’s request. 

We invite comments on how best to 

ensure that beneficiaries receive timely 

and adequate notice of the creditable 

status of their prescription drug 

coverage without imposing a significant 

administrative burden on entities that 

provide such coverage. We also note 

that the statute requires entities to 

disclose the creditable status of this 

coverage to us, and we invite comments 

on the possible methods of providing 

such disclosure. Given the importance 

of knowing whether coverage 

constitutes ‘‘creditable coverage,’’ we 

would like to receive feedback regarding 

whether it would be a significant 

administrative burden for group health 

plans and other sponsors to include in 

disclosures an indication of the value of 

their drug benefit, the total amount of 

the annual premium for their drug 

benefit, and the amount of the annual 

drug benefit premium that the 

beneficiary will be required to pay. 

Section 1860D–13(b)(6)(C) of the Act 

provides that an individual who was not 

adequately informed that his or her 

prescription drug coverage was not 

creditable may apply to CMS to have 

such coverage treated as creditable 

coverage for purposes of not having the 

late penalty imposed. We envision 

establishing a process in which an 

individual could apply for 

reconsideration of the late enrollment 

penalty based upon not being 

adequately informed. In this process, we 

would instruct beneficiaries as to the 

type of information that should be 

submitted as well as where the 

beneficiaries should submit the 

information. The process could also 

include CMS, or an entity with which 

CMS may contract, receiving and 

reviewing information related to the 

reconsideration, including validating 

that the entity in which the individual 

had previously been covered had 

provided the required disclosure. We 

appreciate comment on this process. 

C. Voluntary Prescription Drug Benefit 

and Beneficiary Protections 

1. Overview and Definitions (§ 423.100) 

Subpart C of part 423 implements 

sections 1860D–2, 1860D–4(a), 1860D–

4(b), 1860D–4(i), 1860D–4(k), 1860D–

11(a), 1860D–21(a), 1860D–21(c)(3), and 

1860D–21(d)(2) of the Social Security 

Act. This subpart sets forth 

requirements regarding—

• The benefits offered by PDP 

sponsors and MA organizations that 

offer qualified prescription drug 

coverage. 

• The establishment of prescription 

drug plan service areas. 

• Access standards with regard to 

covered Part D drugs. 

• Information dissemination by PDP 

sponsors and MA Organizations offering 

qualified prescription drug coverage. 

• Disclosure to beneficiaries of 

pricing information for generic versions 

of covered Part D drugs. 

• Privacy, confidentiality, and 

accuracy of PDP sponsors’ beneficiary 

records. 

Section 423.100 of our proposed rule 

also includes definitions for terms that 

are frequently used in this subpart. 

Generally, we clarify the definitions in 

§ 423.100 in the relevant parts of section 

II.C of this preamble. However, we 

believe that additional clarification is 

needed with regard to the terms 

‘‘covered Part D drug’’ and ‘‘dispensing 

fee’’ in order to provide necessary 

context for the Part D benefit 

requirements in this subpart. We are 

providing that clarification below. 

a. Covered Part D Drug 

The definition of a covered Part D 

drug in § 423.100 of our proposed rule 

closely follows the statutory definition 

in section 1860D–2(e) of the Act. 

According to this definition, a covered 

Part D drug must be available only by 

prescription, approved by the Food and 

Drug Administration (FDA), used and 

sold in the United States, and used for 

a medically accepted indication (as 

defined in section 1927(k)(6) of the Act). 

A covered Part D drug would include 

prescription drugs, biological products, 

and insulin as described in specified 

paragraphs of section 1927(k) of the Act 

and vaccines licensed under section 351 

of the Public Health Service Act. The 

definition also includes ‘‘medical 

supplies associated with the injection of 

insulin (as defined in regulations of the 

Secretary).’’ We propose to define those 

medical supplies to include syringes, 

needles, alcohol swabs, and gauze. 

In accordance with section 1860D–

2(e)(2) of the Act, the definition of a 

covered Part D drug would specifically 

exclude drugs or classes of drugs, or 

their medical uses, which may be 

excluded from coverage or otherwise 

restricted under Medicaid, with the 

exception of smoking cessation agents. 

In accordance with section 1927(d)(2) of 

the Act, the drugs or classes of drugs 

that may currently be excluded or 

otherwise restricted under Medicaid 

include—(1) Agents when used for 

anorexia, weight loss, or weight gain; (2) 

agents when used to promote fertility; 

(3) agents when used for cosmetic 

purposes or hair growth; (4) agents 

when used for the symptomatic relief of 

cough and colds; (5) prescription 

vitamins and mineral products, except 

prenatal vitamins and fluoride 

preparations; (6) nonprescription drugs; 

(7) outpatient drugs for which the 

manufacturer seeks to require that 

associated tests or monitoring services 

be purchased exclusively from the 

manufacturer or its designee as a 

condition of sale; (8) barbiturates; and 

(9) benzodiazepines. We are concerned 

that the aforementioned exclusion of 

outpatient drugs for which the 

manufacturer seeks to require that 

associated tests or monitoring services 

be purchased exclusively from the 

manufacturer (or its designee) as a 

condition of sale (item 7 above) may 

prove too narrow to address 

inappropriate tying arrangements. We 

may consider expanding this exclusion 

and solicit public comments on how to 

reduce the risk of abusive tying 

arrangements. 

The definition of a covered Part D 

drug would also exclude any drug for 

which, as prescribed and dispensed or 

administered to an individual, payment 

would be available under Parts A or B 

of Medicare for that individual (even 

though a deductible may apply). By 

including the language ‘‘as so prescribed 

and dispensed or administered,’’ section 

1860D–2(e)(B) makes a distinction 

between what would be paid for under 

Part D as opposed to Part B. This 

language indicates that Congress was 

aware that some covered Part D drugs 

could qualify for payment under Part B 

in some circumstances and Part D in 

other circumstances, depending on the 

way those drugs were dispensed or 

administered. Dispensation or 

administration should be interpreted to 

include the setting, personnel, and 

method involved, and not simply the 

route of administration. 

One goal of Part D is to fill any gaps 

in existing Part B coverage of drugs. Part 

B has a limited and specific drug benefit 

covering drugs furnished ‘‘incident to’’ a 

physician’s service (for example, certain 

injectable drugs that are not usually selfadministered and furnished incident to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46647 

a physician office visit); drugs furnished 

as a supply to covered items of durable 

medical equipment; certain oral drugs 

(immunosuppressive, and certain oral 

anti-cancer and anti-emetic drugs); 

certain immunizations; and several 

other drugs and biologicals. Part D 

cannot pay for these drugs because 

payment is available under Part B. 

Section 1860D–2(e)(2)(B) of the Act 

that specifies that a drug prescribed to 

a Part D eligible individual that would 

otherwise qualify as a Part D drug 

cannot be considered a covered Part D 

drug if payment for such drug ’’* * * is 

available (or would be available but for 

the application of a deductible) under 

part A or B for that individual.’’ We 

interpret this to mean that if payment 

could be available under Part A or B to 

the individual for such drug, then it will 

not be covered under Part D. This will 

be the case even if a beneficiary has Part 

A, but not Part B or vice versa, since, as 

we explain in section F of this preamble 

and at § 423.265(c) of the Act, PDP 

sponsors must offer a uniform benefit 

package in order to carry out Congress’s 

intent in section 1860D–13(a)(1)(F) of 

the Act. If Part B covered drugs were 

included in the Part D benefit package 

only for those enrollees without Part B, 

but not for others, it would not be 

possible for PDP sponsors to offer 

uniform benefit packages for a uniform 

premium to all enrollees. In addition, 

we believe that payment for a drug 

under Part A or B is available to any 

individual who could sign up for Parts 

A or B, regardless of whether they 

actually enrolled. All individuals who 

are entitled to premium-free Part A are 

eligible to enroll in Part B. This includes 

individuals who are entitled to Part A 

based on age, disability, and ESRD. All 

individuals who are entitled to Part B 

only are age 65 or older and, in almost 

all instances, not eligible for premiumfree Part A. However, they are eligible 

to buy into Part A for a premium. Thus, 

for all Part D eligible individuals, drugs 

covered under Parts A and B are 

available if they choose to pay the 

appropriate premiums. 

We believe that the phrase ‘‘for that 

individual’’ in 1860D–2(e)(2)(B) of the 

Act is intended to capture the fact that 

under local medical review policies 

(LMRPs), a drug that might be covered 

under Part B for an individual in one 

area of the country might not be covered 

in another area of the country. Thus, 

what is covered ‘‘under Part B for that 

individual’’ may be, as discussed 

earlier, different in different geographic 

regions. Under this reading, in a region 

where a drug is covered under Part B, 

it would be considered ‘‘available’’ to 

‘‘that individual’’ whether he or she had 

elected to enroll in Part B or not. 

The Part D drug coverage described in 

this proposed rule does not alter the 

coverage or associated rules for drugs 

that are currently covered by Medicare 

prior to the MMA, such as those 

included in the following list, which 

offers examples but is not meant to be 

exhaustive—

1. Drugs furnished incident to a 

physician’s service that are not usually 

self-administered by the patient. 

2. Drugs used in immunosuppressive 

therapy furnished to a beneficiary who 

receives an organ transplant for which 

Medicare makes payment. 

3. Drugs administered to ESRD 

patients and separately billed by 

dialysis facilities. These would include 

erythropoetin (EPO), both when 

administered in the dialysis facility or 

furnished to an ESRD patient for selfadministration. 

4. Drugs taken orally during cancer 

chemotherapy provided that they have 

the same active ingredients as 

chemotherapy drugs and are used for 

the same indications as chemotherapy 

drugs which would be covered if they 

were not self-administered and were 

administered as incident to a 

physician’s professional service, and 

certain oral drugs prescribed for use as 

an acute antiemetic as part of an 

anticancer chemotherapeutic regimen if 

the drug is administered by a physician. 

5. Blood clotting factors for 

hemophilia patients competent to use 

such factors to control bleeding without 

medical supervision, and items related 

to the administration of those factors. 

6. Supplies (including drugs) 

necessary for the effective use of 

covered durable medical equipment, 

including those which must be put 

directly into the equipment and 

furnished to a beneficiary via the 

equipment (for example, amphotericin 

B, an anti-fungal agent, administered 

with an infusion pump, or inhalation 

drugs furnished to a beneficiary via a 

nebulizer). 

7. Pneumococcal pneumonia 

vaccines, hepatitis B vaccines, and 

influenza virus vaccines. 

We intend to ensure that the Part D 

benefit ‘‘wraps around’’ Part B drug 

benefits to the greatest extent possible. 

For example, Part D would cover 

immunosuppressive drugs furnished to 

Medicare beneficiaries who did not 

have their transplant paid for by 

Medicare (e.g., a beneficiary who had 

his or her transplant paid for by a 

private insurer when he or was 

employed, and the beneficiary has now 

enrolled in Part B). Part D could pay for 

these immunosuppressive drugs for 

these beneficiaries since Part B is 

prohibited by statute from paying for 

them. Therefore, we are soliciting 

comments concerning any drugs that 

may require specific guidance with 

regard to their coverage under Part D, 

and any gaps that may exist in the 

combined ‘‘Part D & B’’ coverage 

package. 

b. Dispensing Fees 

The Medicare Modernization Act 

(MMA) does not define the term 

‘‘dispensing fee,’’ although the terms 

‘‘dispensing fee’’ and ‘‘dispense’’ appear 

several times throughout the Act. 

Section 1860D–2(d)(1)(B) states that 

negotiated prices available under Part D, 

‘‘shall take into account negotiated price 

concessions * * * and include any 

dispensing fees for such drugs.’’

Sections 1860D–15(b)(3) and (e)(1)(b) of 

the Act provide that reinsurance and 

risk corridor payments will be based on 

allowable costs that include ‘‘costs 

directly related to the dispensing of 

covered part D drugs during the year.’’

The costs used in calculating the retiree 

drug subsidy also include the ‘‘costs 

directly related to the dispensing of 

covered part D drugs during the year’’

as provided in section 1860D–

22(a)(3)(C)(ii) of the Act. Section 

1860D–2(e)(1)(B) of the Act specifically 

includes the medical supplies 

associated with the injection of insulin 

(as defined in our proposed rule); this 

is the only reference to supplies 

associated with drug administration in 

the Part D drug benefit provisions of the 

MMA. 

Because the statute is ambiguous on 

the meaning of ‘‘dispensing fee,’’ in this 

proposed rule we are not proposing a 

specific definition of ‘‘dispensing fee,’’

but instead are offering three different 

options we believe would be reasonable, 

permissible definitions of the term. We 

invite comments on each of the 

definitions proposed below. 

Option 1: The dispensing fee would 

include only those activities related to 

the transfer of possession of the covered 

Part D drug from the pharmacy to the 

beneficiary, including charges 

associated with mixing drugs, delivery, 

and overhead. The dispensing fee would 

not include any activities beyond the 

point of sale (that is, pharmacy followup phone calls) or any activities for 

entities other than the pharmacy. 

Option 1 would differentiate between 

‘‘dispensing’’ a covered Part D drug and 

‘‘administering’’ one in order to restrict 

the scope of these fees to include only 

those charges for pharmacy services 

related to the preparation and delivery 

of a covered Part D drug. Under option 

1, the dispensing fee could not include 

46648 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

any charges associated with 

administering the drug once the drug 

has already been transferred to the 

beneficiary. Thus, for example, the fee 

would not include any professional fees 

(such as skilled nursing services), 

durable medical equipment (such as an 

external infusion pump or an IV pole), 

supplies (such as tubes and dressings), 

or even follow-up telephone calls from 

the pharmacy to the patient to check on 

the patient’s progress with the drug. 

Option 2: The dispensing fee would 

include the activities included in 

Option 1, but in addition would include 

amounts for the supplies and equipment 

necessary for the drugs to be provided 

in a state in which they can be 

effectively administered. 

Option 3: The dispensing fee would 

include the activities in Option 2, but in 

addition would include activities 

associated with ensuring proper ongoing 

administration of the drugs, such as the 

professional services of skilled nursing 

visits and ongoing monitoring by a 

clinical pharmacist. 

Our proposed options 2 or 3 would 

also frame the definition so that 

supplies, equipment, and the 

professional services associated with 

administering the drug would be limited 

to cases where: (a) A typical patient 

with the condition at issue could not 

receive the benefit of the medication in 

the absence of the associated supplies, 

equipment or professional services, and 

(b) the patient is receiving home 

infusion therapy. 

We believe that option 1 represents 

the best reading of the statute, since it 

would limit dispensing fees to a transfer 

of possession of the drug and would not 

include any fees associated with 

administering the drug. In addition, 

where Congress wished for CMS to 

include the cost of supplies under Part 

D, it specifically directed CMS to do so 

(by requiring that the supplies 

associated with the injection of insulin 

be included in the definition of covered 

Part D drug). 

However, we also recognize that 

options 2 or 3 would eliminate current 

gaps in coverage relative to home 

infused drugs. We have limited options 

2 and 3 to cases of home infusion 

because this is the only circumstance 

we know of where the additional 

services associated with administering 

the drug would not already be covered 

under Medicare Part A or B and would 

be necessary to ensure effective delivery 

of the drug. (For example, infusion 

therapy provided in a hospital 

outpatient setting or in a physician 

office could be covered under Part B. 

Infusion therapy by a hospice could be 

covered as part of the hospice benefit, 

if a patient meets the conditions for 

hospice care.) However, there may be 

related issues with respect to the 

administration of other drugs (for 

example, vaccines and injectable longacting antipsychotic drugs), and we 

solicit comments regarding any 

implications for our proposed options 

for defining dispensing fees. 

Home infusion therapy equipment, 

supplies, and services typically are used 

in order to administer medications to 

patients using intravenous, 

subcutaneous, and epidural routes. Drug 

therapies commonly administered via 

infusion include antibiotics, 

chemotherapy, pain management, 

parenteral nutrition and immune 

globulin. Generally, home infusion 

therapy includes coordinating the 

varied services a patient might need in 

order to receive infusion in the home. 

For example, a home infusion company 

might provide, or facilitate the provision 

of, skilled nursing services, durable 

medical equipment (such as an external 

infusion pump or an IV pole), supplies 

(such as tubes and dressings), education 

of the patient, pharmacy services 

(including mixing the drugs if 

necessary), and delivery services. A 

home infusion company might also call 

the patient periodically to monitor care. 

Based on our research, home infusion is 

covered under the medical benefits of 

most commercial insurers and MA plans 

as a cost-effective alternative to 

inpatient care for administering drugs 

that cannot be self-administered for 

treatment of acute or chronic medical 

conditions in patients who are 

sufficiently ill to be unable to visit an 

outpatient clinic or physician’s office to 

receive the necessary therapy. Home 

infusion providers generally bill private 

insurance plans for these services by 

billing separately for the drug, and also 

charging a per diem for other services. 

The per diem charge represents the 

average daily expense associated with 

non-pharmaceutical expenses 

(including nursing services), such as 

equipment, supplies, labor, and nonnurse clinical services involved in the 

compounding, preparation, delivery, 

administration, and monitoring for a 

given drug therapy. 

While Parts A and B pay for some 

home infusion therapies (through, for 

example, the drugs and supplies that are 

provided incident to the provision of a 

home infusion pump), in other cases 

home infusion therapies would not be 

covered by Medicare Parts A and B (for 

example, when the drug is administered 

in the home through an intravenous 

drip and not a pump). In addition, 

infusion therapy policies may vary from 

region to region based on local DMERC 

coverage policies. 

Options 2 and 3 would therefore 

allow us to include in the Part D 

dispensing fee items and services that 

might be considered essential in order 

to effectively utilize the drug benefit. 

However, it would also extend the 

definition of dispensing fee beyond the 

mere transfer of possession of the drug. 

Also, to the extent that professional 

services are included in the definition of 

dispensing fees, we are concerned about 

double billing with regard to some of 

the skilled nursing costs associated with 

home infusion. In many cases these 

skilled nursing costs are separately 

billable to Part A, Medicaid, or 

supplemental insurance, and we are 

concerned about Part D supplanting 

these other sources of payment. In 

addition, as discussed in subpart D of 

this preamble, PDP sponsors and MA 

organizations offering MA–PD plans 

will be required to offer quality 

assurance and medication therapy 

management programs. These programs 

could be used for pharmacies to follow 

up with patients and ensure that 

patients are properly administering their 

drugs or adhering to their drug 

regimens. We are concerned about 

beneficiaries being charged for quality 

assurance services as part of the 

dispensing fee, when such charges 

might have already been included in the 

cost of the premium. 

Finally, we note that any definition 

we adopt for purposes of Part D would 

not carry over to Part B of the Medicare 

program. Section 1842(o)(2) of the Act 

gives the Secretary discretionary 

authority to pay a dispensing fee to a 

licensed pharmacy that furnishes 

certain covered Part B drugs and 

biologicals to Medicare beneficiaries. 

While the term ‘‘dispensing fee’’ is not 

defined in section 1842(o)(2) of the Act, 

the considerations under Medicare Part 

B, a more comprehensive health 

insurance product that has separate 

payment mechanisms for durable 

medical equipment and professional 

services, are different from those under 

Part D. In addition, the Secretary is not 

required to pay any dispensing fee 

under section 1842(o)(2) of the Act, 

while in Part D, the dispensing fee is 

included in the negotiated price of a 

drug. 

c. Long-Term Care Facility 

We request comments regarding our 

definition of the term long-term care 

facility in § 423.100, which we have 

interpreted to mean a skilled nursing 

facility, as defined in section 1819(a) of 

the Act, or a nursing facility, as defined 

in section 1919(a) of the Act. We are 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46649 

particularly interested in whether 

intermediate care facilities for the 

mentally retarded or related conditions 

(ICF/MRs), described in § 440.150, 

should explicitly be included in this 

definition given Medicare’s special 

coverage related to mentally retarded 

individuals. It is our understanding that 

there may be individuals residing in 

these facilities who are dually eligible 

for Medicaid and Medicare. Given that 

payment for covered Part D drugs 

formerly covered by Medicaid will shift 

to Part D of Medicare, individuals at 

these facilities will need to be assured 

access to covered Part D drugs. Our 

proposed definition limits our 

definition to skilled nursing and nursing 

facilities because it is our understanding 

that only those facilities are bound to 

Medicare conditions of participation 

that result in exclusive contracts 

between long-term care facilities and 

long-term care pharmacies. However, to 

the extent that ICF/MRs and other types 

of facilities exclusively contract with 

long-term care pharmacies in a manner 

similar to skilled nursing and nursing 

facilities, we would consider modifying 

this definition. 

2. Requirements Related to Qualified 

Prescription Drug Coverage (§ 423.104) 

Under section 1860D–11(e)(2)(A) of 

the Act, we may approve as PDP 

sponsors or MA organizations offering 

MA–PD plans only those entities 

proposing to offer qualified prescription 

drug coverage in accordance with our 

requirements. As provided in section 

1860D–2(a)(1) of the Act and 

§ 423.104(d) of our proposed rule, 

qualified prescription drug coverage 

may consist of either standard 

prescription drug coverage or alternative 

prescription drug coverage. Alternative 

prescription drug coverage may include 

supplemental benefits, and this 

coverage is referred to as ‘‘enhanced 

alternative coverage’’ (these concepts 

are discussed in detail below). 

We would review and approve 

current and potential PDP sponsors’

proposed prescription drug plans and 

current and potential MA organizations’

proposed MA–PD plans consistent with 

the rules described in section II.F.6 of 

this preamble. We will further articulate 

requirements regarding the approval of 

qualified prescription drug coverage in 

written policy guidelines and other 

CMS instructions. 

Section 1860D–1(b)(1) of the Act 

provides that we establish an 

enrollment process for prescription drug 

plans that uses rules similar to, with 

limited exceptions, those governing 

enrollment in an MA plan under various 

subsections of 1851 of the Act, 

including portions of 1851(g). Section 

1851(g)(1) of the Act provides that an 

MA organization must accept without 

restrictions individuals who are eligible 

to elect enrollment in its MA plan. 

Accordingly, section § 423.104(b) of our 

proposed rule provides that a PDP 

sponsor offering qualified prescription 

drug coverage would be required to offer 

its plan to all Part D eligible individuals 

residing in the plan’s service area. We 

note that, unlike a local MA–PD plan, a 

prescription drug plan is not eligible for 

a capacity waiver as described in 42 

CFR 422.60(b) of our proposed rule. 

a. Standard Prescription Drug Coverage 

As provided under section 1860D–

2(b) of the Act and codified in 

§ 423.104(e) of our proposed rule, 

‘‘standard prescription drug coverage’’

would consist of coverage of covered 

Part D drugs subject to an annual 

deductible; 25 percent coinsurance (or 

an actuarially equivalent structure) up 

to an initial coverage limit; and 

catastrophic coverage after an 

individual incurs out-of-pocket 

expenses above a certain threshold. In 

2006, the annual deductible would be 

$250, the initial coverage limit would be 

$2,250, and the out-of-pocket threshold 

would be $3600. Once a Part D enrollee 

reached the annual out-of-pocket 

threshold, his or her nominal costsharing would be equal to the greater of: 

(1) 5 percent coinsurance, or (2) a 

copayment of $2 for a generic drug or 

a preferred multiple source drug and $5 

for any other drug, or an actuarially 

equivalent structure. (See Table C–1 for 

a summary version of standard 

prescription drug coverage benefits for 

2006.) 

A multiple source drug is defined 

under section 1927(k)(7)(A)(i) of the Act 

as a drug for which there are two or 

more drug products that are (1) rated as 

therapeutically equivalent by the Food 

and Drug Administration (FDA), (2) are 

pharmaceutically equivalent and 

bioequivalent, as defined in section 

1927(k)(7)(C) of the Act, and as 

determined by the FDA, and (3) are sold 

or marketed in a State during the 

relevant time period. Section 423.100 of 

our proposed rule provides definitions 

for therapeutically equivalent and 

bioequivalent drugs based on the 

definitions provided in sections 

1927(k)(7)(A) of the Act and section 

505(j)(8) of the Food, Drug, and 

Cosmetic Act, respectively. The term 

therapeutically equivalent refers to 

drugs that are rated as therapeutic 

equivalents under the Food and Drug 

Administration’s most recent 

publication of ‘‘Approved Drug Products 

with Therapeutic Equivalence 

Evaluations.’’ Section 423.4 of our 

proposed rule defines a generic drug as 

a drug for which an application under 

section 505(j) of the Federal Food, Drug, 

and Cosmetic Act is approved. To 

clarify, generic drugs are both 

bioequivalent and therapeutically 

equivalent to an innovator drug. Section 

423.100 of our proposed rule also 

clarifies that a preferred drug refers to 

a covered Part D drug on a prescription 

drug plan or MA–PD plan’s formulary 

for which beneficiary cost-sharing is 

lower than for a non-preferred drug on 

the formulary. 

According to section 1860D–2(b)(4)(C) 

of the Act, and as defined in § 423.100 

of the proposed rule, beneficiary costs 

for covered Part D drugs are only 

considered incurred (for purposes of 

applicability toward beneficiary 

spending against the annual out-ofpocket limit) if they are—

1. Incurred against any annual 

deductible, any applicable cost-sharing 

for costs above the annual deductible 

and up to the initial coverage limit, and 

any applicable cost-sharing for costs 

above the initial coverage limit and up 

to the out-of-pocket threshold; 

2. Incurred by the Part D enrollee (or 

by another person on behalf of that 

individual); paid on behalf of a lowincome individual under the Part D 

subsidy provisions described in 

§ 423.782 of the proposed rule; or paid 

on behalf of the enrollee under a State 

Pharmaceutical Assistance Program 

(SPAP) described in § 423.454 of the 

proposed rule; and 

3. Incurred with respect to covered 

Part D drugs that are either included in 

a prescription drug plan or MA–PD 

plan’s formulary or treated as being 

included in a plan’s formulary as a 

result of a coverage determination, 

redetermination, or appeal under 

§§ 423.566, 423.580, and 423.600 of our 

proposed rule. 

As a point of clarification, we also 

propose that beneficiary costs incurred 

under the following circumstances 

count as incurred costs consistent with 

the definition of that term in § 423.100 

of our proposed rule (with plans 

explicitly accounting for such price 

differentials in the actuarial valuation of 

their coinsurance in their bids): 

• Any differential between a network 

retail pharmacy’s negotiated price and a 

network mail-order pharmacy’s 

negotiated price for an extended (for 

example, 90-day) supply of a covered 

Part D drug purchased at a retail 

pharmacy, as described in section 

II.C.4.a of this preamble, and 

• Any differential between an out-ofnetwork pharmacy’s usual and 

customary price for a covered Part D 

46650 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

drug purchased in accordance with the 

out-of-network access rules described in 

section II.C.5 of this preamble and the 

plan allowance for that covered Part D 

drug. 

Section 1860D–2(b)(4)(C)(ii) of the Act 

provides that any costs for which a Part 

D individual is reimbursed by insurance 

or otherwise, a group health plan, or 

another third-party payment 

arrangement do not count toward 

incurred costs; only costs paid by a Part 

D enrollee, or on behalf of a Part D 

enrollee by another person, would count 

as incurred costs. This provision thus 

creates a distinction between all 

enrollee out-of-pocket expenditures and 

those that are counted toward the outof-pocket threshold (incurred costs). 

In § 423.100 of our proposed rule, we 

define the terms ‘‘person,’’ ‘‘insurance or 

otherwise,’’ ‘‘group health plan,’’ and 

‘‘third-party payment arrangement’’ in 

such a way as to strike what we believe 

to be an appropriate balance between: 

(1) allowing certain individuals or 

charitable organizations to provide 

financial assistance to Part D enrollees 

that would be counted toward those 

enrollees’ incurred costs, and (2) 

reducing incentives for current 

employers, other insurers, and 

government programs to reduce their 

current levels of coverage and replace 

that coverage with Part D wrap-around 

benefits, thereby requiring Medicare to 

pay for drug costs that were previously 

borne by other payers. We propose 

defining ‘‘person’’ in such a way that 

other individuals, such as family 

members, could pay for covered Part D 

drug cost-sharing on behalf of Part D 

enrollees. The term ‘‘person’’ is also 

defined more broadly than a human 

being based on legal definitions of the 

term that include corporate entities or 

organizations. This definition of 

‘‘person’’ is consistent with other 

statutory definitions of the term 

‘‘person,’’ including 1 U.S.C. 1, which 

provides that in interpreting an Act of 

Congress, unless the context indicates 

otherwise, the term ‘‘person’’ includes 

corporations, companies, associations, 

firms, partnerships, societies, and joint 

stock companies, as well as individuals. 

We believe that bona fide charities 

unaffiliated with employers or insurers 

could not be excluded from financially 

assisting Part D enrollees with covered 

Part D drug expenditures and having 

those expenditures count toward 

enrollees’ incurred costs. Although 

allowing such financial contributions to 

count toward incurred costs could 

increase Medicare expenditures by 

allowing more beneficiaries to qualify, 

and to qualify sooner, for coverage 

above the out-of-pocket threshold, we 

expect that the number of people who 

are both assisted by charitable 

organizations and have expenditures 

high enough to qualify for protection 

against high out-of-pocket expenditures 

would be small. Since there will be 

many Part D eligible beneficiaries with 

incomes higher than the low-income 

subsidy eligibility limits described in 

§ 423.782 of our proposed rule, we 

believe it is a desirable goal to allow 

appropriate charitable assistance to 

count toward enrollees’ incurred costs. 

This interpretation is consistent with (1) 

our interpretation of the term ‘‘person’’

and (2) our interpretation of the terms 

‘‘insurance or otherwise,’’ ‘‘group health 

plan,’’ and ‘‘third-party payment 

arrangement’’ (as discussed 

subsequently in this preamble section). 

In addition, we note that any 

arrangements pursuant to which a 

charitable organization pays a Medicare 

beneficiary’s cost-sharing obligations 

must comply with the Federal fraud and 

abuse laws, including the anti-kickback 

statute, section 1128B(b) of the Act, as 

well as the civil monetary penalty 

provision at section 1128A(a)(5) of the 

Act. We are considering whether 

assistance in paying enrollees’ out-ofpocket cost-sharing obligations provided 

through prescription drug patient 

assistance program sponsored by 

pharmaceutical manufacturers would be 

allowed under the aforementioned 

Federal fraud and abuse laws. 

We have defined the term ‘‘insurance 

or otherwise’’ consistent with our policy 

goal of reducing incentives for current 

employers, other insurers, and 

government programs to reduce their 

current levels of coverage and replace 

that coverage with Part D wrap-around 

benefits. The use of the term ‘‘insurance 

or otherwise’’ in section 1860D–

2(b)(4)(C)(ii) of the Act suggests that the 

Congress understood that programs 

other than insurance programs would be 

helping beneficiaries pay for covered 

Part D drugs. 

Section 1860D–24 of the Act, which 

extends the coordination of benefits 

provisions required for SPAPs to other 

types of plans—including Medicaid 

programs, Section 1115 waiver 

demonstrations, group health plans, 

FEHBP, military coverage (including 

TRICARE), and ‘‘such other health 

benefit plans or programs that provide 

coverage or financial assistance for the 

purchase or provision of prescription 

drug coverage on behalf of Part D 

eligible individuals as the Secretary may 

specify’’—appears to support our 

proposed definition of ‘‘insurance or 

otherwise,’’ in § 423.100 of our 

proposed rule, as a plan (other than a 

group health plan) or program that 

provides, or pays the cost of, medical 

care (as defined in section 2791(a)(2) of 

the Public Health Service Act). We note 

that our definition of ‘‘insurance or 

otherwise’’ does not modify the 

definition of ‘‘health plan’’ at 45 CFR 

160.103 of the HIPAA Administrative 

Simplification Regulations, or any 

interpretation thereof issued by the 

Department of Health and Human 

Services. 

Therefore, ‘‘insurance or otherwise’’

would include the following programs 

and entities: 

• Government programs and entities 

(for example, Department of Veterans 

Affairs (VA), Department of Labor 

Federal Workers’ Compensation 

Program, and Federally Qualified Health 

Centers (FQHCs); 

• Government insurers (for example, 

Medicaid 1115 demonstrations and the 

State Children’s Health Insurance 

Program (SCHIP); and 

• Government-sponsored funds (for 

example, black lung benefits, Ryan 

White CARE Act funds, and State 

special funds that assist certain 

individuals with their medical costs, 

such as a special fund for AIDS 

patients). 

Because costs for covered Part D drugs 

paid by insurance or otherwise on 

behalf of a Part D enrollee do not, as 

previously discussed, count as incurred 

costs, any Part D wrap-around coverage 

provided to beneficiaries by these 

entities would not count toward 

incurred costs. Wrap-around coverage 

provided to Part D enrollees by group 

health plans and other third-party 

payment arrangements would also not 

count as incurred costs. We have 

defined the term ‘‘ group health plan’’ to 

have the same meaning as in 42 CFR 

411.101. In addition, we have defined 

the term ‘‘third party payment 

arrangements’’ to mean any contractual 

or similar arrangement under which a 

person has a legal obligation to pay for 

covered Part D drugs. 

We request comments regarding the 

treatment of health savings account 

(HSAs) vis-a`-vis our definition of ‘‘group 

health plan,’’ ‘‘insurance or otherwise,’’

and ‘‘third party payment 

arrangements.’’ Our strong preference is 

not to treat HSAs as group health plans, 

insurance or otherwise, or third party 

payment arrangements and therefore to 

allow HSA contributions to count 

toward incurred costs, since we see 

these funds as essentially analogous to 

a beneficiary’s bank account. We also 

seek comments on how to treat FSAs, 

health reimbursement accounts (HRAs), 

and Medicare savings accounts (MSAs), 

relative to our definitions of group 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46651 

health plan, insurance or otherwise, and 

third party payment arrangements. 

In proposing this policy, an 

assessment was made of the need for 

coordination of the Part D benefit with 

the Department of Health and Human 

Services’ programs, including the Indian 

Health Service (IHS) and AIDS drug 

assistance programs. The IHS is the 

agency that fulfills the Secretary’s 

unique relationship to provide health 

services to American Indians and 

Alaska Natives (AI/ANs) based on the 

government-to-government relationship 

between the United States and tribes. 

The Department has a long history of 

recognizing AI/AN beneficiaries’ dual 

eligibility for services both from the HIS 

and from other Department programs. 

We expect many AI/AN beneficiaries 

will qualify for full and partial lowincome subsidies under Part D. For 

those not receiving a full or partial 

subsidy, the IHS may wish to pay for 

premiums to eliminate any barriers to 

Part D benefits. 

For AI/ANs not eligible for the lowincome subsidies and enrolled in a 

prescription drug plan or MA–PD plan, 

the costs of covered Part D drugs 

obtained at an I/T/U pharmacy or a nonIHS retail pharmacy (through an 

appropriate IHS contract health services 

referral) will be applied to meet the 

beneficiary’s deductible under qualified 

prescription drug coverage. These 

payments will not count as incurred 

costs towards meeting the out-of-pocket 

threshold, however. This will ensure 

that an IHS beneficiary receives a 

benefit for IHS expenditures between 

the deductible and the out-of-pocket 

limit. Once the deductible is met, the 

IHS will benefit from Part D coverage 

because the I/T/U pharmacy will be 

reimbursed for 75 percent of spending 

(on average) between the deductible and 

the initial coverage limit. We seek 

comments on how I/T/U pharmacies 

and IHS beneficiaries will achieve 

maximized participation in Part D 

benefits. 

We also assessed the role of the Ryan 

White CARE Act, and in particular the 

AIDS Drug Assistance Program (ADAP), 

which addresses the pharmaceutical 

needs of the neediest HIV/AIDS 

population. The implementation of Part 

D will enable approximately one-half of 

the ADAP enrollees who are potentially 

eligible for Part D to qualify for full 

Medicare low-income subsidies, and an 

additional 30 percent may qualify for 

partial low-income subsidies. In 

addition, for those not receiving a full 

or partial subsidy, the Part D benefit 

would pay—depending on the costsharing structure employed by the 

particular prescription drug plan or 

MA–PD plan—75 percent, on average, of 

an enrollee’s covered Part D drug 

expenditures between the deductible 

and initial coverage limit. Although 

ADAP may realize savings with the 

implementation of Part D, these may be 

offset by the increased costs of picking 

up expenses no longer covered by 

Medicaid for the dual eligible 

population. 

To ensure coordination of benefits for 

the HIV/AIDS population, the ADAP 

program may wish to pay for this 

population’s premiums to eliminate any 

barriers to Part D benefits. ADAP may 

also subsidize costs incurred toward a 

Part D plan’s deductible or cost-sharing 

for those patients unable to afford these 

costs. It should be noted, however, that 

when ADAP does subsidize these costs, 

they would not count as incurred costs 

and thus may make it less likely that an 

eligible person would incur costs above 

the annual out-of-pocket threshold and 

thus qualify for catastrophic costsharing. 

ADAPs and other Ryan White ‘‘titled’’

programs are eligible to participate in 

what is known as the 340B Drug Pricing 

program and are encouraged to do so. 

Under Section 340B of the Public Health 

Service Act, discounted outpatient 

drugs are available to certain Federallyfunded grantees, such as Federally 

qualified health centers (FQHCs), AIDS 

drug assistance programs, and certain 

disproportionate (DSH) hospitals. Upon 

successful registration, these covered 

entities are eligible to purchase 

outpatient prescription medications 

from drug wholesalers and 

pharmaceutical manufacturers at 

significantly reduced prices. All but 

three ADAPs, which have State-based 

programs, participate in 340B. About 

one-half of these States purchase their 

drugs directly and receive an upfront 

discount. The other half operate under 

the rebate model and receive a rebate 

from manufacturers. Studies have 

indicated that the States receiving an 

upfront discount benefit more fully from 

the 340B program than those States 

receiving a rebate. States are encouraged 

to move toward the model of purchasing 

their drugs directly, as they can realize 

more savings than States using the 

rebate model. 

We welcome comments on how to 

maximize the savings for people in need 

of HIV/AIDS medications under the 

340B program. In particular, is it 

feasible for ADAP programs to 

participate with prescription drug plans 

so that the drugs offered to individuals 

with HIV/AIDS can be offered at 340B 

prices? In addition, because it is of 

critical importance for Medicare 

beneficiaries with HIV/AIDS to comply 

with their drug regimens, we are 

soliciting comments regarding the 

coordination of ADAP and Medicare 

Part D benefits. 

We note that nothing precludes an 

insurer, group health plan, or other 

third party arrangement from paying for 

a Part D enrollee’s deductible costs; 

while these payments will not count as 

incurred costs vis-a`-vis the out-ofpocket threshold, they will not prevent 

a Part D enrollee from receiving a 

benefit for expenditures between the 

deductible and the out-of-pocket limit. 

In addition, these entities are not 

precluded from paying for a Part D 

enrollee’s cost-sharing above the out-ofpocket threshold once a beneficiary has 

accumulated incurred costs in excess of 

the out-of-pocket threshold. Please refer 

to section II.J of this preamble for a 

detailed discussion regarding the 

collection of information regarding 

third-party reimbursement for covered 

Part D drugs for the purpose of 

determining enrollees’ incurred costs. 

Section 1860D–2(b) of the Act 

provides that, beginning in 2007, the 

annual deductible, initial coverage 

limit, out-of-pocket threshold, and 

beneficiary cost-sharing after the out-ofpocket threshold is met are to be 

adjusted annually. In accordance with 

section 1860D–2(b)(6) of the Act and as 

provided in § 423.104(e)(5)(iv) of our 

proposed rule, these amounts would be 

increased over the previous year’s 

amounts by the annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs 

for the 12-month period ending in July 

of the previous year. The amounts for 

the annual deductible, initial coverage 

limit, out-of-pocket threshold, and 

catastrophic cost-sharing amounts 

would be rounded to the nearest $5, 

$10, $50, and $0.05, respectively, as 

required by sections 1860D–2(b)(1)(B), 

(b)(3)(B), (b)(4)(B)(ii), and (b)(4)(A)(ii) of 

the Act, and codified in 

§§ 423.104(e)(1)(ii), (e)(3)(ii), 

(e)(5)(iii)(B), and (e)(5)(i)(A)(2) of our 

proposed rule. 

We anticipate that in the first several 

years after the implementation of Part D, 

determining the annual percentage 

increase will be difficult and will 

require the use of alternative sources of 

data. We request comments regarding 

possible alternative data sources we 

could use to determine the annual 

percentage increase in the first several 

years of the Part D program. We will 

provide further detail regarding the 

methods and data sources we would use 

to determine this annual percentage 

increase in operational guidance to PDP 

sponsors and MA organizations offering 

46652 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

MA–PD plans prior to the deadline for 

bid submissions. 

TABLE C–1.—STANDARD PRESCRIPTION DRUG COVERAGE BENEFITS FOR 2006 

Cost-sharing percentage 

Beneficiary 

out-of-pocket 

costs 

Plan payment 

percentage Plan payment 

Annual Deductible ($0–$250 in spending on 

covered Part D drugs covered under the 

plan).

100 ................................................................. $250 0 $0 

Initial Benefit ($251–$2,250 in spending on 

covered Part D drugs covered under the 

plan).

251 .................................................................. 5002 751 1,500 

No coverage of costs ($2,251–$5,100 3 in 

spending on covered Part D drugs covered 

under the plan).

100 ................................................................. 2,850 0 0 

Catastrophic Coverage (after the enrollee has 

incurred out of-pocket costs on covered 

Part D drugs covered by the plan greater 

than $3,600; this is generally equivalent to 

$5,100 3 in covered spending).

The greater of: (1) 5; or (2) $2 for a generic 

or preferred multiple source drug/$5 for 

other drugs 1.

........................ 95 ........................

1Entities have the option of substituting a cost-sharing structure that is actuarially equivalent. 

2 $500 is the maximum out-of-pocket costs if coverage is based on 25 percent coinsurance. Under an actuarially equivalent cost-sharing structure, the maximum out-of-pocket costs and the maximum plan payment for any Part D enrollee could be higher or lower. 3This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket costs for covered Part D drugs covered 

under his/her plan by a group health plan, insurance or otherwise, or other third party arrangement. 

We have interpreted the provisions of 

section 1860D–2(b) of the Act to provide 

for two distinct types of standard 

prescription drug coverage—‘‘defined 

standard coverage’’ and ‘‘actuarially 

equivalent standard coverage.’’ Defined 

standard coverage basically constitutes 

standard prescription drug coverage as 

defined in the statute—with 25 percent 

coinsurance for costs above the 

deductible but below the initial 

coverage limit and cost-sharing for costs 

above the annual out-of-pocket limit 

equal to the greater of: (1) A copayment 

(for 2006, and adjusted annually as 

specified earlier in this preamble) of $2 

for a generic or preferred multi-source 

covered Part D drug, or $5 for other 

drugs; or (2) 5 percent coinsurance. 

Actuarially equivalent standard 

coverage is used to describe standard 

coverage with actuarially equivalent 

alternatives to these cost-sharing 

requirements and consistent with 

section 1860D–2(b) of the Act. 

Section 1860D–2(b)(2)(A)(ii) of the 

Act provides that PDP sponsors and MA 

organizations offering actuarially 

equivalent standard prescription drug 

coverage would be permitted to 

substitute cost-sharing requirements 

(including tiered structures tied to plan 

formularies or particular pharmacies in 

a plan’s network) for costs above the 

annual deductible and up to the initial 

coverage limit, provided that those 

alternative cost-sharing requirements 

were actuarially equivalent to an 

average expected coinsurance of 25 

percent for costs above the annual 

deductible and up to the initial coverage 

limit. Alternative cost-sharing 

arrangements under actuarially 

equivalent standard coverage could 

include reducing cost-sharing to $0 for 

generic or preferred covered Part D 

drugs, as provided under section 

1860D–2(b)(5) of the Act, as long as the 

cost-sharing structure is actuarially 

equivalent to an average expected 

coinsurance of 25 percent for costs 

above the annual deductible and up to 

the initial coverage limit. Plans with 

cost-sharing arrangements that are 

actuarially more generous than standard 

prescription drug coverage would be 

considered enhanced alternative 

coverage, as defined in section II.C.2.b.ii 

of this preamble. (Section II.F.2 of this 

preamble explains the methodology for 

determining actuarial equivalence). 

Based on our interpretation of section 

1860D–2(b)(5) of the Act, we also 

propose allowing plans offering 

actuarially equivalent standard coverage 

to establish cost-sharing of an amount 

that is actuarially equivalent to the 

expected cost-sharing under 

§ 423.104(e)(5)(i) (taking into account 

both 5 percent coinsurance and $2/$5 

copayments for costs above the out-ofpocket threshold required under defined 

standard coverage). As previously 

discussed, section 1860D–2(b)(5) of the 

Act indicates that plans cannot be 

prevented from reducing to $0 the costsharing applicable to preferred or 

generic drugs. While this provision only 

references reductions based on the need 

to retain a standard benefit, we propose 

requiring that any alternative costsharing structure for costs in the 

catastrophic range (whether under 

actuarially equivalent standard coverage 

or enhanced alternative coverage) be 

actuarially equivalent to standard 

prescription drug coverage’s structure of 

5 percent coinsurance or $2/$5 

copayments. Our proposed requirement 

would function in the same manner as 

the requirement for actuarial 

equivalence to alternatives to the 25 

percent coinsurance structure for costs 

above the deductible and below the 

initial coverage limit, as discussed in 

further detail in section II.F.4.b of this 

preamble. Any such alternative costsharing arrangements would be 

reviewed, along with the rest of a plan’s 

benefit design, to ensure that they do 

not discriminate against certain Part D 

eligible individuals. 

b. Alternative Prescription Drug 

Coverage 

Section 1860D–2(c) of the Act and 

§ 423.104(f) provide that a PDP sponsor 

offering a prescription drug plan or an 

MA organization offering an MA–PD 

plan may offer an alternative 

prescription drug benefit design, 

provided that the PDP sponsor or MA 

organization applies for and receives 

our approval for the proposed 

alternative. In order to receive approval 

to offer an alternative prescription drug 

benefit design, a PDP sponsor offering a 

prescription drug plan or an MA 

organization offering an MA–PD plan 

would have to meet the requirements 

related to actuarial equivalence 

described in section 1860D–2(c)(1) of 

the Act and discussed in further detail 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46653 

below (as well as in section II.F.3 of this 

preamble). It is important to note that, 

in modifying the standard coverage 

design to offer alternative prescription 

drug coverage per the following 

requirements, plans would have to use 

defined standard coverage (and not 

actuarially equivalent standard 

coverage) as a fixed point of 

comparison. Because numerous variants 

of actuarially equivalent standard 

coverage are possible, it would not be 

feasible to use actuarially equivalent 

standard coverage as a point of 

comparison for alternative prescription 

drug coverage. 

As provided under section 1860D–

2(c)(2) of the Act and codified in 

§ 423.104(f)(1) of our proposed rule, any 

alternative prescription drug benefit 

design would be required to include a 

deductible that was no greater than the 

deductible offered under standard 

prescription drug coverage. Section 

1860D–2(c)(3) of the Act requires that 

alternative coverage provide the 

coverage required under section 1860D–

2(b)(4), which specifies the 

requirements for coverage to protect 

beneficiaries against high out-of-pocket 

expenditures. As provided in 

§ 423.104(f)(2) of our proposed rule, we 

are interpreting this requirement to 

mean that prescription drug plans and 

MA–PD plans must provide coverage 

above the out-of-pocket threshold that is 

at least as generous as that provided 

under defined standard coverage. In 

other words, plans could—at their 

option—reduce cost-sharing below that 

included under defined standard 

coverage (the greater of 5 percent 

coinsurance or $2/$5 copayments). 

In addition, section 1860D–2(c)(1)(B) 

of the Act and § 423.104(f)(3) of our 

proposed rule would require that the 

actuarial value of alternative 

prescription drug coverage’s 

unsubsidized coverage is at least equal 

to the actuarial value of unsubsidized 

defined standard coverage. Section 

1860D–2(c)(1)(C) of the Act and 

§ 423.104(f)(4) of our proposed rule 

would require that, under alternative 

prescription drug coverage, the plan 

payout at the dollar value of the initial 

coverage limit under standard coverage, 

for an individual whose total spending 

exceeds that limit, is at least equal to 

that provided under defined standard 

coverage. 

i. Basic Alternative Coverage 

Beyond the required parameters for 

alternative coverage discussed above, 

we are interpreting the provisions of 

section 1860D–2(c) of the Act, together 

with section 1860D–2(a)(1) of the Act, as 

providing for two forms of alternative 

coverage—either ‘‘basic alternative 

coverage’’ or ‘‘enhanced alternative 

coverage.’’ Basic alternative coverage 

would refer to alternative coverage that 

is actuarially equivalent to defined 

standard prescription drug coverage, as 

described in section II.C.2.a of this 

preamble. Enhanced alternative 

coverage would refer to alternative 

coverage that exceeds defined standard 

coverage by offering supplemental 

benefits and is discussed in section 

II.C.2.b.ii of this preamble. 

Within the parameters for alternative 

prescription drug coverage described 

above, a PDP sponsor offering a 

prescription drug plan or an MA 

organization offering an MA–PD plan 

with a basic alternative prescription 

drug benefit design could 

theoretically—by combining features 

such as a reduction in the deductible, 

changes in cost-sharing (for example, 

benefit designs that use tiered 

copayments or coinsurance in an 

actuarially equivalent manner to the 25 

percent cost-sharing above the 

deductible and below the initial 

coverage limit under defined standard 

coverage), and a modification of the 

initial coverage limit—still be able to 

maintain an actuarial value of coverage 

equal to defined standard prescription 

drug coverage. 

Although basic alternative 

prescription drug coverage within the 

parameters described above is allowed, 

it is unclear because of utilization 

effects whether PDP sponsors and MA 

organizations could, in fact, offer 

coverage that meets the statutory 

requirements other than by modifying 

cost-sharing as already allowed under 

actuarially equivalent standard 

coverage. We invite comments on 

whether there are basic alternative 

benefit designs that go beyond 

actuarially equivalent standard 

coverage. 

ii. Enhanced Alternative Coverage 

Section 423.104(g) of our proposed 

rule would permit PDP sponsors and 

MA organizations offering an MA–PD 

plan to provide qualified prescription 

drug coverage that includes 

supplemental benefits. Because the 

actuarial value of any prescription drug 

coverage benefit package that includes 

supplemental benefits would exceed 

that of standard coverage, such coverage 

must always be alternative drug 

coverage as described in section II.C.2.b 

of this preamble. Thus, we refer to any 

Part D benefit package that includes 

supplemental benefits as ‘‘enhanced 

alternative coverage.’’

Enhanced alternative coverage would 

include basic prescription drug coverage 

and supplemental benefits. The 

requirements for the supplemental 

benefits that may be included in 

enhanced alternative coverage are found 

in section 1860D–2(a)(2) of the Act and 

§ 423.104(g)(1)(ii) of our proposed rule. 

These supplemental benefits would 

supplement basic prescription drug 

coverage, providing for a package of 

benefits that exceeds the actuarial value 

of defined standard coverage. 

Supplemental benefits could consist of: 

• Reductions in cost-sharing (for 

example, a reduction in the deductible, 

a reduction in the coinsurance 

percentage or copayments applicable to 

covered Part D drugs obtained between 

the annual deductible and the initial 

coverage limit, or an increase in the 

initial coverage limit described in 

§ 423.104(e)(2), provided these 

reductions in cost-sharing increase the 

actuarial value of the benefits provided 

above the actuarial value of basic 

prescription drug coverage); and/or 

• Coverage of drugs that are 

specifically excluded as covered Part D 

drugs under section 1860D–2(e)(2)(A) of 

the Act and § 423.100 of our proposed 

rule. 

We propose interpreting ‘‘value’’ to 

mean the total value as described in 

section 1860D–2(c)(1)(A) of the Act. We 

request comments on this interpretation. 

Under section 1860D–2(a)(2)(B) of the 

Act, and proposed in § 423.104(g)(2), a 

PDP sponsor would not be permitted to 

offer a prescription drug plan that 

provided enhanced alternative coverage 

in a particular service area unless it also 

offered a plan that provided only basic 

prescription drug coverage in that same 

area. Section 1860D–2(a)(3) of the Act 

defines basic prescription drug coverage 

as either—

(a) Standard prescription drug 

coverage (as described in proposed 

§ 423.104(e) and in section II.C.2.a of 

this preamble) with access to negotiated 

prices; or 

(b) Basic alternative drug coverage (as 

described in § 423.100 and section 

II.C.2.b.i of this preamble) with access to 

negotiated prices. 

Similarly, as provided under section 

1860D–21(a)(1)(A) and codified in 

§ 423.104(g)(3)(i) of our proposed rule, 

beginning on January 1, 2006, an MA 

organization could not offer an MA 

coordinated care plan, as defined in 42 

CFR 422.4 of our proposed rule and 

section 1851(a)(2)(A) of the Act, in a 

service area unless that plan, or another 

MA plan offered by the same 

organization in the same service area, 

includes required prescription drug 

coverage. As defined in § 423.100, 

required prescription drug coverage, for 

the purposes of an MA organization 

46654 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

offering an MA–PD plan, would include 

either: (1) Basic prescription drug 

coverage, or (2) enhanced alternative 

coverage, provided there is no MA 

monthly supplemental beneficiary 

premium applied under the plan. Such 

enhanced alternative coverage could be 

provided without a monthly 

supplemental beneficiary premium only 

if a plan applied a credit against the 

otherwise applicable premium of rebate 

dollars available under section 

1854(b)(1)(C) of the Act. Rebate dollars 

represent the dollars available for 

supplemental (and other) benefits when 

an MA plan’s risk-adjusted non-drug bid 

is under the risk-adjusted non-drug 

monthly benchmark amount. In other 

words, to the extent that an MA–PD 

plan chose to provide enhanced 

alternative coverage for no additional 

premium through the application of 

rebate dollars, such enhanced 

alternative coverage would constitute 

required coverage for the purposes of 

meeting the requirement in section 

1860D–21(a)(1)(A) of the Act. 

This provision is similar in intent to 

the restrictions on the offering of 

enhanced alternative coverage by PDP 

sponsors found in § 423.104(g)(2) of our 

proposed rule. As previously 

mentioned, PDP sponsors are required 

to offer at least one plan offering basic 

prescription drug coverage in all areas 

they serve in order to offer any plan that 

enhances or supplements that basic 

coverage. The objective of both of these 

requirements is to assure that PDP 

sponsors and MA PD organizations offer 

at least one option for Part D coverage 

for a premium at the cost of basic 

prescription drug coverage. 

As a note of clarification, provided a 

PDP sponsor offers at least one plan in 

a service area that provides basic 

prescription drug coverage only, it can 

offer as many plans that offer enhanced 

alternative coverage as it wishes. 

Similarly, an MA organization that 

offers at least one MA–PD plan that 

meets the aforementioned test of 

providing required prescription drug 

coverage is free to offer plans that 

provide other types of enhanced 

alternative coverage for which they can 

charge a monthly supplemental 

beneficiary premium, as well as plans 

that offer no qualified prescription drug 

coverage. 

As provided under section 1860D–

21(a)(1)(B)(i) of the Act and codified in 

our proposed rule at 

§ 423.104(g)(3)(ii)(A), an MA 

organization could not offer prescription 

drug coverage (other than that required 

under Parts A and B of Medicare) to 

enrollees of an MSA plan. Under section 

1860D–21(a)(1)(B)(ii) and 

§ 423.104(g)(3)(ii)(B) of our proposed 

rule, an MA organization also could not 

offer prescription drug coverage (other 

than that required under Parts A and B 

of Medicare) under another type of MA 

plan—including a private fee-for-service 

plan—unless the drug coverage it 

provided under that MA plan consisted 

of qualified prescription drug coverage 

and met our requirements regarding 

required prescription drug coverage as 

articulated previously in this preamble 

section. 

c. Negotiated Prices 

Section 1860D–2(d)(1) of the Act 

requires, as implemented under 

§ 423.104(h) of our proposed rule, that 

a PDP sponsor or MA organization 

offering an MA–PD plan provide 

beneficiaries with access to negotiated 

prices for covered Part D drugs. As 

required by section 1860D–2(d)(1)(B) of 

the Act, negotiated prices would have to 

take into account negotiated price 

concessions for covered Part D drugs 

such as discounts, direct or indirect 

subsidies, rebates, and direct or indirect 

remunerations, and would include any 

applicable dispensing fees. Access to 

negotiated prices would have to be 

provided even when no benefits would 

otherwise be payable on behalf of an 

enrollee due to the application of a 

deductible, the initial coverage limit, or 

other cost-sharing. We are interpreting 

the reference to the lack of payable 

benefits due to the application of the 

initial coverage limit as referring to that 

portion of covered Part D drug 

expenditures between the initial 

coverage limit and the out-of-pocket 

threshold. In that expenditure range, a 

beneficiary enrolled in standard 

prescription drug coverage would be 

responsible for 100 percent cost-sharing, 

and the plan would pay no benefits. We 

are also interpreting the phrase ‘‘or other 

cost-sharing’’ as a reference to plan 

designs that may include, as a part of 

their formulary design, access to 

negotiated prices on certain drugs but at 

a tier within their formulary in which 

the plan would pay no benefits and the 

beneficiary would be responsible for 

100 percent cost-sharing (in other 

words, a negotiated price would be 

available and the drug would be on the 

plan’s formulary, but the beneficiary 

would be responsible for 100 percent of 

that drug’s negotiated price). 

As required under section 1860D–

2(d)(1)(C) of the Act, prices negotiated 

with manufacturers for: (1) Covered Part 

D drugs by either a prescription drug 

plan or an MA–PD plan; or (2) a 

qualified retiree prescription drug plan, 

as described in § 423.882 of our 

proposed regulation on the Medicare 

retiree drug subsidy program, with 

respect to covered Part D drugs 

provided on behalf of part D eligible 

individuals would not be taken into 

account in making ‘‘best price’’

determinations under the Medicaid 

program. Under current Medicaid best 

price policy, the largest discount a 

pharmaceutical manufacturer negotiates 

in the private market must be passed 

along to the Medicaid program; 

however, prices negotiated with 

manufacturers for covered Part D drugs 

would not be factored into these 

calculations as provided under 

§ 423.104(h)(2) of our proposed rule. 

Section 423.104(h)(3) would require, 

as stated in the provisions of section 

1860D–2(d)(2) of the Act, that PDP 

sponsors offering a prescription drug 

plan and MA organizations offering an 

MA–PD plan disclose to us all aggregate 

negotiated price concessions—including 

discounts, direct or indirect subsidies, 

and direct or indirect remunerations—

they obtain from each pharmaceutical 

manufacturer that are passed through to 

the Medicare program in the form of 

lower subsidies or to beneficiaries in the 

form of: (1) Lower monthly beneficiary 

premiums, and/or (2) lower covered Part 

D drug prices at the point of sale. We 

note that plans may fulfill this 

requirement through the data 

submission requirements articulated in 

proposed § 423.336(c)(1) and 

§ 423.343(c)(1) and discussed in further 

detail in section II.G.4 of this preamble. 

In other words, we should be able to 

determine the proportion of total 

aggregate price concessions that are 

passed through to either the Medicare 

program or to beneficiaries based on the 

cost data plans would be required to 

submit to CMS. 

As provided under section 1860D–

2(d)(2) of the Act and § 423.104(h)(3)(ii) 

of our proposed rule, information on 

negotiated prices reported to CMS for 

the purposes of ascertaining the level of 

pass-through would be protected under 

the confidentiality provisions applicable 

to Medicaid pricing data under section 

1927(b)(3)(D) of the Act. We note, 

however, that these confidentiality 

protections would not preclude audit 

and evaluation of negotiated price 

concession information by the HHS 

Office of the Inspector General (OIG) 

and, in fact, that such audits and 

evaluations may be necessary for 

carrying out the requirements of section 

1860D–4(d)(1) of the Act. 

We would specify in operational 

guidance the format and frequency of 

these reports. As discussed in section 

II.G.4 of this preamble, we are proposing 

to require plans to ensure that price 

concessions are accounted for separately 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46655 

from any fair market value 

administrative fees pharmaceutical 

manufacturers may pay PDP sponsors or 

MA organizations. For a more detailed 

discussion of data submission 

requirements, please refer to section 

II.G.4 of this preamble. 

As provided under section 1860D–

2(d)(3) of the Act and codified in 

§ 423.104(h)(4) of our proposed rule, we 

would be authorized to conduct 

periodic audits—either directly or 

through contracts with other 

organizations—of the financial 

statements and records of PDP sponsors 

and MA organizations pertaining to the 

prescription drug plans and MA–PD 

plans they offer. As required in section 

1860D–2(d)(3) of the Act, this auditing 

would be performed with the ultimate 

goal of protecting the Medicare program 

against fraud and abuse, as well as 

ensuring proper disclosures and 

accounting under Part D. Section 

423.504(d) of our proposed rule 

includes additional requirements with 

respect to auditing of PDP sponsors as 

a safeguard against fraud and abuse. 

These fraud and abuse protections 

incorporate those protections applicable 

to MA organizations under section 

1857(d)(2)(B) of the Act and are 

discussed in detail in section II.K.6.a of 

this preamble. 

3. Establishment of Prescription Drug 

Plan Service Areas (§ 423.112) 

Section 1860D–11(a)(1) of the Act 

requires that a prescription drug plan’s 

service area encompass an entire PDP 

region, as established by us under 

§ 423.112(b), and § 423.112(a) of our 

proposed rule codifies that requirement. 

However, as provided under 

§ 423.112(e) of our proposed rule, a 

prescription drug plan can be offered in 

more than one PDP region (provided the 

plan encompasses the entire PDP region 

for each region where offered), as well 

as nationally. 

Section 1860D–11(a)(2) of the Act 

provides us with the authority to 

establish PDP regions, and such PDP 

regions must be established in a manner 

that is consistent with the establishment 

of MA regions under 42 CFR 422.445 of 

our proposed rule. Section 1860D–

11(a)(2)(B) stipulates that PDP regions 

must be, to the extent practicable, 

consistent with MA regions as 

established under section 1858(a)(2) of 

the Act. As provided under 

§ 423.112(b)(2), however, if we 

determine that access to Part D benefits 

would be improved by establishing PDP 

regions that are different than MA 

regions, we may establish PDP regions 

that vary from MA regions. Section 

423.112(d) of our proposed rule would 

allow us to revise the PDP regions we 

establish as necessary. 

In accordance with section 1860D–

14(a)(3)(F) of the Act, residents of 

United States territories are not eligible 

for the Part D subsidies otherwise 

provided to low-income individuals. 

Such territorial residents, however, 

would be eligible for financial 

assistance for prescription drug 

expenses under section 1935(e) of the 

Act. Note that a new section 1935 of the 

Act was added by section 103 of the 

Medicare Modernization Act (MMA) 

through a redesignation of the current 

section 1935 as section 1936. The U.S. 

territories, unlike the 50 United States 

and the District of Columbia, may 

continue to receive federal Medicaid 

grants under section 1108 of the Act to 

compensate them for drug coverage 

provided to Part D eligible individuals 

under specific conditions. For this 

reason, section 1860D–11(a)(2)(C) of the 

Act and § 423.112(c) of our proposed 

rule stipulate that CMS designate a 

separate PDP region (or regions) for the 

U.S. territories. 

We intend to initially designate both 

PDP and MA regions by January 1, 2005. 

In accordance with section 

1858(a)(2)(C)(i) of the Act, there will be 

between 10 and 50 PDP regions within 

the 50 States and the District of 

Columbia and at least one PDP region 

covering the United States territories. 

The PDP regions, like the MA regions, 

will become operational in January 

2006. 

We conducted a public meeting on 

July 21, 2004, in order to obtain broad 

public comment on the methodology we 

should use in establishing both the PDP 

regions and MA regions for MA regional 

plans, which would operate as preferred 

provider organizations (PPOs). The 

information on that meeting is available 

at https://www.cms.hhs.gov/ 

medicarereform/mmaregions. Using the 

feedback from that meeting and other 

research, we are considering a number 

of issues, including: how we should 

design PDP regions in order to ensure 

that all beneficiaries have access to 

prescription drug plans; how best to 

ensure access to prescription drug plans 

through the design of PDP regions that 

are the same as (or, if necessary, 

different than) MA regions; how to 

design a PDP region (or regions) in the 

U.S. territories; and how we can best 

discuss with the public the 

development of both the PDP and MA 

regions. Separate guidance on the 

designation of regions will be 

forthcoming. 

Whereas § 423.112 provides that a 

prescription drug plan’s service area 

must encompass one or more PDP 

regions, an MA–PD plan’s service area 

would consist of either: (1) one or more 

MA regions (for a regional MA plan), or 

(2) one or more MA local areas (for a 

local MA plan). ‘‘MA region’’ is defined 

in 42 CFR 422.455(b) of our proposed 

rule as a region within the 50 States and 

the District of Columbia as established 

by CMS. As provided in § 423.112(b)(2) 

of our proposed rule, we will attempt to 

establish PDP regions that coincide with 

MA regions to the extent practicable. 

‘‘Local MA area’’ is defined in 42 CFR 

422.252 of our proposed rule as a 

payment area consisting of county or 

equivalent area that we specify. 

4. Access to Covered Part D Drugs 

(§ 423.120) 

a. Pharmacy Access Standards 

As required by section 1860D–

4(b)(1)(C) of the Act, prescription drug 

plans and MA–PD plans would be 

required to secure the participation in 

their pharmacy networks of a sufficient 

number of pharmacies that dispense 

drugs directly to patients (other than by 

mail order) to ensure convenient access 

to covered Part D drugs by plan 

enrollees. To achieve that goal, we are 

authorized to establish access rules that 

are no less favorable to enrollees than 

rules for convenient access established 

in the statement of work solicitation 

(#MDA906–03–R–0002) by the 

Department of Defense (DoD) on March 

13, 2003, for purposes of the TRICARE 

Retail Pharmacy program. Consistent 

with the TRICARE standards, 

§ 423.120(a)(1) of our proposed rule 

would require that prescription drug 

plans and MA–PD plans establish 

pharmacy networks in which: 

• In urban areas, at least 90 percent 

of Medicare beneficiaries in the plan’s 

service area, on average, live within 2 

miles of a retail pharmacy participating 

in the prescription drug plan’s or MA–

PD plan’s network; 

• In suburban areas, at least 90 

percent of Medicare beneficiaries in the 

plan’s service areas, on average, live 

within 5 miles of a retail pharmacy 

participating in the prescription drug 

plan’s or MA–PD plan’s network; and 

• In rural areas, at least 70 percent of 

Medicare beneficiaries in the plan’s 

service area, on average, live within 15 

miles of a retail pharmacy participating 

in the prescription drug plan’s or MA–

PD plan’s network. 

For the purposes of meeting these 

access standards, as also provided in 

DoD’s statement of work of solicitation 

#MDA906–03–R–0002—

• Urban would be defined as a fivedigit ZIP Code in which the population 

46656 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

density is greater than 3,000 persons per 

square mile; 

• Suburban would be defined as a 

five-digit ZIP Code in which the 

population density is between 1,000 and 

3,000 persons per square mile; and 

• Rural would be defined as a fivedigit ZIP Code in which the population 

density is less than 1,000 persons per 

square mile. 

We are interpreting the access 

standard under § 423.120(a)(1) such that 

a prescription drug plan or regional 

MA–PD plan would have to meet or 

exceed the access standards across each 

region in which it operates, and a local–

MA–PD plan would have to meet or 

exceed the access standards in its local 

service area. In other words, a 

prescription drug plan or regional MA–

PD that operates in a multi-region or 

national service area could not meet the 

access standards proposed in 

§ 423.120(a)(1) by applying them across 

the entire geographic area serviced by 

the plan; instead, it would have to meet 

the standards in each region of its multiregion or national service area. We 

believe that such an interpretation 

maximizes plan flexibility while 

assuring the best possible access to 

pharmacies for Part D enrollees, and we 

request comments on our proposed 

approach. 

While prescription drug plans and 

MA–PD plans would not be precluded 

from including non-retail pharmacies 

(for example, institution-based 

pharmacies) in their networks under our 

proposed rule, we interpret the access 

requirements in section 1860D–

4(b)(1)(C) of the Act as requiring 

prescription drug plans and MA–PD 

plans to count only retail pharmacies as 

part of their networks for the purpose of 

meeting the access standard in 

§ 423.120(a)(1). We would consider a 

retail pharmacy to be any licensed 

pharmacy from which covered Part D 

enrollees could purchase a covered Part 

D drug without being required to receive 

medical services related to that 

particular covered Part D drug from a 

provider or institution affiliated with 

that pharmacy. In other words, 

prescription drug plans and MA–PD 

plans could—and would be encouraged 

to—include non-retail pharmacies (for 

example, hospital and clinic 

pharmacies) in their networks; however, 

given the limited populations served by 

such non-retail pharmacies, plans could 

not count these pharmacies toward our 

pharmacy access requirements. 

We recognize, however, that 

prescription drug plans and MA–PD 

plans operating in rural areas with high 

concentrations of American Indian/ 

Alaska Native (AI/AN) individuals may 

have a difficult time meeting our access 

standards if they cannot count 

pharmacies that are operated by the 

Indian Health Service, Indian tribes and 

tribal organizations, and urban Indian 

organizations (hereinafter referred to as 

‘‘I/T/U pharmacies’’) toward their 

pharmacy access requirements. We are 

considering allowing prescription drug 

plans and MA–PD plans to count I/T/U 

pharmacies toward their network access 

requirements, provided: (1) Such 

pharmacies are under contract with the 

plan; and (2) it would be impossible or 

impracticable for the plan to meet the 

access standard in rural areas of its 

service area without the inclusion of an 

I/T/U pharmacy (or pharmacies) in that 

count because there is not a sufficient 

number of non-I/T/U pharmacies in 

those areas willing or able to contract 

with the PDP sponsor or MA 

organization in accordance with its 

terms and conditions. We invite 

comments on this proposed exception to 

our pharmacy access rules, including 

any impact it might have on pharmacy 

access for non-AI/AN Part D enrollees 

residing in those areas. 

Section 423.120(a)(1) of our proposed 

rule would not in any way preclude 

PDP sponsors or MA organizations 

offering an MA–PD plan from 

contracting with pharmacies outside 

their plans’ service areas, provided that 

the plans meet the pharmacy access 

requirements within their service areas. 

Such a feature would be of particular 

benefit to beneficiaries who spend 

significant amounts of time outside their 

prescription drug plan’s or MA–PD 

plan’s service area (for example, 

‘‘snowbirds’’) and could make a 

particular prescription drug plan or 

MA–PD plan more attractive to them. In 

addition, the fact that beneficiaries 

would have access to network 

pharmacies outside their plan’s service 

area would obviate the need for out-ofnetwork access (discussed in greater 

detail in section II.C.5 of this preamble) 

to covered Part D drugs in many cases. 

Thus, contracting with pharmacies 

outside a plan’s service area could 

ultimately represent a cost-savings both 

to plans and beneficiaries, particularly if 

a plan enrolls a high proportion of 

beneficiaries who regularly travel 

outside the plan’s service area. 

Section 1860D–4(b)(1)(C)(iv) of the 

Act provides that, in establishing rules 

for convenient access to network 

pharmacies, we may include standards 

with respect to access to long-term care 

pharmacies for Part D enrollees who 

reside in skilled nursing facilities and 

nursing facilities (hereinafter referred to 

as ‘‘long-term care facilities’’), as well as 

for American Indian/Alaska Native (AI/ 

AN) Part D enrollees who obtain their 

prescription drugs at I/T/U pharmacies. 

We recognize that given their 

specialized missions and the narrowly 

defined subsets of beneficiaries they 

serve, access to long-term care and I/T/ 

U pharmacies should be preserved. 

Such access would greatly enhance Part 

D benefits for enrollees in long-term 

care facilities, as well as for AI/AN 

enrollees. 

As discussed in section II.C.5 of this 

preamble, we expect that the out-ofnetwork access requirement articulated 

in § 423.124(a)(2) would assure access to 

covered Part D drugs provided by longterm care pharmacies for Part D 

enrollees residing in long-term care 

institutions that do not contract with 

their prescription drug plans or MA–PD 

plans. Since it is generally the case that 

long-term care facilities contract with a 

single long-term care pharmacy, Part D 

enrollees residing in a long-term care 

facility could not reasonably be 

expected to access their covered Part D 

drugs at another pharmacy if their 

facility’s long-term care pharmacy is not 

part of their plan’s network. 

However, we are also considering 

whether to use the authority provided 

under section 1860D–4(b)(1)(C)(iv) of 

the Act to require prescription drug 

plans and MA–PD plans to approach 

some or all long-term care pharmacies 

in their service areas with at least the 

same terms available under their plans’

standard pharmacy contracts. Given 

Federal nursing home regulations, 

nursing facilities contract with a longterm care pharmacy to provide 

prescription drugs and services to their 

residents. In the absence of direct 

collaboration between a plan and a Part 

D enrollee’s long-term care pharmacy, it 

would be difficult for nursing facilities 

to meet Federal pharmacy management 

standards. 

We are concerned, however, that to 

the extent that we require plans to 

solicit long-term care pharmacies in 

their service areas to join their 

networks, plans may be forced to 

negotiate preferential contracting terms 

and conditions (relative to the terms 

they would offer any other pharmacy 

willing to participate in its network) 

with a number of long-term care 

pharmacies in order to meet our 

requirement. 

We also expect that long-term care 

pharmacies will be concerned about 

appropriate reimbursement for services 

(for example, clinical consultations, 

emergency medication access with 24- 

hour-a-day deliveries, specialized 

packaging, and IV and infusion 

therapies) that they currently provide 

long-term care facility residents. It is 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46657 

possible that recognition of appropriate 

services would be addressed by 

provisions arranged by prescription 

drug plans and MA–PD plans and 

network pharmacies, with any resulting 

dispensing charges reflected in 

permissible dispensing fees. Section 

II.C.1 of this preamble discusses several 

options for defining the term 

‘‘dispensing fees.’’ However, it is our 

goal to balance convenient access to 

long-term care pharmacies with 

appropriate payment for dispensing fees 

of efficient facilities. To the extent that 

we require plans to contract with longterm care pharmacies, it is our goal to 

assure that long-term care pharmacies 

charge reasonable dispensing fees to 

plans (and indirectly to CMS through 

the direct subsidy paid to prescription 

drug plans and MA–PD plans). We 

welcome comments regarding how to 

balance convenient access to long-term 

care pharmacies with appropriate 

payment to long-term care pharmacies 

under the provisions of the MMA. 

Alternatively, we would not require 

that plans contract with long-term care 

pharmacies and would, instead, strongly 

encourage PDP sponsors and MA 

organizations offering MA–PD plans to 

negotiate with and include long-term 

care pharmacies in their plans’

pharmacy networks. We seek public 

comment regarding the advantages and 

disadvantages of these two approaches. 

Similarly, we are considering two 

options for assuring access to I/T/U 

pharmacies by AI/AN Part D enrollees 

per the provisions of section 1860D–

4(b)(1)(C)(iv) of the Act. There are 

currently 201 I/T/U pharmacies serving 

107,000 senior and disabled AI/ANs in 

27 States. In some areas, I/T/U 

pharmacies may be the only facilities 

capable of providing medication therapy 

management services to certain AI/AN 

beneficiaries due to language and 

cultural barriers. I/T/U pharmacies are 

unique in several different ways, 

including that they purchase drugs off 

the Federal Supply Schedule (FSS); can 

only serve AI/ANs; may have less 

experience than retail pharmacies (or 

none at all) with point-of-sale 

technology; are not typically well 

integrated into commercial pharmacy 

networks; generally stock a more limited 

range of drugs than would be required 

under a Part D formulary; and always 

waive co-pays. 

One approach to assuring access to I/ 

T/U pharmacies under Part D would be 

to use our authority under Section 

1860D–4(b)(1)(C)(iv) of the Act to 

require that PDP sponsors and MA 

organizations approach any I/T/U 

pharmacies in their plan service areas 

with at least the same terms available 

under the plan’s standard pharmacy 

contract. We are aware, however, that 

contracting with I/T/U pharmacies is 

potentially more complex than 

contracting with retail pharmacies given 

that there are a number of provisions in 

the standard contracts of commercial 

health plans that would likely need to 

be modified or deleted given statutory 

or regulatory restrictions to which I/T/ 

U pharmacies are subject, as well as the 

particular circumstances of I/T/U 

pharmacies. Some examples of standard 

contract clauses that could be 

problematic for I/T/U pharmacies 

include: 

• Prohibitions on waiving copays; 

• Required provision of all drugs on 

a plan’s drug formulary; 

• Requirements that providers bill 

and/or receive funds electronically to 

participate in the network; 

• Requirements that claims be 

submitted within a specific timeframe; 

• Requirements that plans serve all 

patients without discrimination; 

• Requirements that providers carry 

private malpractice insurance; 

• Requirements that providers be 

licensed in the state in which they 

provide services; and 

• Requirements that binding 

arbitration be used in the event that any 

dispute arises with regard to 

performance or interpretation of any 

terms of the agreement and the parties 

are unable to resolve the dispute in an 

informal fashion. 

We expect that, to the extent that we 

require plan inclusion of I/T/U 

pharmacies in plan networks, we would 

provide plans with a model addendum 

to their standard contracts (should we 

require them) that would take the 

special circumstances of I/T/U 

pharmacies into account. Such an 

addendum could also be useful for 

facilitating the inclusion in prescription 

drug plan or MA–PD plan pharmacy 

networks of other types of pharmacies 

(Federally Qualified Health Centers, for 

example, which are subject to some of 

the same limitations described above for 

I/T/U pharmacies that make many 

standard contract clauses 

impracticable). 

A requirement that plans contract 

with I/T/U pharmacies could potentially 

expand plans’ market share in areas 

with high concentrations of AI/ANs. 

Plans may also benefit from cost-savings 

as a result of doing business with I/T/ 

U pharmacies given I/T/U pharmacies’

heavy reliance on the dispensing of 

generic drugs. Also, given that IHS/ 

tribal government subsidies of Part D 

cost-sharing on behalf of beneficiaries 

will not, as discussed in section II.C.2.a 

of this preamble, count toward incurred 

costs, most IHS beneficiaries would 

almost never incur costs above the outof-pocket limit; this would likely 

provide plans with additional costsavings. On the other hand, we 

recognize that there is some potential 

for increased administrative costs for 

prescription drug plans and MA–PD 

plans given the need to modify standard 

contracts (should we require them) and, 

given the limited electronic capabilities 

of most I/T/U pharmacies, the 

processing of paper claims. In addition, 

the AI/AN population is one with which 

commercial health plans have little, if 

any, experience. Given these potential 

administrative costs, we are reluctant to 

require contracts with I/T/U facilities if 

that requirement discourages PDP 

sponsors and MA organizations from 

offering plans in service areas with large 

concentrations of AI/ANs. 

Another option for assuring access to 

I/T/U pharmacies under Part D would 

be not to require that plans contract 

with I/T/U pharmacies and, instead, to 

strongly encourage PDP sponsors and 

MA organizations offering MA–PD plans 

to negotiate with and include I/T/U 

pharmacies in their plans’ pharmacy 

networks. We are concerned, however, 

that—in the absence of a contracting 

requirement—plans may make 

assumptions regarding the 

administrative costs (whether real or 

perceived) of contracting with I/T/U 

pharmacies and may not actively solicit 

the inclusion of these pharmacies in 

their networks. It is our understanding 

that I/T/U pharmacies are not currently 

well integrated in commercial pharmacy 

networks. The lack of I/T/U pharmacies 

in Part D plan networks would render 

enrollment in Part D of little use to AI/ 

AN beneficiaries who rely primarily on 

I/T/U facilities for their health care. We 

encourage comments regarding these 

two approaches, their advantages and 

disadvantages, and their ramifications 

for AI/AN enrollees who are eligible to 

enroll in Part D. 

As noted earlier, federally qualified 

health centers (FQHCs) and rural 

pharmacies face many of the same 

barriers to inclusion in commercial plan 

networks as do I/T/U pharmacies. 

Beneficiaries served by FQHCs and rural 

pharmacies are often served in those 

settings because of their financial and 

geographic circumstances. Plans may 

have to contract with these pharmacies 

in order to meet the access requirements 

in § 423.120(a)(1) of our proposed rule—

particularly in rural areas. However, to 

the extent that they are able to meet the 

access requirements without doing so, 

we are concerned about compromised 

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46658 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

income beneficiaries who rely on FQHC 

and rural pharmacies for their health 

care. We solicit comments on 

permissible ways for us to assure Part D 

enrollees’ access to FQHC and rural 

pharmacies, among others. 

As stated above, we have proposed 

three options for defining ‘‘dispensing 

fees.’’ Two of these options take into 

account some of the costs associated 

with administering infused covered Part 

D drugs to the beneficiary. Based on our 

research, most commercial health plans 

cover home infusion drugs and services 

under their medical benefits, given the 

cost-savings resulting from averted 

hospitalizations. However, because 

prescription drug plans do not offer a 

medical benefit under which to 

experience cost-savings, we do not 

believe that prescription drug plans 

would have an incentive to include 

home infusion pharmacies in their 

networks. We are considering using the 

authority in section 1860D–4(b)(1)(C) of 

the Act to require that both MA–PD 

plans and prescription drug plans 

contract with a sufficient number of 

home infusion pharmacies in their 

service area to provide reasonable 

access for Part D enrollees. Such a 

requirement would be allowed under 

Section 1860D–4(b)(1)(C) of the Act 

because the rules established with 

respect to convenient access to network 

pharmacies for Part D enrollees would 

be at least as favorable to enrollees as 

those used under the TRICARE Retail 

Pharmacy program. We seek public 

comment regarding the advantages and 

disadvantages of such an approach, how 

such a requirement could be structured, 

and any other issues we should 

consider. 

We recognize that some beneficiaries 

may prefer to obtain their prescription 

drugs from mail-order pharmacies. 

While prescription drug plans and MA–

PD plans could not offer a mail-orderonly option to their beneficiaries or 

count mail-order pharmacies as part of 

their networks for the purpose of 

meeting the access standard in 

§ 423.120(a)(1), prescription drug plans 

and MA–PD plans would be permitted, 

as provided under § 423.120(a)(2), to 

offer a home delivery option via a mailorder pharmacy. Any such home 

delivery option would be in addition to 

the retail pharmacies in a plan’s 

network. 

As provided under section 1860D–

21(c)(3) of the Act and codified in 

§ 423.120(a)(3)(i) of our proposed rule, 

we are authorized to waive the 

pharmacy access standards in 

§ 423.120(a)(1) in the case of an MA–PD 

plan that provides access (other than via 

mail order) to qualified prescription 

drug coverage through pharmacies 

owned and operated by the MA 

organization that offers the plan. 

However, in order for the pharmacy 

access standards to be waived, the MA–

PD plan in question would be required 

to have a pharmacy network that, per 

our determination, provides comparable 

pharmacy access to its enrollees. We 

would evaluate whether such a plan’s 

network provides comparable access to 

covered Part D drugs to its enrollees 

using the same considerations we 

currently use to evaluate MA plans’

other provider networks under 42 CFR 

422.112 of our proposed rule. 

Similarly, § 423.120(a)(3)(ii) would 

codify section 1860D–21(d)(2) of the 

Act, which provides that if a private feefor-service MA plan offering qualified 

prescription drug coverage provides 

coverage for drugs, including covered 

Part D drugs, purchased from all 

pharmacies—regardless of whether they 

are network pharmacies under contract 

with the MA plan, and provided that 

beneficiaries are not charged any costsharing above and beyond what they 

would be charged under standard 

prescription drug coverage—the 

pharmacy access requirements at 

§ 423.120(a)(1) would also be waived. 

As provided under section 1860D–

4(b)(1)(A) of the Act and implemented 

in § 423.120(a)(4)(i), PDP sponsors and 

MA organizations offering an MA–PD 

plan would be required to permit the 

participation in their plan networks of 

any pharmacy that was willing to accept 

the plan’s terms and conditions. 

However, it is unreasonable to assume 

that a PDP sponsor or MA organization 

could establish a network using a 

uniform set of terms and conditions 

throughout a service area. Modification 

of contracting terms and conditions 

might be necessary, for example, to 

assure access in remote rural areas or for 

beneficiaries who obtain their drugs 

from long-term care pharmacies. 

Varying terms and conditions might also 

be required in order for the sponsor to 

provide a cost effective benefit through 

rebates and price concessions. The cost 

estimates for Part D assume that PDP 

sponsors and MA organizations offering 

an MA–PD plan would be able to 

achieve savings from retail prices 

through formulary and network design. 

Thus, the requirement at 

§ 423.120(a)(4)(i) of our proposed rule 

does not mandate a single set of terms 

and conditions for participation in a 

pharmacy network. 

We seek comment on whether, in 

order to guarantee that any pharmacy 

willing to meet a PDP sponsor’s or MA 

organization’s contracting terms and 

conditions could participate in a plan’s 

pharmacy network, we should require 

that PDP sponsors and MA 

organizations offering an MA–PD plan 

make available to all pharmacies a 

standard contract for participation in 

their plans’ networks. That requirement 

would not preclude PDP sponsors and 

MA organizations from negotiating 

terms and conditions different from 

those in the standard contract with a 

subset of pharmacies. These varying 

terms and conditions would therefore 

not have to be made available to all 

pharmacies. We note that, if required, it 

is our expectation that these standard 

contracts would require network 

pharmacies (except for pharmacies—

long-term care, I/T/U, and rural 

pharmacies, for example—for which 

paper claims are the norm given 

technology access or coordination of 

benefits issues) to maintain systems to 

adjudicate drug claims at the point-ofsale. 

As stipulated under section 1860D–

4(b)(1)(E) of the Act and 

§ 423.120(a)(4)(ii) of our proposed rule, 

pharmacies could not be required to 

accept insurance risk as a condition of 

participation in a PDP sponsor’s or MA 

organization’s pharmacy network. As 

defined in § 423.4, ‘‘insurance risk’’ in 

relation to a network pharmacy refers to 

risk of the type commonly assumed only 

by insurers licensed by a State. 

Insurance risk does not include 

payment variations designed to reflect 

performance-based measures of 

activities within the control of a 

pharmacy, such as formulary 

compliance and generic drug 

substitutions, nor does it include 

elements potentially in the control of 

the pharmacy (for example, labor costs, 

productivity). 

Section 423.120(a)(5) of our proposed 

rule, based on section 1860D–4(b)(1)(B) 

of the Act, clarifies that a PDP sponsor 

or MA organization offering an MA–PD 

plan would have the option of reducing 

cost-sharing for its enrolled 

beneficiaries below the level that would 

otherwise apply for covered Part D 

drugs dispensed through network 

pharmacies. We interpret this provision 

as not restricting PDP sponsors and MA 

organizations offering MA–PD plans 

from varying cost-sharing not only 

based on type of drug or formulary tier, 

but also on a particular pharmacy’s 

status within the plan’s pharmacy 

network—in essence authorizing 

distinctions between ‘‘preferred’’ and 

‘‘non-preferred’’ pharmacies. We believe 

that the statute allows these within 

network (preferred versus non-preferred 

pharmacy) distinctions to be made 

despite the ‘‘any willing provider’’

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46659 

provision at § 423.120(a)(4)(i) of our 

proposed rule. 

While these within network 

distinctions are allowed, the statute also 

requires that any such tiered costsharing arrangements in no way 

increase our payments to PDP sponsors 

or MA organizations. We are therefore 

proposing that tiered cost-sharing 

arrangements based on within-network 

distinctions could be included in plans’

benefits subject to the same actuarial 

tests that apply for tiered cost-sharing 

structures based on formulary. Thus, a 

reduction in cost-sharing for preferred 

pharmacies could be offered through 

higher cost-sharing for non-preferred 

pharmacies or as alternative 

prescription drug coverage. For further 

discussion of actuarial equivalence, 

please see section II.F.4 of this 

preamble. 

We recognize the possibility that 

plans could effectively limit access in 

portions of their service areas by using 

the flexibility provided in 

§ 423.120(a)(5) of our proposed rule to 

create a within-network subset of 

preferred pharmacies. In other words, in 

designing its network, a plan could 

establish a differential between costsharing at preferred versus nonpreferred pharmacies—while still 

meeting the access standards in 

§ 423.120(a)(1) of our proposed rule—

that is so significant as to discourage 

enrollees in certain areas (rural areas or 

inner cities, for example) from enrolling 

in that plan. Our intent is to use the 

authority provided under section 

1860D–11(e)(2)(D) of the Act to review, 

as part of the bid negotiation process 

described in § 423.272 of our proposed 

rule, the design of proposed 

prescription drug plan and MA–PD plan 

designs to ensure that they are not likely 

to substantially discourage enrollment 

by certain part D eligible individuals. 

Such a review would preclude the 

approval of bids submitted by plans that 

attempt to use strategies such as that 

outlined above to limit enrollment in 

portions of their service areas that are 

more difficult or costly to serve. 

We recognize that some beneficiaries 

may prefer to purchase their 

prescription drugs at a community 

pharmacy rather than through a mailorder pharmacy and that community 

pharmacies typically dispense only 30- 

day supplies of prescription drugs at a 

time. Section 1860D–4(b)(1)(D) of the 

Act would require PDP sponsors and 

MA organizations offering an MA–PD 

plan to allow their enrollees to receive 

benefits at a network retail pharmacy 

instead of a network mail-order 

pharmacy, if they so choose. Such 

benefits could include an extended 

supply (for example, 45-day, 60-day, 90- 

day supply) of covered Part D drugs that 

is typically available only through a 

network mail-order pharmacy. However, 

because mail-order pharmacies are often 

able to provide lower prices to 

individuals than retail pharmacies, it is 

possible that the negotiated price for an 

extended supply (for example, a 90-day 

supply) of a covered Part D drug would 

be more costly at a network retail 

pharmacy than through the network 

mail-order pharmacy assigned to the 

enrollee by their prescription drug plan 

or MA–PD plan. Thus, as provided 

under § 423.120(a)(6) of the proposed 

rule, a plan enrollee who chooses to 

obtain an extended supply of a covered 

Part D drug through a network retail 

pharmacy would be responsible for any 

differential between the network retail 

pharmacy’s and the network mail-order 

pharmacy’s negotiated price for that 

covered Part D drug. Since any such 

differential costs would be associated 

with benefits covered under a Part D 

plan, we seek comments on our 

proposal that this price differential be 

counted as an incurred cost against the 

annual out-of-pocket threshold 

consistent with the definition of 

‘‘incurred cost’’ in § 423.100. Under this 

approach, plans would be required to 

explicitly account for such price 

differentials in the actuarial valuation of 

their coinsurance in their bids. In 

addition, any such differential would 

also count toward the deductible for 

covered Part D expenditures between $0 

and the plan’s deductible. 

b. Formulary Requirements 

To the extent that a PDP sponsor or 

MA organization uses a formulary to 

provide qualified prescription drug 

coverage to Part D enrollees, it would be 

required to meet the requirements of 

§ 423.120(b)(1) and section 1860D–

4(b)(3)(A) of the Act to use a 

pharmaceutical and therapeutic (P&T) 

committee to develop and review that 

formulary. As a note of clarification, we 

interpret the requirement at section 

1860D–4(b)(3)(A) of the Act that a 

formulary be ‘‘developed and reviewed’’

by a P&T committee as requiring that a 

P&T committee’s decisions regarding 

the plan’s formulary be binding on the 

plan. However, we request comments on 

this interpretation. In addition, it is our 

expectation that P&T committees will be 

involved in designing formulary tiers 

and any clinical programs implemented 

to encourage the use of preferred drugs 

(e.g., prior authorization, step therapy, 

generics programs). 

The majority of members comprising 

the P&T committee would be required to 

be practicing physicians and/or 

practicing pharmacists. In addition, at 

least one practicing pharmacist and one 

practicing physician member would 

have to be experts in the care of elderly 

and disabled individuals. However, we 

would also encourage that plans select 

P&T committee members representing 

various clinical specialties in order to 

ensure that all disease states are 

adequately considered in the 

development of plan formularies. 

Section 423.120(b)(1)(ii) of the proposed 

rule also provides that at least one 

practicing pharmacist and one 

practicing physician members on a 

plan’s P&T committee be independent 

experts. We interpret the statutory 

language at section 1860D–4(b)(3)(A)(ii) 

of the Act requiring certain members of 

the P&T committee to be ‘‘independent 

and free of conflict with respect to the 

sponsor and plan’’ to mean that such 

P&T committee members must have no 

stake, financial or otherwise, in 

formulary determinations. In other 

words, these individuals would be 

required to be independent and free of 

conflict with respect not only to a PDP 

sponsor and its prescription drug plan 

or an MA organization and its MA–PD 

plan, but also with respect to 

pharmaceutical manufacturers. In 

addition, we solicit public comment 

with respect to the appropriateness of 

strengthening the statutory requirement 

in section 1860D–4(b)(3)(A)(ii) of the 

Act by requiring, in our final 

regulations, that more than just one 

pharmacist and one physician on the 

P&T committee be independent and free 

of conflict. 

When developing and reviewing the 

formulary, the P&T committee would be 

required, under § 423.120(b)(1)(iii) and 

in accordance with section 1860D–

4(b)(3)(B) of the Act, to base clinical 

decisions on the strength of scientific 

evidence and standards of practice, 

including assessing peer-reviewed 

medical literature (for example, 

randomized clinical trials, 

pharmacoeconomic studies, outcomes 

research data, and such other 

information as the committee 

determined appropriate). We note that 

the Public Health Service has developed 

guidelines for the treatment of HIV 

disease and related opportunistic 

infections that may also be useful to 

plan’s P&T committees; these guidelines 

can be found at http:// 

www.aidsinfo.nih.gov/guidelines/. 

Pharmacoeconomic studies may be 

considered in clinical decision making 

by a P&T committee with respect to 

formulary development. It is our 

expectation, however, that any cost 

considerations will be balanced with 

46660 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

clinical considerations in the 

development and revision of a plan’s 

formulary. The P&T committee would 

also take into account whether 

including a particular covered drug in 

the formulary (or in a particular 

formulary tier) had any therapeutic 

advantages in terms of safety and 

efficacy, per § 423.120(b)(1)(iv) of our 

proposed rule. Section 423.120(b)(1)(v) 

of our proposed rule would require that 

any decisions made by the P&T 

committee regarding development or 

revision of a plan’s formulary be 

documented in writing. 

As provided under section 1860D–

4(b)(3)(C)(ii) of the Act, we will request 

the U.S. Pharmacopeia (USP) to develop 

a model set of guidelines that consists 

of a list of drug categories and classes 

that may be used by PDP sponsors and 

MA organizations to develop 

formularies for their qualified 

prescription drug coverage, including 

their therapeutic categories and classes. 

We expect that the model categories and 

classes developed by USP will be 

defined so that each includes at least 

one drug that is approved by the FDA 

for the indication(s) in the category or 

class. That is, no category or class 

would be created for which there is no 

FDA approved drug and which would 

therefore have to include a drug based 

on its ‘‘off label’’ indication. However, 

this would not preclude physicians and 

other prescribers from prescribing drugs 

for off label indications, though we 

strongly encourage prescribers to clearly 

document and justify off-label use in 

their Part D enrollees’ clinical records. 

Additionally, the USP model guidelines 

would not preclude PDP sponsors or 

MA organizations from assigning an 

FDA approved drug to a category or 

class based on an off label use for that 

drug, provided the FDA has not made a 

determination that the drug is unsafe for 

that use. In addition to developing these 

initial model guidelines, the USP will 

revise its classification periodically to 

reflect changes in therapeutic uses of 

covered Part D drugs and any additions 

of new covered Part D drugs. As 

explained below, PDP sponsors and MA 

organizations will have some flexibility 

in developing formularies for 

prescription drug plans and MA–PD 

plans. 

We expect that the development of 

these guidelines will require USP to 

conduct outreach to beneficiary groups 

and major industries affected by the 

development of model guidelines. We 

specifically envision USP conducting 

multiple consultations and a public 

meeting with related health care 

industries and providers (including 

national representatives of pharmacies); 

Medicare physicians and other 

practitioners, including pharmacists; 

other provider groups, including longterm care providers; the managed care 

industry; the health insurance industry; 

pharmacy benefit managers (PBMs); and 

Medicare beneficiary advocacy groups). 

These consultations would be 

conducted with the goal of researching 

current best practices in formulary 

development and existing commercial 

and other standards (for example 

Medicaid, the Medicare Prescription 

Drug Discount Card), as well as 

obtaining informed recommendations 

concerning the development of the Part 

D model guidelines. The goal of the 

public meeting would be to solicit 

comments on a draft of the model 

guidelines, which would be developed 

on the basis of the aforementioned 

consultations, as well as USP’s research 

and recommendations. As our work 

with USP gets underway, we will 

provide further detail on the USP 

classification in upcoming operational 

guidance to entities wishing to become 

PDP sponsors or MA organizations 

offering MA–PD plans. Also, we wish to 

make clear that any guidelines 

established by the USP are applicable 

only to Part D benefits. They do not 

require the Secretary to make any 

decisions or take any actions with 

regard to classifying or categorizing 

drugs for any purpose other than 

implementing the Part D benefit. 

Although the USP will develop 

guidelines, under section 1860D–4(b)(3) 

of the Act PDP sponsors and MA 

organizations would have the flexibility 

to develop their own classification 

schemes. The USP listing would simply 

serve as a model set of guidelines. As 

specified in 1860D–11(e)(2)(D)(ii) of the 

Act, if the therapeutic classifications 

within a plan’s formulary conform to 

the USP classification model, we could 

not determine, based on the formulary’s 

therapeutic classifications, that the plan 

violates the provision at 1860D–

11(e)(2)(d)(i) of the Act and 

§ 423.272(b)(2) that prohibits the design 

of a plan and its benefits (including any 

formulary and tiered formulary 

structure) that substantially discourages 

enrollment by certain Part D eligible 

individuals. It is important to note, 

however, that even if a plan’s formulary 

classifications conform to the USP 

classification model, its overall 

formulary design could still be found to 

substantially discourage enrollment by 

certain Part D individuals (for example, 

based on particular drugs selected for 

inclusion in the formulary and/or 

proposed cost-tiering structure). If, on 

the other hand, a PDP sponsor or MA 

organization offering an MA–PD plan 

designs its formulary using therapeutic 

classes and categories that vary from the 

USP classification model, CMS would 

evaluate the submitted formulary design 

to ensure that the proposed therapeutic 

classification system does not 

substantially discourage enrollment by 

certain Part D eligible individuals. We 

invite comments regarding standards 

and criteria that we could use to 

determine that a PDP sponsor or MA 

organization’s formulary classification 

system that is not based on the model 

classification system does not in fact 

discriminate against certain classes of 

Part D eligible beneficiaries. 

Section 1860D–4(b)(3)(C) of the Act 

and § 423.120(b)(2) require the inclusion 

of ‘‘drugs’’ in each therapeutic category 

and class of covered Part D drugs in a 

plan’s formulary, although not 

necessarily all drugs within such 

categories and classes. We interpret this 

requirement to mean that a PDP sponsor 

or MA organization’s formulary would 

be required to include at least two drugs 

within each therapeutic category and 

class of covered Part D drugs within the 

PDP sponsor or MA organization’s 

formulary (unless there is only one drug 

in a particular therapeutic class or 

category, in which case the inclusion of 

only one drug would be required). 

Section 423.120(b)(2) of our proposed 

rule would also require that the drugs 

included in each therapeutic class or 

category include a variety of strengths 

and doses to the extent this is feasible. 

We believe that the inclusion of at least 

two drugs in each therapeutic class or 

category (except for those classes or 

categories that include only one drug) 

strikes an appropriate balance between 

providing plans with the necessary 

leverage to negotiate with manufacturers 

for significant discounts on covered Part 

D drugs and ensuring sufficient drug 

choice for beneficiaries. We note, 

however, that it is our expectation that 

plans’ formularies will provide Part D 

enrollees a comprehensive benefit—one 

that covers an amount and variety of 

drugs sufficient to treat all disease 

states. In addition, given that discounts 

on commonly used generic drugs are 

typically made available to enrollees 

under current industry practice and 

produce cost-savings both for plans and 

enrollees, we expect that prescription 

drug plan and MA–PD plan formularies 

will include a wide range of generic 

drugs. 

As elaborated above, we will evaluate 

the formularies of plans using a 

classification system different from the 

USP model guidelines to ensure that the 

formulary does not discriminate against 

certain classes of beneficiaries. We also 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46661 

intend to strictly enforce rules regarding 

plans’ P&T committees, as described 

above, as well as coverage 

determination, reconsideration, and 

appeals processes, to ensure that Part D 

enrollees are able to access the drugs 

they need. 

Within the aforementioned 

parameters, it is certainly possible that 

a prescription drug plan or MA–PD plan 

could develop a formulary that employs 

a number of strategies—for example, 

financial incentives to encourage use of 

generics, tiered cost-sharing and other 

mechanisms that create strong 

incentives for manufacturers to 

negotiate favorable prices for covered 

Part D drugs, prior authorization 

procedures, therapeutic interchange, 

step therapy, and use of mail order—to 

produce cost-savings both for plans and 

for Medicare. While we are open to 

these types of strategies as a way to 

minimize costs for enrollees and for the 

Medicare program, it is possible that 

certain vulnerable populations 

(enrollees in long-term care facilities or 

those suffering from mental illness or 

chronic diseases such as AIDS, for 

example) may be negatively impacted 

financially if they do not have access to 

a wide range of drugs in certain 

therapeutic classes and categories. We 

seek comments on ways to balance 

plans’ flexibility to use some of the 

mechanisms described above to 

maximize covered Part D drug discounts 

and lower enrollee premiums with the 

needs of certain special populations of 

Part D enrollees. 

One such population is Part D 

enrollees residing in long-term care 

facilities. Given the changes in 

Medicaid drug coverage introduced by 

the MMA, we believe it is particularly 

important to ensure that the drug needs 

of institutionalized Part D enrollees—

most of whom are dually eligible for 

Medicare and Medicaid—are met. The 

institutionalized population is generally 

more sensitive to and less tolerant of 

many medications. Long-term care 

pharmacies typically provide an open 

formulary to prescribing physicians that 

allows immediate access to a wide 

variety of medications in many different 

dosages and delivery forms. We request 

comments regarding any special 

treatment (for example, offering certain 

classes of enrollees an alternative or 

open formulary that accounts for their 

unique medical needs, and/or special 

rules with respect to access to dosage 

forms that may be needed by these 

populations but not by other Part D 

enrollees), we should consider requiring 

of plans with respect to special 

populations, as well as suggestions 

regarding the particular special 

populations for whom we may want to 

make allowances. 

Under § 423.120(b)(3) of our proposed 

rule and in accordance with section 

1860D–4(b)(3)(C)(iii) of the Act, PDP 

sponsors and MA organizations could 

not change therapeutic categories and 

classes in a formulary other than at the 

beginning of a plan year, except as we 

would permit to take into account new 

therapeutic uses and newly approved 

covered Part D drugs. Section 

423.120(b)(4) of our proposed rule 

specifies that, in accordance with 

section 1860D–4(b)(3)(F) of the Act, PDP 

sponsors and MA organizations offering 

MA–PD plans would periodically be 

required to evaluate and analyze 

treatment protocols and procedures 

related to their formularies to ensure 

that their plan members were receiving 

the best possible care for conditions 

related to their use of covered Part D 

drugs. We invite comments as to 

minimum timeframes for periodic 

evaluation and analysis of protocols and 

procedures related to a plan’s formulary 

by PDP plans and MA organizations 

offering MA–PD plans (for example, 

quarterly, annually). 

In addition, section 1860D–4(b)(3)(E) 

of the Act requires that PDP sponsors 

and MA organizations provide 

‘‘appropriate notice’’ to us, affected 

enrollees, authorized prescribers, 

pharmacists, and pharmacies regarding 

any decision to either: (1) Remove a 

drug from its formulary, or (2) make any 

change in the preferred or tiered costsharing status of a drug. Section 

423.120(b)(5) would implement that 

requirement by defining appropriate 

notice as at least 30 days prior to such 

change taking effect during a given 

contract year. We interpret the statutory 

term ‘‘affected enrollee’’ as referring to a 

plan enrollee who is currently taking a 

covered Part D drug that is either being 

removed from a plan’s formulary, or 

whose preferred or tiered cost-sharing 

status is changing. In other words, plans 

would not be required to notify all 

enrollees regarding formulary changes 

during a contract year—only those 

directly affected by changes with 

respect to a particular covered Part D 

drug. We note that plans would still be 

required to provide at least two drugs 

within each therapeutic category and 

class of covered Part D drugs within the 

PDP sponsor or MA organization’s 

formulary (unless there is only one drug 

in a particular therapeutic class or 

category), even if they choose to remove 

a covered Part D drug from their 

formularies in the middle of a contract 

year. In addition, we refer the reader to 

section II.M.5 of this preamble, which 

discusses formulary exceptions 

procedures and may be important for 

enrollees of plans whose formularies 

change mid-year. 

We recognize that both current and 

prospective enrollees of a prescription 

drug plan or an MA–PD plan will need 

to have the most current formulary 

information by the time of the annual 

coordinated election period described in 

§ 423.36(b) in order to enroll in the Part 

D plan that best suits their particular 

covered Part D drug needs. To this end, 

and as provided under § 423.120(b)(6) of 

our proposed rule, PDP sponsors and 

MA organizations would be prohibited 

from removing a covered Part D drug or 

from changing the preferred or tiered 

cost-sharing status of a covered Part D 

drug between the beginning of the 

annual coordinated election period 

described in § 423.36(b)(2) and 30 days 

subsequent to the beginning of the 

contract year associated with that 

annual coordinated election period. We 

believe this requirement will prevent 

situations in which prescription drug 

plans or MA–PD plans change their 

formulary early in the contract year, 

without providing appropriate notice, as 

described in § 423.120(b)(5), to new 

enrollees. Given that we are proposing 

that plans provide at least 30 days 

notice to affected enrollees prior to 

making formulary changes, it seems 

reasonable to require, as we propose 

doing in § 423.120(b)(6), that all 

marketing materials distributed during 

the annual coordinated election period 

reflect the formulary a plan will offer at 

the beginning of the contract year for 

which it is enrolling Part D eligible 

individuals. 

As discussed in sections II.C.6.c and 

II.C.6.d of this preamble, PDP sponsors 

and MA organizations can get 

information regarding formulary 

changes to beneficiaries via an Internet 

Web site, as well as via explanations of 

benefits sent to enrollees who utilize 

their Part D benefits. However, other 

methods (for example, notification by 

mail) will have to be used to provide 

notice to CMS, all affected enrollees, 

authorized prescribers, pharmacists, and 

pharmacies about impending formulary 

changes. 

Each PDP sponsor and MA 

organization offering qualified 

prescription drug coverage would also 

be required to establish policies and 

procedures to educate and inform health 

care providers and enrollees about its 

formulary, according to the provisions 

of § 423.120(b)(7) and section 1860D–

4(b)(3)(D) of the Act. As required under 

section 1860D–4(b)(3) of the Act, the 

requirements regarding the development 

and application of formularies 

discussed in this preamble section may 

46662 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

be met by a PDP sponsor or MA 

organization directly, or through 

contracts or other arrangements between 

a PDP sponsor or MA organization and 

another entity or entities. 

c. Use of Standardized Technology 

In accordance with the requirements 

of section 1860D–4(b)(2)(A) of the Act, 

§ 423.120(c) of our proposed rule would 

require that PDP sponsors and MA 

organizations issue (and reissue, as 

appropriate) a card or other technology 

that enrollees could use to access 

negotiated prices for covered part D 

drugs. Section 1860D–4(b)(2)(B)(i) of the 

Act mandates that we develop, adopt, or 

recognize standards relating to a 

standardized format for a card or other 

technology for accessing negotiated 

prices to covered Part D drugs. These 

standards would be compatible with the 

administrative simplification 

requirements of Title XI of the Act and 

could be based on standards developed 

by a standard setting organization. 

As provided under section 1860D–

4(b)(2)(B)(ii) of the Act, we will consult 

with the National Council for 

Prescription Drug Programs (NCPDP) 

and other standard setting 

organizations, as appropriate, to develop 

these standards. Given that NCPDP is 

recognized as the industry standard for 

current prescription drug programs, and 

we relied on its standards in developing 

requirements for discount card 

sponsors’ cards under the Medicare 

Prescription Drug Discount Card and 

Transitional Assistance Program, we are 

proposing basing our card standards on 

NCPDP’s ‘‘Pharmacy ID Card Standard.’’

This standard is based on the American 

National Standards Institute ANSI 

INCITS 284–1997 standard titled 

Identification Card—Health Care 

Identification Cards, which may be 

ordered through the Internet at http:// 

www.ansi.org. We will provide further 

operational guidance regarding our 

standards for a card (or other 

technology) to entities wishing to 

become PDP sponsors or MA 

organizations in time for these entities 

to use the standards (and have their 

cards approved for use by us) beginning 

January 1, 2006. It is our intent, 

however, that these standards require 

that plans use something other than an 

enrollee’s social security number as an 

identifier on their cards. 

5. Special Rules for Access to Covered 

Part D Drugs at Out-of-Network 

Pharmacies (§ 423.124) 

Section 1860D–4(b)(1)(C)(iii) of the 

Act requires us to establish pharmacy 

access standards that include rules for 

adequate emergency access to covered 

Part D drugs by Part D enrollees. We 

reviewed the definition of an 

‘‘emergency medical condition’’ (see 

§ 422.113(b)(1)(i) of our proposed rule) 

under the MA program to determine 

whether the ‘‘prudent layperson’’

standard was an appropriate standard 

for ascertaining whether the need for a 

covered Part D drug constitutes an 

emergency. However, we do not believe 

that the definition of an emergency 

medical condition, or a variation 

thereof, is entirely appropriate to 

prescription drugs. To the extent that a 

physician (or other prescriber) 

prescribes a covered Part D drug, we 

consider that covered Part D drug to 

likely be medically necessary. The issue 

of urgency or emergency is difficult to 

determine from a clinical perspective, 

however. 

Given the inherent difficulties in 

establishing emergency access standards 

for covered Part D drugs, we propose to 

meet the requirements of section 

1860D–4(b)(1)(C)(iii) by establishing a 

broader out-of-network access 

requirement. As provided in 

§ 423.124(a) of our proposed rule, we 

would require that PDP sponsors and 

MA organizations offering MA–PD plans 

assure that their enrollees have adequate 

access to drugs dispensed at out-ofnetwork pharmacies when they cannot 

reasonably be expected to obtain 

covered Part D drugs at a network 

pharmacy. We expect that out-ofnetwork access would be guaranteed 

under at least the following four 

scenarios: 

• In cases in which a Part D enrollee 

meets all of the following: is traveling 

outside his or her plan’s service area; 

runs out of or loses his or her covered 

Part D drug(s) or becomes ill and needs 

a covered Part D drug; and cannot 

access a network pharmacy; 

• In cases in which a Part D enrollee 

cannot obtain a covered Part D drug in 

a timely manner within his or her 

service area because, for example, there 

is no network pharmacy within a 

reasonable driving distance that 

provides 24-hour-a-day/7-day-per-week 

service; 

• In cases in which a Part D enrollee 

resides in a long-term care facility and 

the contracted long-term care pharmacy 

does not participate in his or her plan’s 

pharmacy network; and 

• In cases in which a Part D enrollee 

must fill a prescription for a covered 

Part D drug, and that particular covered 

Part D drug (for example, an orphan 

drug or other specialty pharmaceutical 

typically shipped directly from 

manufacturers or special vendors) is not 

regularly stocked at accessible network 

retail or mail-order pharmacies. 

We believe that enrollees under the 

aforementioned circumstances could 

not reasonably be expected to access a 

network pharmacy and must therefore 

be assured access to an out-of-network 

pharmacy as provided under 

§ 423.124(a) of our proposed rule. We 

request comments on our proposed outof-network access requirements. 

We are aware that routine access to 

out-of-network pharmacies by Part D 

enrollees may undermine a plan’s costsavings incentives. However, provided 

adequate access is assured under 

§ 423.124(a), PDP sponsors and MA 

organizations offering MA–PD plans 

would have some flexibility to design 

their out-of-network coverage policies. 

PDP sponsors and MA organizations 

offering MA–PD plans may therefore 

establish reasonable rules to assure that 

enrollees use out-of-network pharmacies 

appropriately. For example, PDP 

sponsors and MA organizations offering 

MA–PD plans could limit the amount of 

covered Part D drugs dispensed at an 

out-of-network pharmacy, require the 

use of mail order pharmacies as 

appropriate for extended out-of-area 

travel, and/or require a plan notification 

process for individuals who fill their 

prescriptions at out-of-network 

pharmacies. 

As a point of clarification, enrollees 

would not be permitted to access 

prescription drugs that were not 

considered covered Part D drugs due to 

application of the prescription drug 

plan’s or MA–PD plan’s formulary at an 

out-of-network pharmacy. Enrollees 

who require a covered Part D drug that 

is not on their prescription drug plan or 

MA–PD plan’s formulary would be 

required to use the coverage 

determination process described in 

§ 423.566 of our proposed rule. 

Both the enrollee and his or her 

prescription drug plan or MA–PD plan 

would be financially responsible for 

covered Part D drugs obtained at an outof-network pharmacy as described in 

§ 423.124(a) of our proposed rule (in 

other words, when an enrollee cannot 

reasonably be expected to access his or 

her covered Part D drugs at a network 

pharmacy), though we note that paper 

claims may have to be filed and 

payment reconciled after the drug 

purchase instead of (as would be the 

case with most, if not all, network 

pharmacies), at the point of sale. Section 

423.124(b)(1) of our proposed rule 

would require that the Part D enrollee 

be liable for any cost-sharing, including 

a deductible, that would have otherwise 

applied had the covered Part D drug 

been obtained at a network pharmacy. 

Such cost-sharing would be applied 

relative to the plan allowance for that 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46663 

covered Part D drug, which we propose 

defining in § 423.100 as the amount 

prescription drug plans and MA–PD 

plans use to determine their payment 

and Part D enrollees’ cost-sharing for 

covered Part D drugs purchased at outof-network pharmacies in accordance 

with the requirements of proposed 

§ 423.124(b). We request comments on 

how to further define the term ‘‘plan 

allowance.’’ Our understanding is that it 

is current industry practice to define the 

plan allowance as the lowest of the 

contractual discount offered to 

pharmacies in a plan’s standard contract 

(as described above, we are soliciting 

public comment regarding whether we 

should require PDP sponsors and MA 

organizations to offer a standard 

contract to all pharmacies), maximum 

allowable cost (MAC), or the pharmacy’s 

usual and customary price (described 

below). 

Thus, for example, if the beneficiary 

would have been liable for 25 percent 

coinsurance at a network pharmacy, he 

or she would pay 25 percent of the plan 

allowance for that covered Part D drug. 

If, on the other hand, the beneficiary 

would have been liable for a $10 copay 

at a network pharmacy, he or she would 

still pay $10 at the out-of-network 

pharmacy. 

In addition to this cost-sharing, and as 

provided under proposed 

§ 423.124(b)(2), the enrollee would be 

responsible for any difference in price 

between the out-of-network pharmacy’s 

usual and customary (U&C) price and 

the plan allowance for that covered Part 

D drug. The term ‘‘usual and customary 

price’’ refers to the price that a 

pharmacy would charge a customer who 

does not have any form of prescription 

drug coverage. Thus, for example, if an 

out-of-network pharmacy’s U&C price 

for a covered Part D drug were $100, the 

plan’s allowable cost (including 

beneficiary cost-sharing) for that 

covered Part D drug were $90, and the 

negotiated price for the covered Part D 

drug at the beneficiary’s network 

pharmacy were also $90, a beneficiary 

obtaining a drug at the out-of-network 

pharmacy would pay the cost-sharing 

that would have otherwise applied at a 

network pharmacy (for example, 25 

percent of the $90 plan allowance), plus 

the $10 difference—a total of $32.50, in 

this case (compared to $22.50 at the 

network pharmacy). We request public 

comments regarding our definition of 

usual and customary price. We are 

concerned that, given our proposed outof-network access policy, pharmacies 

may increase their U&C prices to 

increase their total reimbursement. This 

would be prejudicial not only to 

beneficiaries in need of out-of-network 

access, but also to uninsured 

individuals purchasing drugs at retail 

pharmacies, and we seek feedback on 

permissible ways to prevent such an 

outcome. 

When an enrollee purchases a covered 

Part D drug at an out-of-network 

pharmacy consistent with § 423.124(a) 

of our proposed rule, the cost-sharing he 

or she pays relative to the plan 

allowance ($22.50 in the example 

above) counts as an incurred cost 

against his or her annual out-of-pocket 

threshold because such out-of-network 

access to a covered part D drug is a 

covered benefit under those 

circumstances. As with the price 

differential that a beneficiary could 

incur by purchasing an extended supply 

(for example, 90-day) of covered Part D 

drugs purchased at a retail pharmacy 

rather than a mail-order pharmacy 

(discussed in section II.C.4.a of this 

preamble), the price differential 

between out-of-network pharmacies’

U&C costs and the plan allowance 

would also be counted as an incurred 

cost against a beneficiary’s annual outof-pocket threshold. We seek comments 

on our proposal that this price 

differential be counted as an incurred 

cost against the out-of-pocket threshold 

consistent with the definition of 

‘‘incurred cost’’ in § 423.100 of the 

proposed rule. Under this approach, 

plans would be required to explicitly 

account for such price differentials in 

the actuarial valuation of their 

coinsurance in their bids. In addition, 

any such differential would also count 

toward the deductible for covered Part 

D expenditures between $0 and the 

plan’s deductible. 

The plan in the example above would 

be responsible for payment of the plan 

allowance for the covered Part D drug 

minus the applicable beneficiary costsharing—$67.50, in this case—which is 

the same amount as the plan would 

have paid for that covered Part D drug 

at the network pharmacy. Given our 

proposed rules regarding financial 

responsibility for out-of-network access 

to covered Part D drugs, plans would in 

effect be financially held harmless for 

out-of-network use by their enrollees 

under § 423.124(a) of our proposed rule. 

We believe this is necessary in order to 

curb unnecessary use of out-of-network 

pharmacies and to ensure that plans can 

achieve cost-savings for both 

beneficiaries and the Medicare program. 

We welcome public comments 

regarding our proposed payment rules 

for covered Part D drugs obtained at outof-network pharmacies when enrollees 

cannot reasonably obtain those drugs at 

a network pharmacy. 

6. Dissemination of Plan Information 

(§ 423.128) 

Section 423.128 of our proposed rule 

would establish beneficiary protection 

requirements concerning the 

dissemination of Part D information by 

PDP sponsors and MA organizations to 

enrollees in, and individuals eligible to 

enroll in, a prescription drug plan or 

MA–PD plan. Part D information 

disseminated by PDP sponsors and MA 

organizations to current or prospective 

Part D enrollees would constitute 

marketing materials, as described in 

§ 423.50(b) of the proposed rule, and 

must be approved by us. For more 

information regarding the approval of 

marketing materials, please refer to 

section II.B.9 of this preamble). 

As explained in greater detail below, 

we note that—with the exception of the 

drug-specific information dissemination 

requirements—many of the 

requirements of § 423.128 of the 

proposed rule duplicate information 

dissemination requirements contained 

in § 422.111 of our proposed rule that 

are applicable to all MA plans, 

including MA–PD plans. We have 

proposed applying the requirements of 

§ 423.128 to MA–PD plans to ensure 

that Part D eligible enrollees have access 

to comparable drug-specific information 

from both prescription drug plans and 

MA–PD plans. We solicit comments on 

how best to coordinate the requirements 

of § 423.128 and § 422.111 of our 

proposed rule for MA–PD plans. 

a. Content of Plan Description 

Sections 423.128(a) and (b) of our 

proposed rule complies with the 

stipulation in section 1860D–4(a)(1) of 

the Act that requirements for the 

dissemination of Part D information be 

similar to the information dissemination 

requirements for MA organizations 

under section 1852(c)(1) of the Act and 

as interpreted in § 422.111(b) of our 

proposed rule. 

In order to ensure that individuals 

who are either eligible for, or enrolled 

in, a plan offering qualified prescription 

drug coverage receive the information 

they need to make informed choices 

about their Part D coverage options, PDP 

sponsors and MA organizations offering 

an MA–PD plan would be required to 

disclose, to each enrollee in a plan 

offering qualified prescription drug 

coverage, a detailed description of that 

plan. This description would be 

provided in a clear, accurate, and 

standardized form at the time of 

enrollment and annually, at a minimum, 

after enrollment. The information 

provided would be similar to the 

information MA plans must disclose to 

46664 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

their enrollees under § 422.111(b) of our 

proposed rule. The plan description 

would include information about: 

• The service area; 

• Benefits offered, including 

information on cost-sharing 

requirements (for example, tiered or 

other copayment level applicable to a 

drug or class of drugs, deductibles, 

coinsurance), cost-sharing requirements 

for subsidy eligible individuals, and 

how a beneficiary may obtain further 

information about those cost-sharing 

requirements; 

• How any formulary used by the 

plan works, the process for obtaining an 

exception to a prescription drug plan’s 

or MA–PD plan’s tiered cost-sharing 

structure, and how to obtain a copy of 

the formulary as well as information 

about formulary changes; 

• Access to network pharmacies; 

• Out-of-network coverage provided 

by the plan; 

• Grievance, coverage determination, 

exceptions, reconsideration, and 

appeals procedures; 

• A description of the plan’s quality 

assurance program, including the 

medication therapy management 

program required under § 423.153(d) of 

our proposed rule; and 

• Disenrollment rights and 

responsibilities. 

b. Disclosure of Information Upon 

Request 

In addition, according to section 

1860D–4(a)(2) of the Act and as codified 

in § 423.128(c) of our proposed rule, a 

beneficiary who is eligible to enroll in 

a PDP sponsor’s prescription drug plan 

or an MA organization’s MA–PD plan 

would have the right to obtain, upon 

request, more detailed plan information. 

This information would be similar to 

that which MA organizations are 

required to disclose to their enrollees 

upon request under sections 

1852(c)(2)(A), (B), and (C) of the Act and 

42 CFR 422.111(c) and (f) of our 

proposed rule, and would include: 

• General coverage information (for 

example, enrollment procedures; 

grievance, coverage determination, 

reconsideration, exceptions, and 

appeals procedural rights; the potential 

for the PDP sponsor or MA organization 

contract termination or service area 

reduction; benefits; premiums; 

formulary; service area; and quality and 

performance indicators); 

• The procedures the organization 

would use to control utilization of 

services and expenditures; 

• The number of disputes and their 

disposition in the aggregate; and 

• The financial condition of the PDP 

sponsor or MA organization. 

c. Provision of Specific Information 

As required under section 1860D–

4(a)(3) of the Act and § 423.128(d) of our 

proposed rule, PDP sponsors and MA 

organizations offering an MA–PD plan 

would be required to have in place a 

mechanism for providing, on a timely 

basis, specific information to current 

and prospective enrollees upon request. 

Such mechanisms would include: 

• A toll-free customer call center; 

• An Internet Web site; and 

• Responses in writing upon 

beneficiary request. 

As provided in § 423.128(d)(1)(i) and 

(ii) of our proposed rule, plans’

customer call centers would be required 

to be open during usual business hours 

and provide customer telephone service, 

including to pharmacists, in accordance 

with standard business practices. We 

strongly recommend, however, that 

plans provide some sort of 24-hour-aday/7 day-a-week access to their tollfree customer call centers in order to 

provide timely responses to timesensitive questions (for example, on outof-network pharmacy access) and 

request comments on whether we 

should require the more stringent 24- 

hour-a-day/7-day-a-week standard in 

our final regulations. 

In addition, we are proposing 

requiring that plans maintain Web sites 

as one means of disseminating 

information to current and prospective 

Part D enrollees. The Internet has 

proved to be an inexpensive and widely 

available source of information on 

health plans. Almost all Federal 

Employees Health Benefits (FEHB) 

plans, most large employer plans, and 

almost all managed care organizations 

maintain websites for the convenience 

of enrollees. Such Web sites typically 

contain information on drug 

formularies, preferred providers, plan 

access and emergency procedures, 

claims procedures, and a wide array of 

other useful information. Health plans 

have found that up-to-date formulary 

and provider information can be 

conveyed to enrollees far more quickly, 

reliably, and inexpensively via Internet 

than through traditional paper 

processes. Survey evidence shows that 

roughly half of the elderly routinely use 

the Internet. Even those who do not 

have direct access usually have friends 

or family who can assist them in 

obtaining information from the Internet. 

Libraries and senior support and 

counseling groups are almost always 

able to provide Internet Assistance. 

Thus, a great number of Medicare 

beneficiaries could benefit from the 

existence of prescription drug plan and 

MA–PD plan Web sites. 

As provided in § 423.128(d)(2)(i) of 

our proposed rule, PDP sponsors and 

MA organizations offering MA–PD plans 

would be required to include the 

detailed plan description information 

described in section II.C.6.a of this 

preamble. In addition, per 

§§ 423.128(d)(2)(ii) and (iii) of our 

proposed rule, plans would have to post 

current versions of their formularies, 

update those formularies at least 

weekly, and use the website as one 

mechanism to provide notice (at least 30 

days in advance, as discussed in section 

C.4.b of this preamble) of upcoming 

formulary changes, including the 

removal of covered Part D drugs from a 

formulary or changes to the tiered or 

preferred status of covered Part D drugs. 

Plan websites would have to be 

available both to current and 

prospective Part D enrollees. We note 

that plans would continue to be 

required to make information available 

to Part D eligible individuals in written 

formats as is currently the case for MA 

plans, and the provision of plan 

information via the Internet would 

simply be one additional mechanism for 

plans to communicate with enrollees 

and potential enrollees. 

Finally, prescription drug plans and 

MA–PD plans would be required to 

respond to beneficiary requests for 

specific information in writing, upon 

request. This requirement is codified in 

§ 423.128(d)(3) of our proposed rule. 

d. Claims Information 

In accordance with the requirements 

of section 1860D–(4)(a)(4) of the Act, 

and as codified in § 423.128(e) of our 

proposed rule, PDP sponsors would 

furnish to enrollees who receive covered 

Part D drugs an explanation of benefits. 

Explanations of benefits would be 

required to be written in a form easily 

understandable to beneficiaries. 

As provided in §§ 423.128(e)(1)–(5) of 

our proposed rule, plans’ explanations 

of benefits would have to include: 

• A listing of the item or service for 

which payment was made, as well as 

the amount of such payment for each 

item or service; 

• A notice of the individual’s right to 

request an itemized statement; 

• Information regarding the 

cumulative, year-to-date amount of 

benefits provided relative to the 

deductible, the initial coverage limit, 

and the annual out-of-pocket threshold 

for that year; 

• A beneficiary’s cumulative, year-todate total of incurred costs (to the extent 

practicable); and 

• Information about any applicable 

formulary changes. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46665 

We would require, under 

§ 423.128(e)(6) of our proposed rule, 

that an explanation of benefits be 

provided at least monthly for those 

utilizing their prescription drug benefits 

in a given month. This proposed 

requirement is consistent with our 

policy regarding the Medicare Summary 

Notice, which is provided monthly for 

beneficiaries with Part A or Part B 

utilization. It is also consistent with the 

standards followed by banking and 

other financial organizations, which 

provide their clients with monthly 

statements provided there is activity on 

their accounts. 

A PDP sponsor or MA organization 

offering an MA–PD plan could provide 

the notice of benefits electronically in 

cases in which a beneficiary elected to 

receive notices in that form. If 

technically feasible, a PDP sponsor or 

MA organization could also provide the 

notice of benefits at the point of sale; 

this would allow the PDP sponsor or 

MA organization to provide enrollees 

with additional information (for 

example, this could facilitate the 

provision of information regarding the 

availability of lower-cost generic 

availability required under § 423.132 of 

the proposed rule). 

7. Public Disclosure of Pharmaceutical 

Prices for Equivalent Drugs (§ 423.132) 

Under § 423.132(a) of our proposed 

rule, which codifies the requirements of 

section 1860D–4(k)(1) of the Act, PDP 

sponsors offering a prescription drug 

plan and MA organizations offering an 

MA–PD plan would be required to 

ensure that pharmacies inform enrollees 

of any differential between the price of 

a covered Part D drug to an enrollee and 

the price of the lowest priced generic 

version of that drug and available under 

the plan at that pharmacy. Under 

§ 423.132(b) of our proposed rule, this 

information would have to be provided 

at the time the plan enrollee purchases 

the drug, or in the case of drugs 

purchased by mail order, at the time of 

delivery of that drug. Disclosure of this 

information would not be necessary, 

however, if the particular covered Part 

D drug purchased by an enrollee was 

the lowest-priced generic version of that 

drug available at a particular pharmacy. 

As provided under section 1860D–

4(k)(2)(B) of the Act and § 423.132(c) of 

our proposed rule, we are permitted to 

waive the requirement that information 

on differential prices between a covered 

Part D drug and generic equivalent 

covered Part D drugs be made available 

to prescription drug plan enrollees at 

the point of sale (or at the time of 

delivery of a drug purchased through a 

mail-order pharmacy). Accordingly, we 

are proposing waiving the requirement 

in § 423.132(a) that information on 

lowest-priced generic drug equivalents 

be provided to enrollees for covered Part 

D drugs purchased by prescription drug 

plan and MA–PD plan enrollees when 

those covered Part D drugs are 

purchased at: 

• Any pharmacy, when the 

individual is enrolled in an MA private 

fee-for-service plan that offers qualified 

prescription drug coverage and provides 

plan enrollees with access to covered 

Part D drugs dispensed at all 

pharmacies, without regard to whether 

they are contracted network pharmacies, 

and does not charge additional costsharing for access to covered Part D 

drugs dispensed at all pharmacies; 

• Out-of-network pharmacies; 

• I/T/U network pharmacies; and 

• Network pharmacies located in any 

of the U.S. territories (American Samoa, 

the Commonwealth of the Northern 

Mariana Islands, Guam, Puerto Rico, 

and the Virgin Islands). 

Section 1860D–21(d)(2) of the Act 

specifically requires us to waive the 

public disclosure requirement for 

private fee-for-service MA plans 

meeting the criteria described above. 

Section 423.132(c)(1) of our proposed 

rule implements this waiver for private 

fee-for-service MA plans that meet those 

criteria. 

Our rationale for proposing waiver of 

the public disclosure requirement for 

out-of-network pharmacies, as provided 

under § 423.132(c)(2) of our proposed 

rule, is that such a requirement 

necessitates a contract between a PDP 

sponsor or MA organization and a 

pharmacy. Since, by definition, out-ofnetwork pharmacies are not under 

contract with a PDP sponsor or an MA 

organization, complying with the public 

disclosure requirement would be 

impracticable. 

We also propose waiving the 

requirement in § 423.132(a) when 

prescription drug plan enrollees obtain 

covered Part D drugs in I/T/U 

pharmacies, as provided under 

§ 423.132(c)(3) of our proposed rule. 

Because I/T/U pharmacies do not charge 

American Indians/Alaska Natives (AI/ 

ANs) for drugs obtained at I/T/U 

pharmacies, AI/ANs obtaining drugs 

from these pharmacies would not 

benefit from the provision of 

information about covered Part D drug 

price differentials. Furthermore, because 

I/T/U pharmacies generally only stock 

the generic versions of brand name 

drugs, AI/ANs obtaining drugs from 

these pharmacies would already be 

receiving a generic equivalent of any 

brand name part D drug prescribed to 

them. 

We believe it is appropriate to waive 

the public disclosure requirement for 

PDP sponsors when covered Part D 

drugs are provided in network 

pharmacies located in the territories 

given that few PBMs and health plans 

currently have contractual relationships 

with retail pharmacies in the territories. 

Our goal in waiving this requirement, as 

provided in § 423.132(c)(4) of our 

proposed rule, would be to reduce the 

administrative complexity of PDP 

sponsors and MA organizations’

contracts with participating retail 

pharmacies in the territories, which we 

believe would enhance organizations’

willingness to offer qualified 

prescription drug coverage in the 

territories. However, mail order drugs 

sent to residents of the territories would 

be required to include information 

about the price differential between a 

covered Part D drug and its lowestpriced generic version in the same 

manner as such information would be 

provided to Part D enrollees in the 50 

States and District of Columbia who 

obtain mail order drugs under Part D. 

Finally, as provided in § 423.132(c)(5) 

of our proposed rule, we propose 

waiving the public disclosure 

requirement in § 423.132(a) under such 

circumstances as we deem to be 

impossible or impracticable. We request 

comments on the appropriateness of the 

circumstances we have proposed for 

waiver of the requirements in 

§ 423.132(c), as well as any additional 

circumstances we may wish to consider. 

We note that a similar public disclosure 

requirement was waived for endorsed 

discount card sponsors under the 

Medicare Prescription Drug Discount 

Card (42 CFR 403 and 408) for covered 

discount card drugs dispensed under 

several of the same circumstances as 

those described above. 

In § 423.132(d)(1) of our proposed 

rule, we propose waiving the 

requirement that information on 

differential prices between a covered 

Part D drug and generic equivalent 

covered Part D drugs be made available 

to prescription drug plan and MA–PD 

plan enrollees at the point of sale when 

prescription drug plan enrollees obtain 

covered Part D drugs in long-term care 

pharmacies. Long-term care pharmacies 

generally provide drugs directly to the 

skilled nursing facilities and nursing 

facilities where the patient resides, not 

directly to the patient, under a medical 

benefit. They also engage in a significant 

coordination of benefits effort that 

would require that at least some claims 

be processed off-line, and not in real 

time. Given the manner in which longterm care pharmacies provide 

prescription drugs to residents of longVerDate May<21>2004 21:04 Aug 02, 2004 Jkt 203001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 E:\FR\FM\03AUP2.SGM 03AUP2
46666 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

term care facilities, as well as the way 

in which they process claims, it would 

be impracticable for these pharmacies to 

provide beneficiaries with information 

regarding covered Part D drug price 

differentials at the point of sale. 

Although long-term care network 

pharmacies would be exempt from the 

requirement that information about 

lower-priced generic alternatives be 

provided at the point of sale, they 

would not be exempt from the public 

disclosure requirement in § 423.132(a) 

altogether. We request comments 

regarding appropriate standards with 

regard to the timing of such disclosure 

by long-term care pharmacies to the 

institutionalized Part D enrollees they 

service. We note, as well, that under 

§ 423.132(d)(2) of our proposed rule, we 

may modify the timing of the public 

disclosure requirement under such 

other circumstances as we deem 

compliance with that requirement to be 

impossible or impracticable. 

8. Privacy, Confidentiality, and 

Accuracy of Enrollee Records 

(§ 423.136) 

To the extent that the prescription 

drug plan offered by a PDP sponsor 

maintains medical records or other 

health information regarding Part D 

enrollees, § 423.136 of our proposed 

rule would require the PDP sponsor to 

meet the same requirements regarding 

confidentiality and accuracy of enrollee 

records as MA organizations offering 

MA plans must currently meet under 42 

CFR 422.118, according to the 

stipulations of section 1860D–4(i) of the 

Act. PDP sponsors would therefore be 

required to—

• Abide by all Federal and State laws 

regarding confidentiality and disclosure 

of medical records or other health and 

enrollment information, including the 

Health Insurance Portability and 

Accountability Act (HIPAA) of 1996 and 

the privacy rule promulgated under 

HIPAA; 

• Ensure that medical information is 

released only in accordance with 

applicable Federal or State law; 

• Maintain the records and 

information in an accurate and timely 

manner; and 

• Ensure timely access by enrollees to 

records and information pertaining to 

them. 

Prescription drug plans would be 

considered covered entities under the 

HIPAA Privacy Rule because they meet 

the definition of ‘‘health plan,’’ as 

described in 45 CFR 160.103. The HHS 

Office for Civil Rights (OCR) is 

responsible for implementing and 

enforcing the HIPAA Privacy Rule. OCR 

has authority to investigate complaints, 

to conduct compliance reviews, and to 

impose civil money penalties for HIPAA 

Privacy Rules violations. Thus, any 

violations by an endorsed sponsor with 

respect to its obligations under the 

Privacy Rule as a covered entity are 

subject to such enforcement by OCR. 

OCR maintains a Web site with 

frequently asked questions and other 

compliance guidance at http://hhs.gov/ 

ocr/hipaa. 

D. Cost Control and Quality 

Improvement Requirements for 

Prescription Drug Benefit Plans 

1. Overview (§ 423.150) 

Subpart D of part 423 implements 

provisions included in sections 1860D–

4(c), 1860D–4(d), 1860D–4(e), 1860D–

4(j), and 1860D–21(d)(3) of the Act and 

sections 102(b) and 109 of Title I of the 

MMA. This subpart sets forth the 

following requirements: 

• Cost and Utilization Management 

Programs, Quality Assurance Programs, 

Medication Therapy Management 

Programs (MTMP), and Programs to 

control fraud, abuse, and waste for PDP 

sponsors and MA Organizations offering 

MA–PD plans that offer qualified 

prescription drug coverage; 

• CMS consumer satisfaction surveys 

of PDP and MA–PD plan enrollees. 

• Electronic prescription programs. 

• Compliance deemed on the basis of 

accreditation. 

• Accreditation organizations. 

• Procedures for the approval of 

accreditation as a basis for deeming 

compliance. 

2. Cost and Utilization Management, 

Quality Assurance, Medication Therapy 

Management, and Programs To Control 

Fraud, Abuse, and Waste (§ 423.153) 

Section 423.153(a) of our proposed 

rule would require each PDP sponsor or 

MA Organization offering a MA–PD 

plan that provides qualified prescription 

drug coverage under a prescription drug 

plan to establish a cost-effective drug 

utilization management program, a 

quality assurance program, a MTMP, 

and a program to control fraud, abuse, 

and waste as described in §§ 423.153(b), 

423.153(c), 423.153(d), and 423.153(e), 

respectively. 

We have combined these 

requirements into one section of the 

proposed regulation because each of 

these requirements would impact the 

quality and cost of care provided to 

beneficiaries. Our intent is to ensure 

that the prescription drug benefit would 

be provided using state of the art cost 

management and quality assurance 

systems. We also understand the 

overlapping nature of these 

requirements and that provisions under 

one requirement might complement 

another requirement. For example, drug 

utilization management early-refill edits 

used to prevent stockpiling of 

medications could also identify 

potential medication misuse by patients. 

Although these requirements are 

similar in their underlying goals, they 

can also be quite different. For example, 

drug utilization management and 

quality assurance systems are generally 

considered to be population based, 

while medication therapy management 

involves targeted, direct patient care. 

While we understand that some 

members of industry use various quality 

assurance measures and systems for 

controlling utilization and reducing 

medication errors, less information is 

available regarding medication therapy 

management. Medication therapy 

management has been used to describe 

a broad range of professional activities 

and responsibilities. We are familiar 

with state Medicaid programs (for 

example, Wisconsin, Mississippi) 

paying for cognitive services as part of 

their prescription drug benefit, but we 

have less information about current 

similar practices in the private sector. 

Therefore, our regulatory approach for 

utilization management, quality 

assurance, and controlling fraud, abuse, 

and waste will be different than our 

approach for medication therapy 

management. We particularly ask for 

comments on this section of the 

proposed regulation. 

In general, and within the parameters 

described later in this preamble and in 

regulation, PDP sponsors and MA 

Organizations offering MA–PD plans 

would have flexibility to design drug 

utilization management programs, 

quality assurance measures and 

systems, MTMPs, and programs 

designed to control fraud, abuse, and 

waste. 

a. Cost Effective Drug Utilization 

Management 

Section 423.153(b) of our proposed 

rule would require each PDP sponsor or 

MA Organization offering a MA–PD 

plan that provides qualified prescription 

drug coverage under a prescription drug 

plan to provide a cost-effective drug 

utilization management program. The 

program would include incentives to 

reduce costs when medically 

appropriate, such as through the use of 

multiple source drugs as defined in 

section 1927(k)(7)(A)(i) of the Act. For 

example, plans could utilize different 

dispensing fees that would encourage 

the use of these multiple source drugs 

as opposed to more expensive single 

source drugs. This should not be 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46667 

confused with the practice of 

‘‘switching’’ one branded drug product 

with another similar branded drug 

product, commonly referred to as 

‘‘therapeutic substitution.’’ Therapeutic 

substitution would always require 

explicit prescriber notification and 

approval. 

We believe that a cost-effective drug 

utilization management program could 

also employ the use of prior 

authorization, step therapy, tiered costsharing, and other tools to manage 

utilization. We are aware that these are 

tools commonly used today to manage 

pharmacy benefit costs for many 

commercial and State programs. We 

believe that the competitive bidding and 

premium setting processes, combined 

with the requirements for transparency 

and information availability, provide 

powerful incentives for plans to 

innovate and adopt the best techniques 

available. We invite comment on 

whether there are industry standards for 

cost effective drug utilization 

management and whether CMS should 

adopt any of these standards for PDPs 

and MA–PDs. 

Although we have not included 

proposed regulations, we are 

considering for the final rule a 

requirement that these tools should be 

under the direction and oversight of a 

Pharmacy and Therapeutics Committee 

to ensure an appropriate balance 

between clinical efficacy and cost 

effectiveness. We seek comments on this 

issue. We also seek comments on 

requiring the direct involvement of a 

Pharmacy and Therapeutics Committee 

not only with cost containment 

measures, but also with other areas of 

quality assurance and medication 

therapy management. Again, although 

we have not included proposed 

regulations requiring this standard, we 

are considering this standard for our 

final rule. 

In addition, appropriate drug 

utilization management programs would 

have policies and systems in place to 

assist in preventing overutilization and 

underutilization of prescribed 

medications. PDP sponsors and MA 

Organizations offering MA–PD plans 

must inform enrollees of program 

requirements and procedures in order to 

prevent unintended interruption in drug 

therapy. For example, enrollees would 

be made aware of how to proceed if 

special circumstances require their 

prescriptions to be refilled before the 

targeted refill date. 

b. Quality Assurance 

Section 423.153(c) of our proposed 

rule would require each PDP sponsor or 

MA Organization offering a MA–PD 

plan that provides qualified prescription 

drug coverage under a prescription drug 

plan to provide a quality assurance 

program. That program would include 

quality assurance measures and systems 

for (1) reducing medication errors, (2) 

reducing adverse drug interactions, and 

(3) improving medication use. 

We are proposing that quality 

assurance programs include 

requirements for drug utilization 

review, patient counseling, and patient 

information record-keeping. We believe 

these requirements would generally 

need to comply with section 4401 of the 

Omnibus Reconciliation Act of 1990 as 

codified in 42 CFR 456.705 and section 

1927(g)(2)(A) of the Act, and we are 

considering such specific requirements 

for the final rule. Although these 

regulations were written specifically for 

the Medicaid population, we 

understand that they describe currently 

accepted standards for contemporary 

pharmacy practice and our intent is to 

require plans to continue to comply 

with contemporary standards. We solicit 

comment on whether the Medicaid 

standards are in fact industry standards, 

whether they are appropriate standards 

for part D, and if they are, how they 

should be adapted for use in part D. 

Therefore, we have chosen not to add 

further specification in the regulation 

text. We also understand that some 

members of industry use additional 

quality assurance measures and 

systems. We invite comments on 

whether there are industry standards, 

above and beyond those mentioned 

above, that we might adopt. 

Furthermore, PDP sponsors and MA 

Organizations offering MA–PD plans 

will be required to have systems and 

measures established to ensure that 

network pharmacy providers are 

complying with their quality assurance 

requirements. We are requesting 

comments on the costs and challenges 

associated with these systems and 

measures. 

The elements that are currently 

viewed as desirable for quality 

assurance systems are—(1) electronic 

prescribing (which will become a 

requirement in the future as discussed 

later in this preamble); (2) clinical 

decision support systems; (3) 

educational interventions, which could 

be provided by QIOs or could rely on 

other mechanisms; (4) bar codes; (5) 

adverse event reporting systems; and (6) 

provider and patient education. We do 

not expect PDPs and MA–PD plans to 

adopt all of these elements. However, 

we expect substantial innovation and 

rapid development of improved quality 

assurance systems in the new 

competitive and transparent market 

being created by the new Part D benefit. 

We invite comments on which, if any, 

elements of a quality assurance system 

should be contained in our program 

requirements. We are particularly 

interested in best practices in quality 

assurance, costs and benefits associated 

with each element, the challenges 

involved in implementing quality 

assurance measures and systems, types 

of data useful for reducing medication 

errors, associated costs and challenges 

with collecting this data, and how this 

data could be best communicated to 

providers and beneficiaries to improve 

medication use. 

We note that the MMA does not 

define or explain the term ‘‘medication 

error.’’ Nevertheless, we believe a 

common definition is important. In the 

future, we may require quality reporting 

that includes error rates. We could use 

this information to evaluate plans. In 

addition, we may publish this 

information for enrollees to use when 

comparing and choosing their 

individual plans. Therefore, we 

particularly invite comments on how we 

could evaluate PDPs and MA–PDs based 

on the types of quality assurance 

measures and systems they have in 

place, how error rates can be used to 

compare and evaluate plans, and how 

this information could best be provided 

to beneficiaries to assist them in making 

their choices among plans. 

Medication error reduction programs 

and requirements have been discussed 

in many venues and various definitions 

of ‘‘medication error’’ have been used. 

For example, in its proposed rule 

requiring bar codes on most human drug 

products, the Food and Drug 

Administration adopted the following 

definition of a medication error: 

Any preventable event that may cause or 

lead to inappropriate medication use or 

patient harm while the medication is in the 

control of the healthcare professional, 

patient, or consumer. Such events may be 

related to professional practice; healthcare 

products, procedures, and systems, including 

prescribing; order communication; product 

labeling, packaging, and nomenclature; 

compounding; dispensing; distribution; 

administration; education; monitoring; and 

use. (See 68 FR 12500 (March 14, 2003)). 

This definition of ‘‘medication error’’

is identical to that used by the National 

Coordinating Council for Medication 

Error Reporting and Prevention (NCC 

MERP). (See National Coordinating 

Council for Medication Error Reporting 

and Prevention, ‘‘What is a Medication 

Error?’’ (Undated)). 

We are citing this definition in this 

preamble as one that we would use 

initially in interpretive guidance. We 

believe that this definition could be 

46668 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

applied to, and include, adverse drug 

events and interactions as they pertain 

to quality assurance. As the state of 

industry practice evolves, we may, from 

time to time, update this definition by 

manual issuance. We invite comments 

on this definition. 

c. Medication Therapy Management 

Programs 

Section 1860D–4(c)(1)(C) of the Act 

requires PDP sponsors and MA 

organizations offering MA–PD plans to 

establish a MTMP, and § 423.153(d) 

would codify that requirement. As 

stated earlier, neither we, nor many 

private insurers, have extensive 

experience requiring or reimbursing for 

MTMPs. As a result, we seek comments 

on what requirements and/or guidelines 

for MTMPs should be formulated in our 

regulation. In this section of the 

preamble, we are providing a broad 

overview of the types of activities that 

a PDP sponsor or MA organization 

offering a MA–PD plan could provide as 

part of a MTMP. We also discuss 

various options for determining which 

beneficiaries might qualify as ‘‘targeted 

individuals’’ and what types of 

clinicians might provide MTMP 

services. We plan to conduct further 

research and seek comments before 

establishing requirements with respect 

to MTMPs. We are interested in current 

MTMP best practices, essential 

components of MTMPs, and which 

quality assurance requirements, if any, 

should be included in MTMPs. We are 

also interested in measures and 

information on effective MTMP services 

that could be publicized and used by 

beneficiaries who wish to use these 

services. We are particularly interested 

in the most effective steps to make 

valuable, proven MTMP services 

available to beneficiaries to improve 

health care quality and reduce costs. We 

are mindful of the importance of 

stimulating the evolution of the most 

appropriate and efficient form of 

MTMPs, without stifling innovation or 

prematurely locking-in specific 

attributes. 

The description of a MTMP in section 

1860D–4(c)(2) of the Act would allow 

for plans to establish a broad range of 

additional services. The purpose of a 

MTMP is to provide services that will 

optimize therapeutic outcomes for 

targeted beneficiaries. Specific services 

to be provided under a MTMP would be 

distinct from those required for 

dispensing medication. Medication 

therapy management services would be 

reimbursable when adopted by a plan 

and only when provided to targeted 

beneficiaries as defined in § 423.153(2) 

of our proposed rule and discussed later 

in this preamble. 

Section 1860D(4)(c)(2)(B) of the Act 

states that MTMPs may include 

elements designed to promote (for 

targeted beneficiaries): 

• Enhanced enrollee understanding—

through beneficiary education 

counseling, and other means—that 

promotes the appropriate use of 

medications and reduces the risk of 

potentially adverse events associated 

with the use of medications. 

• Increased enrollee adherence to 

prescription medication regimens (for 

example, through medication refill 

reminders, special packaging, and other 

compliance programs and other 

appropriate means). 

• Detection of adverse drug events 

and patterns of overuse and underuse of 

prescription drugs. 

In order to promote these elements 

and optimize therapeutic outcomes for 

targeted beneficiaries, we envision 

MTMPs potentially spanning a range of 

services, from simple to complex. In 

addition to those mentioned in the 

statute, services could include, but not 

be limited to, performing patient health 

status assessments, formulating 

prescription drug treatment plans, 

managing high cost ‘‘specialty’’

medications, evaluating and monitoring 

patient response to drug therapy, 

providing education and training, 

coordinating medication therapy with 

other care management services, and 

participating in State-approved 

collaborative drug therapy management. 

We would also anticipate that these 

services could be offered as components 

of more coordinated disease 

management programs, but would not 

expect provision of these services to be 

limited to such programs. 

In addition to MTMPs providing for 

different types of services, we would 

also anticipate the need for different 

levels of service based on the individual 

requirements of targeted beneficiaries. 

For example, one beneficiary may 

require only a fifteen-minute phone 

consultation, while another would be 

better served by a one-hour in-person 

visit with the pharmacist. The level of 

service should be determined by time 

and resources required to accommodate 

the specific needs of the individual 

beneficiary. Therefore, we would 

anticipate that a MTMP would include 

policies and procedures for ensuring 

targeted beneficiary access to the 

appropriate types and levels of service 

offered by the particular PDP or MA–PD 

plan. 

Within this broad framework, we 

believe that PDP sponsors and MA 

Organizations offering MA–PD plans 

can customize their MTMPs and that a 

competitive market supported by useful 

information on MTMP services will 

provide the best mechanism for 

establishing optimal MTMPs. We 

believe that MTMPs can lead to 

improved overall health for individuals, 

while at the same time decreasing 

overall healthcare costs resulting from 

improper medication use and adverse 

drug events. We may provide a 

mechanism for plans to demonstrate the 

types of services, levels of service, and 

quality outcomes associated with their 

MTMPs to further aid beneficiaries with 

choosing the plan that will best meet 

their needs. 

In addition, as provided in 

§ 423.153(d)(3), a MTMP, as adopted by 

a plan, would have to be developed in 

cooperation with licensed practicing 

pharmacists and physicians. 

Beyond these broad parameters for a 

MTMP, there are several issues to 

consider as we provide additional 

guidance to PDP sponsors and MA 

organizations. First, we consider 

MTMPs to be administrative activities 

similar to quality assurance drug 

utilization review or measures to control 

fraud, abuse and waste. Like these other 

quality improvement services intrinsic 

to the drug plan, MTMP services would 

not involve direct beneficiary costsharing and Part D enrollees would not 

be required to pay separate fees for these 

services (although the cost could be 

reflected in the premium rate). The cost 

of a MTMP is considered an 

administrative cost incident to 

appropriate drug therapy and, therefore, 

not an additional benefit. Nevertheless, 

unlike the general quality assurance and 

fraud, abuse, and waste control 

requirements, MTMP services can be 

limited to targeted beneficiaries. To the 

extent that MTMPs reduce drug 

spending by more than their costs, they 

have the potential to lower overall Part 

D costs. To the extent that MTMP 

services lower overall medical costs for 

beneficiaries with chronic illnesses, we 

also seek comment on how to integrate 

MTMP services and financial incentives 

into the Medicare Chronic Care 

Improvement program (section 721 of 

the Act). 

Second, section 1860D4(c)(2)(A)(ii) of 

the Act requires that MTMP services be 

provided only for targeted individuals. 

In other words, not all members of a 

plan would be entitled to receive these 

services. As provided under 

§ 423.153(d)(2), ‘‘targeted beneficiaries’’

would be plan enrollees who have 

multiple chronic diseases, are taking 

multiple Part D covered drugs, and are 

likely to incur annual costs that exceed 

a certain level that we determine. We 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46669 

invite comments on how we should 

provide guidance to drug plans in 

defining ‘‘multiple chronic diseases’’

and ‘‘multiple covered Part D drugs’’ for 

the purposes of determining which Part 

D enrollees would qualify for MTMP 

services, or whether such 

determinations are best left to the plans 

as part of their benefit design. 

While the statute states that CMS sets 

the level of annual costs that must be 

incurred by a beneficiary to qualify for 

the receipt of MTMP services, our 

preferred policy is to delegate this 

function to the private drug plans, as 

they would be able to evaluate their 

patients with greater specificity and 

information. We request comments on 

this policy as both a policy and legal 

matter. We believe that, given current 

evidence, the level of annual costs that 

must be incurred by a beneficiary to 

qualify for the receipt of MTMP services 

should be determined by the drug plan. 

We do not think there is sufficient 

evidence at this point to specify a 

threshold of annual drug costs to be 

used for targeting these services to 

particular Part D enrollees. However, we 

seek comments on what guidance we 

could provide to plans to ensure these 

services are targeted in the most 

efficient manner and to the most 

appropriate beneficiaries. 

In addition, we are concerned about 

the method that plans should use to 

determine the costs that enrollees are 

‘‘likely to incur’’ to ascertain whether 

they qualify as targeted beneficiaries. 

Once plans have historical data on 

specific patients, determining how to 

target such services should become 

easier and more effective. For example, 

based on their previous experience with 

providing prescription drug services, 

plans could qualify enrollees for MTMP 

services based on whether the enrollees 

have multiple chronic diseases and 

whether they are using multiple drugs. 

As they develop more experience with 

their Medicare enrollees, past 

medication history might become 

another useful guide. 

We believe that plans would benefit 

from additional guidance on 

interpreting the level above which a 

beneficiary’s incurred costs would 

qualify him or her for MTMP services. 

We invite comments on all the disease, 

drug, and cost issues that we should 

consider in further refining the 

definition of a targeted beneficiary for 

receipt of MTMP services. 

Another issue to be considered relates 

to which clinicians would be providing 

MTMP services and the method for 

providing those services. Section 

1860D–4(c)(2)(A)(i) of the Act 

specifically states that a pharmacist may 

furnish MTMP services. While we 

believe that pharmacists will be the 

primary providers of these services, 

MTMPs could also include other 

qualified health care professionals as 

providers of services. The individual 

needs of the targeted beneficiary should 

determine the appropriate provider and 

setting for MTMP services. For example, 

consultant pharmacists will likely 

provide services to beneficiaries in longterm care facilities; retail pharmacists 

could provide those same services to 

ambulatory beneficiaries. 

Furthermore, we believe beneficiary 

choice and on-going beneficiaryprovider relationships should play a 

role in determining the best provider for 

MTMP services. Improved therapeutic 

outcomes through MTMP services will 

frequently require active beneficiary, or 

caregiver, participation. While 

population based quality assurance and 

cost control measures might adequately 

be served by impersonal telephone 

services, we believe that telephone 

services are only one mode of providing 

medication therapy management 

services. Active beneficiary 

participation and consistent delivery of 

quality MTMP services will require 

developing and maintaining on-going 

beneficiary-provider relationships. 

Therefore, to the extent that these 

services are adopted by plans in their 

MTMPs, we would expect the range of 

services offered to reflect this important 

component and maximize beneficiary 

participation by considering beneficiary 

preference and existing beneficiaryprovider relationships in determining 

the appropriate provider and setting for 

delivery of MTMP services. 

Section 1860D–4 (c)(2)(E) of the Act 

states that in establishing fees for 

pharmacists or others providing MTMP 

services, to the extent that these services 

are adopted by a plan in its MTMP, a 

PDP sponsor must take into account the 

resources and time associated with 

implementing the MTMP. Section 

423.153(d)(5) codifies that requirement. 

We propose to implement this 

requirement as follows: 

(1) First, we would expect potential 

PDP sponsors to describe, as part of 

their applications, their plan to consider 

the resources used and the time 

required to implement their MTMP in 

establishing fees for pharmacists and 

others providing services under the 

MTMPs. 

(2) Second, in the event that we 

receive complaints that a PDP sponsor 

is not paying pharmacists or others in 

accordance with the fees discussed in 

the application for the MTMP it has 

elected to adopt, we would investigate 

further. 

While section 1860D–4(c)(2)(E) of the 

Act specifies that the time and resources 

necessary to implement the MTMP must 

be taken into account when establishing 

fees, it does not specify how these fees 

should be paid. We believe that fees 

associated with provision of medication 

therapy management services are 

separate and distinct from dispensing 

fees discussed in section § 423.100 of 

the preamble for this proposed 

regulation. Although section 1860D–

4(c)(2)(E) of the Act states that PDP 

sponsors must disclose to the Secretary 

the amount of ‘‘any such management or 

dispensing fees’’, it merely governs 

disclosure and does not require that 

MTMP be included in the dispensing 

fee (indeed the Act distinguishes 

management fees from dispensing fees 

that are part of individual 

prescriptions). 

Therefore, costs associated with 

MTMPs, including these management 

fees, are included as part of the general 

administrative overhead costs in the 

plan bid. For purposes of evaluating the 

administrative component of a PDP’s 

bid, we will ask a PDP sponsor or MA 

organization to disclose the fees it pays 

to pharmacists or others, including an 

explanation of those fees attributable to 

MTMP services. The fee information 

provided to us under this authority 

would be protected under the 

confidentiality provisions of section 

1927(b)(3)(D) of the Act. Under those 

provisions, we would be prohibited 

from disclosing the specific fees in a 

manner that links the fees to the 

particular pharmacy or other provider 

providing the MTMP services—except 

to the extent necessary to administer the 

Part D program, to permit the 

Comptroller General to review the 

information, or to permit the Director of 

the Congressional Budget Office to 

review the information. If we were to 

discover situations in which plans 

systematically did not pay the fees 

described in their applications—and, if 

those errors were not corrected upon 

notification, we might, at our discretion, 

employ the broad ranges of intermediate 

sanctions or termination provisions 

available under subparts K and O of the 

regulations. 

While we expect to perform the due 

diligence described above through 

application review and potentially 

following up on any complaints we do 

not believe we have the authority to 

mandate that PDP sponsors or MA 

organizations pay pharmacists or other 

providers a certain amount for MTMP 

services. We also would not adjudicate 

any specific disputes between PDP 

sponsors or MA organizations and 

pharmacists or other providers 

46670 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

regarding the specific fees due for 

MTMP services. 

Finally, as specified in section 

1860D–4(c)(2)(D) of the Act, we are 

required to establish guidelines that 

MTMPs operated by PDP sponsors are 

coordinated with the ‘‘chronic care 

improvement program’’ (CCIP) under 

section 1807 of the Act. The CCIP is a 

new program established by section 721 

of the MMA, which added a new 

section, section 1807, to the Act. The 

new section 1807 creates a method for 

us to assist beneficiaries with multiple 

chronic conditions in managing their 

care. The program is targeted only to 

beneficiaries in original fee-for-service 

Medicare—not beneficiaries enrolled in 

MA plans. Therefore, we anticipate that 

our guidelines will be targeted toward 

PDP sponsors and not to MA 

organizations that offer MA–PD plans. 

As stated above, the CCIP is a new 

program. By statute, the first agreements 

under that program with chronic care 

improvement organizations should be 

entered into within 12 months of the 

MMA’s date of enactment. On April 23, 

2004, we published in the Federal 

Register (69 FR 22065–22079), the 

solicitation for the CCIP program. 

Because the program has not yet been 

established, however, we cannot 

provide a great deal of guidance at this 

time regarding how the MTMPs under 

Part D would coordinate with the CCIP. 

We are concerned with the possibility of 

beneficiaries receiving duplicative 

services. We seek comments on how 

MTMP services provided through CCIP 

can be effectively coordinated with 

MTMP services provided by PDPs. 

There are several different ways that 

communication could take place so that 

a beneficiary enrolled in both the CCIP 

and a PDP receives efficient assistance 

with managing their chronic diseases. 

For example, the CCIP might collect 

information at intake, obtain a 

beneficiary information release, and 

inform the PDP of enrollment. An 

alternate approach is for us to use the 

enrollment files from the two programs 

to communicate to the respective 

parties. We invite comments on this 

issue and these proposed options. We 

may provide further interpretive 

guidance on coordination with the CCIP 

once the section 1807 agreements are 

finalized and the new program is in 

place. We invite comments from 

interested parties relating to specific key 

issues that should be addressed in this 

guidance. 

d. Fraud, Abuse and Waste 

Section 423.153(e) of our proposed 

rule would require PDP sponsors and 

MA Organizations offering MA–PD 

plans that provide qualified prescription 

drug coverage under a prescription drug 

plan to provide a program to control 

fraud, abuse, and waste. These 

requirements overlap to some extent 

with those in subpart K of this 

regulation, but cover somewhat different 

territory. 

We would expect these plans, as 

prudent purchasers, to implement 

programs to control their expenditures. 

We would be interested in comments on 

the following discussion as to possible 

requirements in this area over and above 

the incentives operating in at risk plans. 

We would also like comments on the 

value added from requiring plans to 

develop comprehensive performance 

standards for use in evaluating internal 

processes that would appropriately and 

efficiently research, identify, monitor, 

and take immediate action to mitigate 

fraud, abuse, and waste. Fraud, abuse, 

and waste apply not only to both the 

PDPs and MA–PDs and their staffs, but 

also to the PBMs, pharmacies, 

physicians, and other providers that 

they deal with. For instance, PDPs and 

MA–PDs need to determine whether or 

not physicians are illegally prescribing 

narcotics. In addition to available 

appropriate data that might be supplied 

by us, the plans could develop and 

utilize methods such as data analysis, 

record audit of PBMs, pharmacies, 

physicians, and other providers, DUR 

(note these DURs overlap with those 

described previously, but these focus on 

those related to fraud, abuse, and 

waste), and methods used to consider 

and resolve disputes related to 

pharmacies, physicians’, and other 

provider’s dissatisfaction to ensure the 

integrity of all entities (government, 

beneficiary, PDP sponsor, PBMs, 

pharmacies, physicians, and other 

providers). 

One area of concern is inappropriate 

switching of prescriptions by a PDP or 

MA–PD plan without consulting a 

prescribing physician. For instance, 

switching from brand to generic may be 

appropriate, but switching brands, e.g. 

Lipitor to Zocor, may not without 

consultation. 

We also seek comments on the 

appropriateness, value and need for 

requiring the plans to test program 

integrity analytic tools for effectiveness, 

efficiency, and adaptability to the 

Medicare Benefit environment. For 

example, one approach could require 

the plans to provide any of the 

following in periodic reports: (1) 

Summary of data analysis activities, (2) 

resources, (3) tools, or (4) trend analysis. 

Alternatively, the plans could be 

required to develop their strategy and 

propose what each plan determines to 

be the best approach for detecting and 

deterring fraud and abuse. Furthermore, 

the plans could be asked to demonstrate 

that the agreed upon activities and 

outcomes that the plans achieve are in 

relation to priorities established by us. 

We seek comments on the likely value 

of these requirements. We also seek 

comments on the implementation, 

scope, and operation of an effective and 

robust fraud, abuse, and waste control 

program for plan sponsors. 

e. Exception for Private Fee for Service 

Plans 

Section 423.153(f) of our proposed 

rule would implement section 1860D–

421(d)(3) of the Act by exempting 

private fee-for-service MA plans that 

offer qualified prescription drug 

coverage from the requirement to 

establish a drug utilization management 

program and a MTMP; however, these 

private fee-for-service MA plans would 

still be required to establish a quality 

assurance program and program to 

control fraud, abuse and waste as 

described in § 423.153(c) and 

§ 423.153(e), respectively. 

3. Consumer Satisfaction Surveys 

(§ 423.156) 

Under § 423.156, we would conduct 

consumer satisfaction surveys among 

enrollees of PDPs and MA Organizations 

offering MA–PD plans in order to 

provide comparative information about 

qualified prescription drug coverage to 

enrollees as part of our information 

dissemination efforts. Section 1860D–

4(d) of the Act specifies that these 

surveys be conducted in a manner 

similar to that in which they are 

currently conducted under § 422.152(b) 

(that is, annually) for MA plans by using 

the Consumer Assessment of Health 

Plans (CAHPS). We believe a CAHPSlike instrument (or perhaps a 

modification of CAHPS for MA 

Organizations offering MA–PD plans) 

will most likely be the vehicle used to 

collect this information. As we have 

done in the past in developing surveys 

of Medicare beneficiaries in various 

settings, we will work with the Agency 

for Healthcare Research and Quality 

(AHRQ) to develop a survey measuring 

the experience of beneficiaries with 

their qualified prescription drug 

coverage, a sampling strategy, and an 

implementation strategy. We will 

provide further information regarding 

this survey as it is developed. 

4. Electronic Prescription Program 

(§ 423.159) 

Section 1860D–4(e) of the Act 

contains provisions for electronic 

prescription programs. The statute 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46671 

contains specific provisions on when 

voluntary initial standards may be 

adopted (not later than September 1, 

2005), and when final standards should 

be published (not later than April 1, 

2008) and then effective (not later than 

1 year after the date of promulgation of 

final standards). 

The statute requires the National 

Committee on Vital and Health 

Statistics (NCVHS) to develop 

recommendations, in consultation with 

a specific group of constituencies, for 

possible adoption by the Secretary 

according to the schedule set forth 

above. Those constituencies include 

physicians, hospitals, pharmacists and 

pharmacies, PBMs, State boards of 

pharmacy and medicine, Federal 

agencies and other electronic 

prescribing experts for uniform 

standards. The law also requires a pilot 

project once the Secretary has adopted 

or announced the initial standards. The 

pilot will run from January 2006 

through December of that year, and it 

will be completed prior to the 

promulgation of the final standards. The 

law further states that a pilot is not 

needed if there is already adequate 

industry experience with whatever 

standards the Secretary is planning to 

adopt. 

To fulfill the statute’s responsibilities, 

the NCVHS’ Subcommittee on 

Standards and Security has already held 

two public hearings on issues related to 

e-prescribing. The hearings on March 30 

and 31, 2004, and May 25, 26, and 27, 

2004 included testimony from eprescribing networks, providers, 

software vendors, and industry experts 

on patient safety and drug knowledge 

databases. National electronic 

prescribing studies were also presented. 

In order to further refine their 

recommendations to the Secretary, the 

NCVHS Subcommittee on Standards 

and Security will continue to hold 

additional hearings on the state-of-theart of electronic prescribing including 

testimony from a broad representation 

of stake holders in July, August and 

September 2004. Readers interested the 

NCVHS’ hearing schedule for eprescribing standards, testimony 

presented at the hearings and standards 

recommendations should consult the 

NCVHS Web site at http:/ 

www.ncvhs.hhs.gov/. 

Many in the industry urge us to move 

expeditiously to establish electronic 

prescribing standards. However, the 

statute intentionally provided for a 

deliberative process by directing the 

NCVHS to study, select and recommend 

electronic prescribing standards. Any 

comments received in response to this 

proposed rule will be considered along 

with the NCVHS’ recommendations in 

the development of the proposed rule 

on the electronic prescribing standards. 

We are particularly interested in 

comments that help us identify 

consensus or reach consensus on eprescribing standards ahead of the 

statutory time frame, and to help us 

identify and evaluate industry 

experience based on pilot programs 

engaged in e-prescribing activities in 

2004 and 2005. 

To ensure that our regulations are as 

comprehensive as possible, we have 

included language at § 423.159(a) that 

would require PDP sponsors and MA 

Organizations offering MA–PD plans to 

have the capacity to support eprescribing programs in accordance 

with the final e-prescribing standards 

established by the Secretary, including 

any standards that are established before 

the drug benefit begins in 2006. In 

addition, once final standards are set, 

any prescriptions that are transmitted 

electronically under the Part D drug 

benefit for Medicare beneficiaries will 

have to conform to those standards. 

Aside from PDP and MA–PD plans 

having the capacity to support final eprescribing standards, there is, however, 

no requirement that prescriptions be 

written or transmitted electronically (by 

for example physicians or pharmacies). 

Until e-prescribing standards are 

effective, of course, our regulations at 

§ 423.159(a) also will not be in effect. 

Although there is no requirement that 

physicians write prescriptions 

electronically, our regulations state that 

PDP sponsors and MA Organizations 

offering MA–PD plans who participate 

in the Part D program must be able to 

support the final e-prescribing program 

as specified in section 1860D–4(e)(2) of 

the Act. The statutory language is quite 

specific that e-prescribing will not just 

be used for a physician to send a 

prescription to a pharmacy, but also will 

transmit data that can only be supported 

by the PDP sponsor or MA organization 

offering an MA–PD plan. For example, 

the e-prescribing program is intended to 

ensure that pharmacies receive 

electronic information on the drugs 

included on the PDP’s or MA–PD’s 

formulary, any tiering of the formulary, 

the patient’s medical history, the 

possibility of any adverse druginteractions (based on other 

prescriptions the patient is already 

taking) and the availability of lowerpriced, alternative prescriptions. Since 

the PDP sponsor or MA organization 

offering an MA–PD plan will most likely 

be the warehouse for all this 

information, without participation of 

the PDP sponsors or MA Organizations 

offering MA–PD plans, the e-prescribing 

program would not be able to provide 

the results the Congress intended. In 

addition, if plans do not have this 

program, beneficiaries participating in 

those plans would not benefit from the 

patient safety aspects of the program. 

Also, under section 1860D–12(b)(3)(D) 

of the Act, we have the authority to add 

additional contract terms to the PDP and 

MA–PD contracts. 

While PDP sponsors and MA 

Organizations offering MA–PD plans 

will be required to support the final eprescribing standards issued by us, they 

will not be required to support the pilot 

standards, which are voluntary under 

section 1860D 4(e)(4)(C) of the Act. 

Therefore, only those entities that 

participate in a pilot testing of certain eprescribing standards will be required to 

implement an e-prescribing program 

using the initial standards adopted by 

the Secretary. Others in the health care 

industry will not be required to use the 

initial standards at the time they are 

issued, but will be encouraged to do so. 

Finally, we note that the pilot test 

specified in the MMA is not required if 

there is adequate industry experience 

with the standards. In that case, the 

Secretary may propose them as final 

standards in a proposed rule, thereby 

expediting a portion of the standards 

adoptions process. Therefore, to the 

extent we determine, after consultation 

with affected standard setting 

organizations and industry users, that 

there already is adequate industry 

experience with certain standards, we 

may propose to finalize those standards 

through notice and comment 

rulemaking even if we have not 

completed the pilot testing of other 

standards so that a portion of the 

standards adoptions process could be 

expedited. We seek comments on the 

desirability of this strategy, including 

any concerns about potential 

unintended consequences. 

In order to facilitate electronic 

prescribing by a PDP or MA–PD 

sponsor, we invite public comment on 

additional steps to spur adoption of 

electronic prescribing, overcome 

implementation challenges, and 

improve Medicare operations. For 

example, we have added regulations at 

§ 423.159(b) of this proposed rule that 

would allow an MA–PD plan to provide 

a separate or differential payment to a 

participating physician who prescribes 

covered Part D drugs in accordance with 

electronic prescription standards. (Note 

that this provision only applies to MA–

PD plans and not to PDPs.) Section 

102(b) of the MMA makes it clear that 

this differential payment may occur 

when a participating physician 

prescribes drugs in accordance with an 

46672 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

electronic prescription drug program 

that meets standards established under 

section 1860D–4(e) of the Act. These 

differential payments are to reward 

physicians for using electronic 

prescriptions rather than handwritten 

ones. These payments would not be 

used to encourage physicians to 

prescribe more frequently or 

inappropriately steer their use of 

particular drugs. Since the standards 

established under section 1860D–4(e) of 

the Act include the initial, voluntary 

standards, which may be tested on a 

pilot basis as early as January 1, 2006, 

we believe the differential payments 

envisioned by section 102 of the MMA 

may occur as early as January 1, 2006 

(for physicians who prescribe in 

accordance with the standards adopted 

by the Secretary in September 2005). We 

believe the fact that section 102 of MMA 

has an effective date of January 1, 2006, 

supports this determination. Differential 

payments, at the MA organization’s 

discretion, could take into consideration 

the cost to the physician in 

implementing the program and could be 

increased for participating physicians 

who use e-prescribing to significantly 

increase—

(1) Formulary compliance where 

medically appropriate; 

(2) Use of lower cost, therapeutically 

equivalent alternatives; 

(3) Reductions in adverse drug 

interactions as evidenced by appropriate 

use of drug interaction checking 

functions in electronic prescribing; and 

(4) Efficiencies in filling and refilling 

prescriptions through reduced 

administrative costs. 

The additional or increased payments 

made to the physicians could be 

structured in the same manner as fees 

for services under § 423.153(d) of this 

proposed rule. We have not provided a 

great deal of specificity in our 

regulations regarding how the 

differential payments may be structured 

because we believe the MA 

Organizations offering MA–PD plans 

should have discretion in structuring 

these added payments, if any. 

We note that any payments must be 

in compliance with other Federal and 

State laws, including ‘‘the physician 

self-referral prohibition at section 1877 

of the Act’’ and the Federal antikickback provisions at section 1128B(b) 

of the Act. We are soliciting the public’s 

view of the application of these legal 

authorities to the differential payments 

described in this section. We will share 

any comments regarding the antikickback statute with the Office of 

Inspector General. 

We also seek comment on measures of 

MA–PD plan quality related to the use 

of e-prescribing, and other MA–PD 

quality measures that reflect effective eprescribing systems. The use of 

electronic prescribing shows promise 

for improving Medicare operations by 

reducing costs in the administration of 

the Part D drug benefit and in the use 

of prescription drugs, for example 

promoting generic drug use and creating 

timely interface with formularies 

supported by up-to-date evidence. 

Likewise, it has the potential to improve 

the quality of the care provided to 

Medicare beneficiaries through the 

therapeutic monitoring of allergies and 

adverse events. Yet, implementing 

electronic prescribing effectively poses a 

number of challenges. While electronic 

prescribing is gradually gaining 

acceptance by health care providers, 

fewer than 10 percent of U.S. doctors 

currently engage in the practice. The 

adoption rate is particularly low among 

solo practitioners, those in rural areas, 

and certain medical specialties. The 

electronic prescribing process and the 

technology that enables it must be cost 

effective, the systems must be fast and 

easy to use, and alerts and other data 

passed backed to the prescriber must 

demonstrate value. We invite comments 

on these challenges and on possible 

Federal activities that would promote 

the effective use of e-prescribing by 

providers, including publishing best 

practices, and making technical 

information on e-prescribing products 

available. In addition receptivity to the 

use of electronic prescribing by 

consumers is not well understood 

especially among the elderly and 

disadvantaged populations. We seek 

additional information on how those 

populations may view electronic 

prescribing and what step may be taken 

to get them to use this modality and, 

thus, take advantage of the safety and 

quality benefits it offers. 

We also invite comments on how to 

promote the use of electronic 

prescribing by providers, health plans 

and pharmacies and other entities 

involved in the provision and payment 

of health care to Medicare beneficiaries. 

Beyond the grants authorized in 

§ 423.159(b) of this proposed rule, we 

invite comments on what incentives 

could be used to spur more widespread 

adoption, especially for early 

implementers. We also invite your 

comments on what educational efforts 

or data analyses might be undertaken to 

help health practitioners understand, or 

empirically confirm, and ultimately 

realize, the benefits of electronic 

prescribing. Lastly, we seek public input 

on the ways electronic prescribing can 

further reduce costs to the Medicare 

program and promote quality of care to 

beneficiaries. 

5. Quality Improvement Organizations 

(QIO) Activities (§ 423.162) 

Section 109 of the MMA expands the 

work of QIOs to include Part C and Part 

D. This provision explicitly covers the 

full range of Part C organizations. QIOs 

are required to offer providers, 

practitioners, MA organizations, and 

PDP sponsors quality improvement 

assistance pertaining to health care 

services, including those related to 

prescription drug therapy. We plan to 

issue guidance on how QIOs can 

provide this assistance and would 

coordinate the activities of the QIOs 

with the quality related activities of 

other stakeholders. 

To fulfill this responsibility, QIOs 

would need access to data from the 

transactions between pharmacies and 

PDPs and MA–PD plans providing the 

Part D benefit. This data would be 

extracted from the claims data 

submitted to us. Although the agency is 

still developing plans for the QIO 

activities related to the Part D benefit, 

we expect that this data primarily from 

the NCPDP telecommunications format 

between pharmacies and plans will be 

used. The data would include paymentrelated information (that is, plan 

identification, beneficiary HIC, date 

prescription filled, NDC, quantity 

dispensed, ingredient cost, dispensing 

fee, and pharmacy zipcode) and 

additional items such as prescriber 

identifiers, pharmacy identifiers, dose, 

days supply, and other dispensing 

information. Potentially, the 

information gathered will be aggregated 

in our data warehouse, and then 

distributed to QIOs to fulfill their 

requirements for quality improvement 

as specified in their contracts and in 

response to requests. 

We have been consulting, on an 

individual, organization by organization 

basis, with representatives from 

pharmacy benefit managers, managed 

care organizations, programs that have 

monitored drug utilization, and others 

who have utilized pharmacy claims 

data. We welcome comments related to 

the collection and use of information for 

providing quality improvement 

assistance related to Part D. 

We are proposing that any 

information collected by the QIOs 

would be subject to confidentiality 

requirements in Part 480 of our 

regulations. For purposes of applying 

these confidentiality regulations, we are 

also proposing that MA organizations 

offering MA–PD plans and PDP 

sponsors fall within the definition of 

health care facilities. This means that 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46673 

the confidentiality provisions in Part 

480 of our regulations would apply to 

PDP sponsors and MA–PD plans in the 

same manner as they apply to 

institutions. 

6. Treatment of Accreditation 

(§ 423.165, § 423.168, and § 423.171) 

Section 1860D–4(j) of the Act requires 

that the provisions of section 1852(e)(4) 

of the Act relating to the treatment of 

accreditation will apply to PDP 

sponsors with respect to—(1) access to 

covered Part D drugs including the 

pharmacy access requirements and the 

use of standardized technology and 

formulary requirements; (2) quality 

assurance, drug utilization review, 

medication therapy management, and a 

program to control fraud, abuse and 

waste; and (3) confidentiality and 

accuracy of enrollee records. Thus, the 

requirements in § 423.165, § 423.168, 

and § 423.171 are similar to the 

requirements found in § 422.156, 

§ 422.157, and § 422.158 for the MA 

program, except for subject areas that 

are deemed. 

A PDP sponsor may be deemed to 

meet the requirements that relate to 

access to covered Part D drugs; quality 

assurance, drug utilization review, 

medication therapy management, and a 

program to control fraud, abuse, and 

waste; and confidentiality and accuracy 

of enrollee records, if it is accredited 

and periodically reaccredited by a 

private national accrediting organization 

under a process that we have 

determined meets a process and 

standards that are no less stringent than 

our applicable requirements. National 

accreditation organizations are those 

entities that offer accreditation services 

that are available in every State to every 

organization wishing to obtain 

accreditation status. The process that we 

would use to deem compliance with 

PDP requirements would mirror the 

process used for deeming compliance 

with fee-for-service requirements and 

the MA program. 

Section 423.165 would provide the 

conditions under which a PDP sponsor 

may be deemed to meet our 

requirements permitted under 

paragraph (b) of this section. The first 

condition would be that the PDP plan be 

fully accredited (and periodically 

reaccredited) by a private, national 

accreditation organization that we 

approve. The second condition would 

be that the PDP organization be 

accredited using the standards that we 

approved for the purposes of assessing 

the PDP sponsors’ compliance with 

Medicare requirements. 

Consistent with our approach in the 

MA program, we would analyze on a 

standard-by-standard basis whether an 

accreditation organization applies and 

enforces requirements no less stringent 

than those in part 422 with respect to 

the standard at issue. We would 

determine the scope of the accreditation 

organization’s approval (and, thus, the 

extent to which PDP organizations 

accredited by the organization are 

deemed to meet our requirements) based 

on a comparison of the accreditation 

organization’s standards and its 

procedures for assessing compliance 

with our deemable requirements and 

our own decision-making standards. We 

would make those determinations on 

the basis of the application materials 

submitted by accreditation 

organizations seeking our approval in 

accordance with § 423.168. We would 

also conduct surveys to validate the 

accreditation organization’s 

enforcement on a standard-by-standard 

basis. 

Section 423.165(d) would establish 

the obligations of deemed PDP sponsors. 

A PDP sponsor would have to submit to 

our surveys that are intended to validate 

an accreditation organization’s process 

and authorize the accrediting 

organization to release to us a copy of 

its most current accreditation survey, 

together with any information related to 

the survey that we may require 

(including corrective action plans and 

summaries of our unmet requirements). 

These activities are part of our ongoing 

oversight strategy for ensuring that the 

accreditation organization applies and 

enforces its accreditation standards in a 

manner comparable to ours. 

Section 423.165(e) would address 

removal of deemed status. We would 

remove part or all of a PDP sponsor’s 

deemed status if—

(1) We determine, on the basis of our 

own survey or the results of the 

accreditation survey, that the PDP 

organization does not meet the Medicare 

requirements for which deemed status 

was granted. 

(2) We withdraw our approval of the 

accreditation organization that 

accredited the PDP organization; or 

(3) The PDP fails to meet the 

requirements of § 423.165(d). 

Section 423.165(f), would explain that 

we retain the authority to initiate 

enforcement action against any PDP 

sponsor that we determine, on the basis 

of our own survey or the results of the 

accreditation survey, no longer meets 

the Medicare requirements for which 

deemed status was granted. We expect 

the accreditation organization to have a 

system in place for enforcing 

compliance with our standards (such as 

sanctions for motivating correction of 

deficiencies), but we cannot delegate to 

the accreditation organization the 

authority to impose the intermediate 

sanctions established by section 1860D–

12 of the Act or termination of the PDP 

contract. 

Deeming applies only to our 

enforcement of this regulation, and 

neither our enforcement of this 

regulation nor accreditation by an 

accrediting body undercuts the Office 

for Civil Rights enforcement of the 

HIPAA privacy rule. 

Section 423.168 would discuss the 3 

conditions for our approval of an 

accreditation organization. We could 

approve an accreditation organization if 

the organization applies and enforces 

standards for PDP sponsors that are at 

least as stringent as Medicare 

requirements and, if the organization 

complies with the application and 

reapplication procedures proposed in 

§ 423.171. 

Section 423.168(c) of our proposed 

rule would establish ongoing 

accreditation organization 

responsibilities. These responsibilities 

largely parallel those currently imposed 

upon accreditors under original 

Medicare. One exception is the 

proposed requirement that an 

accreditation organization notify us in 

writing within 3 days of identifying, 

with respect to an accredited PDP 

sponsor, a deficiency that poses 

immediate jeopardy to the PDP 

sponsor’s enrollees or to the general 

public. 

Section 423.168(d) of our proposed 

rule would establish specific criteria 

and procedures for continuing oversight 

and for withdrawing approval of an 

accreditation organization. Oversight 

consists of equivalency review, 

validation review, and onsite 

observation. 

We could withdraw our approval of 

an accreditation organization at any 

time if we determine that deeming 

based on accreditation no longer 

guarantees that the PDP organization 

meets the Medicare requirements, that 

failure to meet those requirements could 

jeopardize the health or safety of 

Medicare enrollees or constitute a 

significant hazard to the public health, 

or that the accreditation organization 

has failed to meet its obligations under 

§ 423.165 through § 423.171. 

Section 423.171 of our proposed rule 

would address the procedures for 

approval of accreditation as a basis for 

deeming compliance. As mentioned, the 

process that we would use to deem 

compliance with PDP requirements is 

virtually identical to the process that is 

being used for deeming compliance 

with fee-for-service requirements. One 

proposed requirement that would 

46674 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

appear in § 423.171, and which also 

appears in regulations governing MA 

plans at § 422.158(a)(11), but does not 

appear in regulations governing original 

Medicare, is the requirement that an 

accreditation organization applying for 

approval of deeming authority submit 

the name and address of each person 

with an ownership or control interest in 

the accreditation organization. This 

information would be used to determine 

whether the accreditation organization 

is controlled by the organizations it 

accredits for the purposes of § 423.168. 

Section 423.171 would further provide 

for reconsideration of adverse 

determinations of accreditation 

applications. 

F. Submission of Bids and Monthly 

Beneficiary Premiums: Determining 

Actuarial Valuation 

1. Overview 

Subpart F would implement most of 

the provisions in sections 1860D–11 and 

1860D–13 of the Act, as well as sections 

1860D–12(b)(2) (on limitation on 

entities offering fallback plans), 1860D–

15(c)(2) (on geographic adjustment of 

the national average monthly bid 

amount), 1860D–21(d) (on special rules 

for private fee-for-service (PFFS) plans), 

1860D–21(e)(3) (on cost contractors), 

and 1860D–21(f)(3) (on PACE) of the 

Act. In this section we address 

submission, review, negotiation, and 

approval of bids for prescription drug 

plans and MA–PD plans; the calculation 

of the national average bid amount; and 

determination and collection of enrollee 

premiums. References to 42 CFR part 

422 of our regulations are to the new 

MA rules. 

As discussed in subpart C, the statute 

provides a framework for the provision 

of subsidized prescription drug 

coverage. Within this framework, PDP 

sponsors and MA organizations have 

some flexibility to design coverage that 

is different from defined standard 

coverage to meet the needs of Part Deligible Medicare beneficiaries. This 

framework plays a critical role in bid 

submissions, and the actuarial 

evaluation and approval of bids. 

As part of our discussion we specify 

the actuarial equivalency tests plan 

sponsors would have to meet when 

offering coverage other than defined 

standard coverage. Please note that the 

coverage definitions are discussed in 

detail in subpart C of the preamble. In 

order to determine actuarial 

equivalency, plan sponsors would 

compare their plans to the defined 

standard coverage baseline to assess the 

various tests of actuarial equivalency 

that we discuss in detail in the sections 

below. 

2. Requirements for Submission of Bids 

and Related Information 

As provided under section 1860D–

11(b) of the Act, each applicant to 

become a PDP sponsor or MA 

organization would be required to 

submit a bid for prescription drug 

coverage for each plan it intends to 

offer. Most bids would be expected to 

represent full risk plans, meaning that 

the prescription drug plan is not a 

limited risk plan or a fallback 

prescription drug plan, and is not asking 

for any modification of the statutory risk 

sharing arrangements. A bid from a full 

risk plan may be referred to as a full risk 

bid. PDP sponsors may choose to 

participate as limited risk plans, 

meaning that they provide basic 

prescription drug coverage and request 

a modification of risk level (as described 

in § 423.265(d)) in its bid submitted for 

the plan. A bid with a modified level of 

risk is referred to as a limited risk bid. 

This term does not include a fallback 

prescription drug plan. A risk bid 

(whether full risk or limited risk) could 

not be accepted from any entity 

applying to become a PDP sponsor or 

MA organization offering an MA–PD 

plan that—(1) also submits a bid for the 

same year to act as a fallback plan; (2) 

will be offering a fallback plan in any 

region for the upcoming year; or (3) 

currently offers a fallback plan in the 

region for which they are submitting the 

bid. In determining whether an entity is 

barred from submitting a risk bid 

according to these rules, we would use, 

as our reference point, the calendar year 

that they are submitting their bids. For 

example, the limitation would work as 

follows: 

An applicant submitting a risk bid for 

sponsoring a PDP in 2009 would be 

excluded from the risk bidding if it—

(1) Also submits a bid to act as a 

fallback plan in 2009 (where 2009 is the 

first year of a multi-year fallback 

contract); 

(2) Already is approved to act as a 

fallback in any PDP region for 2009; or 

(3) Offers a fallback in 2008 for the 

same region for which they would be 

submitting their 2009 risk bid. 

This fallback prohibition also applies 

if an applicant (or related entity) acted 

as, or will act as a subcontractor to an 

entity offering a fallback plan. In other 

words, an entity would be treated as 

having submitted a bid under the 

fallback contracting process, and thus 

not be an eligible risk bidder, if that 

entity was acting as a subcontractor for 

an integral part of the drug benefit 

management activities of an eligible 

fallback entity. Thus, for example, if an 

applicant was a subcontractor to a 

fallback in 2008, it cannot submit a risk 

bid for the same region for 2009. 

Similarly, an applicant for a 2009 risk 

bid cannot include as its subcontractor 

an entity already approved or applying 

to act as a fallback plan for 2009. 

Because awards for 2006 will not be 

known at the time the initial bids are 

due in 2005 (for contracts in 2006), any 

entity that bids as a fallback plan (or a 

subcontractor to a fallback plan) is 

barred from bidding as a non-fallback 

plan in any and all regions for that year. 

Bids would be due to us no later than 

the first Monday in June for each plan 

to be offered in the subsequent calendar 

year. This date stems from the 

requirement in section 1860D–11(b) of 

the Act that bid data from potential PDP 

sponsors be submitted at the same time 

and in a similar manner as the 

information described in section 

1854(a)(6) of the Act for MA plans. 

Since section 1854(a)(1) of the Act 

requires initial data to be submitted on 

the first Monday of June of each year 

after 2004, we have also incorporated 

this date into our regulations. In the 

case of MA–PD plans, the prescription 

drug bid would be a component of the 

unified MA bid described in 

§ 422.254(b)(1) with benefits beyond 

basic coverage (if any) incorporated into 

the supplemental benefits portion of the 

prescription drug benefit bid. 

We are clarifying that this bid would 

represent the expected monthly average 

cost (including reasonable 

administrative costs) to be incurred by 

the plan applicant for qualified 

prescription drug coverage in the 

applicable area for a Part D eligible 

individual with a national average risk 

profile for the factors described in 

section 1860D–15(c)(1)(A) of the Act 

and in § 423.329(b)(1) of this proposed 

rule. We plan to develop and publish 

the risk adjustment factors and identify 

the characteristics of an average 

individual no later than the date of the 

45-day notice for the announcement of 

2006 rates, which is February 18, 2005. 

Any modifications to these 

characteristics for subsequent years 

would be announced by the date of the 

annual 45-day notice. (For further 

discussion of prescription drug risk 

adjustment, see Subpart G of this 

preamble.) We are interested in 

providing information to potential 

bidders to help eliminate the 

uncertainty of drug trend for Medicare 

beneficiaries and in delaying the 

submission of pricing information as 

long as we can under the law and 

consistent with our need to inform 

beneficiaries. We solicit comment on 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46675 

the nature of any additional information 

needed to prepare bids and suggestions 

for any other methods that the bid 

submission process could be structured 

to provide for later pricing data 

submission. 

The costs represented in each plan 

bid should be those for which the plan 

would actually be responsible. Given 

the structure of qualified prescription 

drug coverage, these costs would not 

include payments made by the enrollee 

for deductible, coinsurance (including 

100 percent coinsurance between the 

initial coverage limit and the out-ofpocket threshold), copayments, or 

payments for the difference between a 

plan’s allowance and an out-of-network 

pharmacy’s usual and customary charge 

(as discussed in § 423.124(b)). It also 

does not include costs reimbursed by us 

through the reinsurance subsidy. 

However, we require the separate 

identification, calculation, and reporting 

of costs assumed to be reimbursed by us 

through reinsurance. For standard 

coverage, defined or actuarial 

equivalent, these costs would include 

the plan’s share of costs above the 

deductible and up to the initial coverage 

limit, as well as the plan’s share of costs 

above the annual out-of-pocket limit. If 

enhanced alternative coverage is 

provided, the plan costs for 

supplemental benefits would be 

distinguished from those for basic 

coverage. The costs attributable only to 

basic coverage, once approved, are 

known as the standardized bid amount. 

In § 423.265(c) we would require that, 

with the exception of potential 

employer group waivers under section 

1860D–22(b) and 1857(i) of the Act, late 

enrollment penalties and low-income 

premium and cost sharing subsidies, the 

bid represents a uniform benefit package 

based upon a uniform level of premium 

and cost sharing among all beneficiaries 

enrolled in the plan. This means that all 

enrollees in a given PDP or MA–PD plan 

would be subject to the same cost 

sharing structure and would be charged 

the same premium for benefits the PDP 

sponsor or MA organization chose to 

offer. 

We note that while benefits are 

required to be uniform for all enrollees 

under the drug benefit, this is not the 

case for enrollees under a prescription 

drug discount card program. To avoid 

any confusion between these related 

programs, we would like to make this 

distinction clear. Because of the limited 

low-income assistance under the card 

program, card sponsors have been 

permitted to negotiate lower prices for 

low-income members. Also, in some 

cases there may be reduced cost sharing 

sponsored by manufacturers for lowincome members after the $600 in 

transitional assistance is used that does 

not apply to other card members. Under 

the Part D prescription drug program, 

however, both the negotiated prices and 

the benefit structure would be the same 

for all enrollees in a given PDP or MA–

PD plan. While the low-income 

subsidies will result in low-income 

beneficiaries’ actual out-of-pocket costs 

being lower than for beneficiaries who 

do not qualify for this assistance, the 

benefit structure to which the subsidies 

apply is the same for all enrollees in a 

plan. 

3. General CMS Guidelines for Actuarial 

Valuation of Prescription Drug Coverage 

As directed by section 1860D–11(c) of 

the Act, we would develop processes 

and methods using generally accepted 

actuarial principles and methodologies 

for determining the actuarial valuation 

of prescription drug coverage. Although 

we plan to provide additional 

information in the future in the form of 

interpretive guidance on these 

processes, we are currently considering 

the following processes and methods for 

calculating ‘‘actuarial valuation’’ and 

‘‘actuarial equivalence’’ in the context of 

risk bids: 

• Sponsors offering standard coverage 

with cost-sharing variants either to the 

25 percent coinsurance (before the 

initial coverage limit) or the greater of 

5 percent coinsurance or $2 generic/ 

preferred/$5 any other drug (after the 

out-of-pocket threshold is met) would 

be required to demonstrate the actuarial 

equivalence of their variations. 

+ Sponsors offering basic or 

enhanced alternative prescription drug 

coverage would be required to 

demonstrate that—

+ The actuarial value of total or gross 

plan coverage is at least equal to the 

actuarial value of total or gross coverage 

of the defined standard benefit. 

+ The actuarial value of total 

coverage of their alternative is at least 

equal to the actuarial value of defined 

standard coverage; 

+ The actuarial value of unsubsidized 

coverage of their alternative is at least 

equal to the actuarial value of the 

unsubsidized portion of defined 

standard coverage; and 

+ The plan payout at the dollar value 

of the initial coverage limit under 

standard coverage, for individuals 

whose total spending exceeds that limit, 

is at least equal to that provided under 

defined standard coverage. 

• All sponsors would determine the 

actuarial value of the defined standard 

benefit, either because it is—

+ Offered to the beneficiaries; 

+ Used as a comparison for either of 

the following: 

■ Standard coverage with actuarially 

equivalent cost-sharing variants. 

■ Alternative coverage; or 

+ Used to determine the basic 

component in enhanced alternative 

coverage. 

• Sponsors that offer enhanced 

alternative coverage would also be 

required to determine the actuarial 

value of coverage beyond basic 

coverage. 

• We anticipate that we would 

specify data sources, methodologies, 

assumptions, and other techniques in 

accordance with generally accepted 

actuarial principles as either 

recommended or required in further 

guidance. We would also specify the 

data elements (including format) to be 

sent to us for evaluation. We would then 

evaluate the analysis and assumptions 

for compliance and reasonableness. For 

example, we would evaluate the source, 

size, and timeframe of data on which 

assumptions are based, the demographic 

characteristics of enrollees, the 

distribution of risk levels, the average 

costs in each cost-sharing tier, and the 

update factors used, among other 

considerations. 

• We would also have reported and 

separately identified administrative 

costs. Since the level of the bid will 

directly affect the premium paid by the 

beneficiary and the attractiveness of the 

plan, we expect that plans will have a 

strong incentive to keep administrative 

costs and return on investment at 

reasonable levels. Any review of 

administrative costs would likely focus 

primarily on outliers from the 

competitive range identified in the bids 

received. All proposals would contain a 

description of how certain costs (those 

related to appeals that result in payment 

for non-formulary drugs) are included in 

the calculations. Processes and methods 

for determining actuarial valuation 

would take into account the effect that 

providing actuarially equivalent 

standard coverage or alternative 

prescription drug coverage (rather than 

defined standard coverage) has on drug 

utilization. This includes utilization 

effects attributable to different benefit 

structures, such as from tiered cost 

sharing, as well as those attributable to 

supplemental benefits. The utilization 

effect of supplemental benefits on basic 

benefits would have to be loaded into 

the supplemental portion of the bid. In 

other words, since the existence of 

supplemental coverage would increase 

total average per capita spending, that 

increase over the average spending (if 

coverage were limited to basic coverage) 

would be included in the portion of the 

46676 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

bid attributable to supplemental 

coverage. Section 1860D–11(c)(1)(D) of 

the Act specifies ‘‘the use of generally 

accepted actuarial principles and 

methodologies.’’ We are interpreting 

this to require that a qualified actuary 

certify the plan’s actuarial valuation 

(which may be prepared by others under 

his or her direction or review). Actuarial 

certification would give better assurance 

that the actuarial values in the bid were 

prepared in conformance with actuarial 

standards and methodologies. 

• Section 1860D–11(c)(3)(B) of the 

Act specifies that PDP sponsors or MA 

organizations offering MA–PD plans 

may use qualified independent actuaries 

in certifying the actuarial values in their 

bids. (The actuarial valuation may be 

prepared by others under the direction 

or review of a qualified actuary). We 

interpret this provision as encouraging 

PDP sponsors and MA organizations 

that do not employ qualified actuaries, 

to use outside actuaries in their 

processes. We propose to specify that a 

qualified actuary is an individual who 

is a member of the American Academy 

of Actuaries because members of the 

Academy must meet not only 

educational and experience 

requirements, but also a code of 

professional conduct and standards of 

practice. These standards create a 

common ground for actuarial analysis. 

Furthermore, a member of the Academy 

is subject to its disciplinary action for 

violations of the code and standards. 

This same requirement is specified in 

the SCHIP legislation at section 

2103(c)(4)(A) of the Act. Moreover, the 

National Association of Insurance 

Commissioners (NAIC) imposes 

significantly stricter requirements on 

actuaries preparing the financial 

statements of insurance companies. 

4. Determining Actuarial Equivalency 

for Variants of Standard Coverage and 

for Alternative Coverage 

When considering the specific 

requirements for actuarial equivalence 

and valuation in the Act, we are aware 

that there is no official definition of 

actuarial equivalence. Moreover, the 

concept of actuarial equivalence is 

applied in multiple contexts. We must 

address actuarial equivalence 

requirements regarding cost sharing, 

expected benefits, and bid submissions. 

We plan to address the application of 

actuarial equivalence within these 

separate contexts in this discussion and 

in separate detailed guidance to the 

industry. Thus, we plan to use 

interpretive guidance to further explain 

the process and methodology for 

determining actuarial equivalence and 

valuation. The processes and methods 

for determining actuarial equivalence 

and valuation would be in keeping with 

generally accepted actuarial principles. 

We would require prospective PDP 

sponsors and MA organizations wishing 

to offer MA–PD plans to include all of 

the requirements discussed in the 

following sections in the information 

submitted with the bid, when 

applicable. The MMA contains some 

specific requirements for actuarial 

equivalence or valuation. These 

actuarial equivalence tests are discussed 

below. 

a. Actuarial Equivalence as Applied to 

Actuarially Equivalent Standard 

Coverage—Cost-Sharing 

As required in section 1860D–

2(b)(2)(A) of the Act, standard 

prescription drug coverage must have 

‘‘coinsurance for costs above the annual 

deductible * * * and up to the initial 

coverage limit that is equal to 25 

percent; or is actuarially equivalent 

* * * to an average expected payment 

of 25 percent of such costs.’’ We 

interpret this to mean that sponsors 

would be required to demonstrate that 

the actuarial value of their alternative 

cost-sharing as a percent of the actuarial 

value of both cost-sharing and plan 

payments for claims up to the initial 

coverage limit is the same percentage as 

for 25 percent coinsurance under 

defined standard coverage. In 

calculating these percentages, sponsors 

would reflect the utilization impacts of 

the two structures, but hold constant 

formulary (drug list), drug pricing 

(except to the extent that the plan 

incorporated differential pricing and 

cost sharing based on participation 

status within the plan’s network), and 

the group whose utilization is modeled. 

This would allow plans to have variable 

co-payments or coinsurance, including 

tiered structures for preferred and nonpreferred drugs, in the initial coverage 

interval as long as the actuarial 

equivalence test is met. As a simple 

example, a plan could have a tiered 

coinsurance benefit with coinsurance 

higher than 25 percent for brand name 

drugs and lower than 25 percent for 

generics. Some beneficiaries with 

expenses between the deductible and 

the initial coverage limit would be 

expected to pay more than 25 percent, 

and others to pay less, depending on 

their usage of brand versus generic 

drugs. Overall, however, the total 

coinsurance would have to be 

actuarially equivalent to an average of 

25 percent for all beneficiaries with 

expenses in this interval, even if the 

total expenditures beneath the initial 

coverage limit ($2,250 in 2006) are 

lower than would be expected under 

defined standard coverage (due to 

increased use of generics, for example). 

If sponsors wanted to provide a 

variant on defined standard cost sharing 

after the out-of-pocket threshold is met, 

an actuarial test similar to that 

described above for variants on the 25 

percent coinsurance would apply. In 

this case, based on the group of 

individuals projected to exceed the outof-pocket threshold, the sponsor would 

compute total cost sharing once the true 

out-of-pocket (TROOP) threshold has 

been met as a percentage of the sum of 

that cost sharing plus the comparable 

plan payout. This percentage would 

have to equal the percentage computed 

in the same manner using the defined 

standard benefit (that is, the greater of 

$2/$5 or 5 percent). We note that any 

variant in cost sharing could not lead to 

discrimination against certain 

beneficiaries, for example, by increasing 

the cost sharing of a drug used for a 

particular illness well above the cost 

sharing for other drugs. 

b. Tests for Alternative Coverage 

As required by section 1860D–2(c) of 

the Act, sponsors offering alternative 

coverage, that is, benefit structures 

different from standard coverage, must 

satisfy five tests (three of the five are 

actuarial equivalency tests). As 

discussed in Subpart C, alternative 

coverage would include coverage 

actuarially equivalent to defined 

standard coverage (basic alternative 

coverage) or coverage that would 

include supplemental coverage 

(enhanced alternative coverage). All 

alternative coverage would have to meet 

all five of the coverage standards or tests 

discussed in section b.1–5 of this 

preamble. Tests one through three were 

established by the Congress to assure 

that alternative coverage would be at 

least actuarially equivalent to standard 

coverage. Tests four and five are 

additional tests imposed by the 

Congress through section 1860D–2(c) of 

the Act. 

1. Test for Assuring at Least Equivalent 

Value of Total Coverage 

As required in section 1860D–

2(c)(1)(A) of the Act, a plan could offer 

alternative prescription drug coverage as 

long as the actuarial value of total or 

gross coverage is at least equal to total 

or gross coverage provided under 

standard coverage. Based on a typical 

distribution of enrollee utilization, the 

average plan payout (including costs 

reimbursed by Medicare through the 

reinsurance subsidy) would have to be 

at least equal to the sponsor’s estimate 

of the payout under defined standard 

coverage (holding various factors 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46677 

constant as described above under 

section 4.a.). 

Alternative benefit structures, such as 

a decrease in the deductible with an 

increase in coinsurance below the initial 

coverage limit, or a lower initial 

coverage limit with a corresponding 

decrease in coinsurance, or a lower 

initial coverage limit with a 

corresponding decrease in deductible, 

could be accommodated as basic 

alternative coverage as long as the 

actuarial value of this coverage equaled 

that of defined standard coverage. 

Alternative structures could not 

increase the deductible or provide less 

than the protection offered against high 

out-of-pocket expenditures described in 

section 1860D–2(b)(4) of the Act. To the 

extent that the alternative coverage 

exceeds the value of defined standard 

coverage, the plan would be offering 

enhanced alternative coverage, that is, 

alternative coverage that includes 

supplemental benefits (as discussed in 

subpart C). 

2. Test for Assuring Equivalent 

Unsubsidized Value of Coverage 

In section 1860D–2(c)(1)(B) of Act, a 

plan could offer alternative coverage as 

long as the unsubsidized value of 

coverage (the value of the coverage 

exceeding subsidy payments) is at least 

equal to the sponsor’s estimate of 

unsubsidized value under defined 

standard coverage (holding various 

factors constant as described above 

section 4.a.). We interpret the 

unsubsidized value of coverage to mean 

the value of the benefit attributable to 

the beneficiary share of the premium. 

There is a basic question about how 

this test could be applied during the 

plan review and approval process. In 

order to determine the unsubsidized 

value of coverage, one would have to 

know the projected reinsurance 

payments, and the value of the direct 

subsidy. While the projected 

reinsurance payments would be known 

at the time of the submission (since the 

actuarial value of the benefit is reduced 

by projected reinsurance payments to 

produce the bid), the value of the direct 

subsidy would not be known (since it 

would require computing the national 

weighted average bid and bids have not 

yet been approved). In the face of this 

problem, one approach could be to 

remove reinsurance payments as 

estimated by the sponsor and to use an 

estimate of the direct subsidy that we 

would provide. For instance, in the first 

year we might provide the estimate used 

for budgeting purposes, and in 

subsequent years, an estimate based on 

prior years’ actual experience updated 

for trend. We are requesting comments 

on this approach. 

In trying to assess the impact of the 

test of total value (section 1860D–

2(c)(1)(A) of the Act) and the test of 

unsubsidized value (section 1860D–

2(c)(1)(B) of the Act), we have been 

unable to identify an example of a plan 

meeting the first test but not the second. 

We are seeking comment with regard to 

this question. 

3. Test for Assuring Standard Payment 

for Costs at Initial Coverage Limit 

Under section 1860D–2(c)(1)(C) of the 

Act, sponsors are to determine the 

average payout ‘‘with respect to costs 

incurred that are equal to the initial 

coverage limit’’ for ‘‘an actuarially 

representative pattern of utilization.’’

This projected payout is compared to a 

dollar amount that is equal to what 

defined standard coverage would pay 

for someone with costs equal to the 

initial coverage limit. Given the 

comparison, this raises the question of 

what represents ‘‘an actuarially 

representative pattern of utilization.’’ As 

with the other tests, we believe that it 

would be reasonable for plans to use 

either anticipated plan utilization or a 

typical utilization pattern based on the 

Medicare population. However, given 

the implicit comparison to payout under 

defined standard for someone with costs 

equal to the initial coverage limit, it 

would not be valid to include 

individuals with expenses below the 

value of the initial coverage limit. After 

excluding individuals with total 

expenses below the value of the initial 

coverage limit, the plan would compute 

the actuarial value of plan payout at the 

point where total expenses are equal to 

the initial coverage limit under standard 

coverage. Under this interpretation, a 

plan could offer alternative coverage as 

long as the coverage is designed to 

provide an actuarial value of plan 

payout that is equal to at least 75 

percent of costs between the standard 

deductible and initial coverage limit 

($1,500 in 2006). In other words, 

considering only plan enrollees with 

expected expenses greater than or equal 

to the dollar value of the standard initial 

coverage limit, the plan would have to 

demonstrate that the expected plan 

payout associated with expenses equal 

to that dollar value would be at least 75 

percent of benefit costs between the 

deductible and initial coverage limit (75 

percent of $2,000 per beneficiary in CY 

2006) including taking into account 

their expected behavioral response to 

the different benefit structure. This test, 

combined with the prohibition on 

increasing the deductible under 

alternative coverage (described below), 

would ensure that the benefit below the 

dollar level of the standard initial 

coverage limit is always actuarially 

equivalent to standard coverage. As a 

defined standard benefit it is not 

permissible to trade off benefits above 

the initial coverage limit for benefits 

below. 

4. Test for Assuring the Deductible Does 

not Exceed the Standard Deductible. 

In keeping with the requirements of 

section 1860D–2(c)(2) of the Act, 

alternative coverage could not be 

structured so that the deductible is any 

higher than what it is in standard 

coverage ($250 in 2006). 

5. Test for Assuring the Same Protection 

Against High Out-of-Pocket Costs 

As specified by section 1860D–2(c)(3) 

of the Act, any alternative coverage 

must provide ‘‘the coverage’’ specified 

for costs above the catastrophic limit in 

standard coverage. We interpret this to 

mean that both enhanced and basic 

alternative coverage would have to offer 

at least the coverage available above the 

catastrophic limit through defined 

standard coverage. We would apply this 

test in the same way that we do for 

standard coverage with a variant of cost 

sharing above the catastrophic limit. 

That is, examining the group of 

individuals the sponsor projects would 

exceed the out-of-pocket threshold, total 

cost sharing once TROOP has been met, 

as a percentage of the sum of such cost 

sharing plus comparable plan payout, 

must be less than or equal to the 

percentage computed using the defined 

standard benefit (that is, the greater of 

$2/$5 or 5 percent). Again, we note that 

any variant in cost sharing could not 

lead to discrimination against certain 

beneficiaries, for example, by increasing 

the cost sharing of a drug used for a 

particular illness well above the cost 

sharing for other drugs. 

c. Value of Qualified Coverage 

In accordance with section 

1860D’11(b)(2)(B) of the Act, with the 

bid, each PDP sponsor and MA 

organization offering an MA–PD plan 

must submit the actuarial value of 

qualified coverage in the region for the 

Part D eligible individual with a 

national average risk profile for the 

factors described in section 

1860D’15(c)(1)(A) of the Act. We 

interpret this to mean that the weighted 

average of the plan’s expected riskstandardized costs will represent the 

plan’s cost for the theoretical national 

average-risk Part D individual. Any 

increase in costs attributable to 

increased utilization as the result of 

enhanced alternative coverage must be 

46678 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

excluded from this calculation. (Any 

alternative coverage that does not 

include supplemental coverage would 

be, by definition, actuarially equivalent 

to standard coverage. In this case, there 

is no need to make a further utilization 

adjustment since the test of actuarial 

equivalence for the 25 percent costsharing requirement has already taken 

into account utilization.) Any utilization 

effect that supplemental coverage has on 

the basic benefit should be priced into 

the supplemental portion of the bid. 

5. Information Included With the Bid 

a. Bid Format 

We have not yet determined the exact 

format for the bid submission and we 

would provide future guidance on these 

requirements. We believe that we would 

develop a fully automated process that 

would include electronic signatures for 

certifications of the actuarial analysis 

and the plan benefit package. Section 

1860D–11(c)(1)(D) of the Act specifies 

‘‘the use of generally accepted actuarial 

principles and methodologies.’’ We 

would require that an actuary (a 

member of the American Academy of 

Actuaries) certify the actuarial 

valuation, which may be prepared by 

others under his or her direction or 

review. Actuarial certification would 

give better assurance that the actuarial 

values in the bid were prepared in 

conformance with actuarial standards 

and methodologies. Section 1860D–

11(c)(3)(B) of the Act permits use of 

outside qualified independent actuaries. 

We expect that plans would use outside 

actuaries, especially if they did not have 

qualified in-house actuaries. 

As provided in section 1860D–

11(b)(3) of the Act, we would develop 

the bid submission format to facilitate 

the submission of bids for multiple 

regions and in all regions, and we 

would take this into account in process 

development. This approach would 

need to ensure that separate bids were 

provided for each region in order to 

calculate the national average monthly 

bid amount and any geographic 

adjustment required. Our overall 

approach would be to increase our 

flexibility to develop appropriate 

methodologies in response to program 

changes, while minimizing burden, 

rather than codifying these processes in 

regulation. We believe that we would 

have the authority to develop these 

methodologies through interpretive 

guidance because our regulations state 

that sponsors provide the actuarial 

value of their plans in accordance with 

generally accepted actuarial principles 

and methodologies. 

The information included with the 

bid should be sufficient for our review 

of the acceptability of a proposed plan 

based on actuarial principles and for 

negotiation of terms and conditions of 

an entity’s participation in the provision 

of Part D benefits. As provided in 

section 1860D–11(b)(2) of Act and 

§ 423.265(d) of this proposed rule, the 

information that would accompany the 

bid submission would, at a minimum, 

include the following: 

• Information on the prescription 

drug coverage to be provided, including 

the structure of the benefit, including 

deductibles, coinsurance (including any 

tiers), initial (or subsequent) coverage 

limits at which coinsurance levels 

change, and out-of-pocket thresholds. 

This would also include the plan’s 

formulary and any drugs, or types of 

drugs, excluded from coverage, and all 

documents provided to beneficiaries 

explaining the benefit, including the 

Evidence of Coverage, and would be 

certified by an officer of the plan. We 

solicit comments on the best way to 

obtain clear information on what drugs 

are included in the formulary. 

• The actuarial value of the qualified 

prescription drug coverage in the region 

for a beneficiary with a national average 

risk profile certified by a qualified 

actuary. 

• The portion of the bid attributable 

to basic benefits. 

• The portion of the bid attributable 

to supplemental benefits, if applicable. 

• The actuarial basis for the portion 

of the bid attributable to basic coverage 

and to supplemental benefits, if 

applicable, certified by a qualified 

actuary. 

• The assumptions regarding 

reinsurance subsidy payments. 

• The assumptions regarding 

administrative expenses. 

• The plan’s service area and the 

plan’s network of pharmacies serving 

that service area. 

• (For PDP sponsors only) the level of 

risk assumed in the bid, including 

whether the sponsor requires a 

modification of risk level (see 

discussion below) and, if so, the extent 

of the modification. Although our 

procedures may subsequently seek this 

information, we may only review it to 

the extent that the initial submission of 

bids does not yield the statutory 

minimum number of full risk bidders in 

each region and area. Our goal in 

designing the bidding process will be to 

maximize the level of risk borne by 

contracting plans and to minimize the 

need for fallback plans, and we would 

welcome comments on facilitating risk 

bidding; and 

• Any other information that we 

would require. 

b. Risk Adjustment of Supplemental 

Premium 

The portion of the bid attributable to 

supplemental benefits represents the 

supplemental premium for a beneficiary 

with a national average risk profile. The 

payment process provided in section 

1860D–15 of the Act would only 

address risk adjustment of the basic 

portion of the bid, and there are no 

other provisions for risk adjusting the 

supplemental benefit portion of the bid. 

If not addressed, this would result in 

plans with average risk scores above 1.0 

being under-compensated by enrollees 

for supplemental benefits, and plans 

with average risk scores below 1.0 being 

over-compensated, as illustrated below. 

TABLE F–1.—SUPPLEMENTAL PREMIUM RISK ADJUSTMENT

Plan 

A 

Plan 

B 

Plan 

C 

Plan Average Risk Profile ............................................................................................................ 0.80 1.00 1.10 

1.0 Supplemental Premium ....................................................................................................... 100 100 100 

Supplemental Premium if Risk-Adjusted ..................................................................................... 80 100 110 

Over or (under) compensation .................................................................................................... $20.00 $0.00 $(10.00) 

Table F–1 illustrates the case of three 

equally efficient plans that each 

estimate the cost of the same 

supplemental benefits at $100. Plan B 

has an average risk profile, that is, the 

arithmetic average of the risk scores of 

all of its enrollees is equal to 1.0. Plan 

A and Plan C, however, have healthier 

and sicker than average risk pools, with 

enrollee risk scores averaging .80 and 

1.10, respectively. Plan A only needs an 

average risk-adjusted premium of $80 to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46679 

meet the revenue requirements of 

providing those supplemental benefits 

to its healthier enrollees, but would 

receive $20 more on average from 

enrollees if it collects the whole $100 

unadjusted premium. In contrast, Plan C 

needs to collect $10 more than it would 

receive from the unadjusted (1.0) 

premium to fully fund the expected 

needs of its sicker enrollees. 

Consequently, we are proposing to 

require additional information on the 

projected risk profiles of its projected 

enrollees for accurate valuation of the 

supplemental portion of the bid with 

the bid submission. We intend, through 

the negotiation process, to reach 

agreement on a supplemental premium 

based on the bid submission that would 

account for the risk profile of enrollees 

and, thus, meet the plan’s revenue 

requirements. Our goal is to maintain a 

level playing field that would facilitate 

the fair competition envisioned in the 

MMA. Review and approval of this 

information is discussed in section F.3. 

of this preamble. 

c. Modification of Risk in PDP Bids 

As provided under section 1860D–

11(b)(2)(E) of Act and in § 423.265(d)(4), 

PDP sponsors may request a 

modification of certain risk sharing 

arrangements provided under section 

1860D–15(e) of the Act, thus, becoming 

a limited risk plan. Modification of risk 

could include an increase in the Federal 

percentage assumed in the risk corridors 

or a decrease in the size of the risk 

corridors. Any modification of risk 

would have to apply to all PDP plans 

offered by a PDP sponsor in a region. 

Section 1860D–11(b)(2)(E)(i) of the 

Act states that modification of risk will 

not be available to MA–PD plans. 

Therefore, in discussing the possibility 

of including in the bid a request for a 

modification of risk, we include only 

PDP sponsors. Limited risk plans would 

only be accepted if the access 

requirements in section 1860D–3(a) of 

the Act could not otherwise be met 

through the approval of a sufficient 

number of full risk plans. These 

requirements call for at least two 

qualifying plans offered by different 

entities, one of which must be a standalone prescription drug plan. If other 

bidders meet these requirements, a bid 

from a limited risk plan could not be 

approved and might not be reviewed. 

6. Review and Negotiation of Bid and 

Approval of Plans 

a. Authority To Review Bids 

We would review the information 

filed by the PDP sponsor or MA 

organization in order to conduct 

negotiations on the terms and 

conditions proposed in the bid. The 

MMA grants use the authority to 

negotiate bids and benefits ‘‘similar to’’

the statutory authority given the Office 

of Personnel Management (OPM) in 

negotiating health benefits plans under 

the FEHBP program. We believe that the 

Congress used ‘‘similar to’’ in the statute 

because of the differences between the 

two programs. For example, while the 

OPM authority applies to level of 

benefits, standard Part D drug coverage 

is defined. With regard to rates, in some 

cases the context for FEHBP 

negotiations is not applicable to Part D. 

For example, the rates for communityrated plans under FEHBP are related to 

the rate the entity provides to similarly 

sized groups, and there is no 

comparable concept in Part D. Arguably 

the degree of competition among plans, 

and price signaling through premium 

and benefits, might be significantly 

greater in Part D than in FEHBP. 

Although these differences do exist 

there are also similarities. OPM is 

concerned about trend factors used to 

establish the premium for experiencerated plans, and we would have similar 

concerns about the reasonableness of a 

sponsor’s trend assumptions. OPM is 

concerned about cost-sharing changes 

proposed by plans, and we would have 

similar concerns with regard to 

supplemental benefits. OPM wants to 

maintain high member satisfaction and 

ensure top quality service by plans, and 

we would have similar interests. 

Chapter 89 of title 5 U.S.C. gives OPM 

broad discretion to negotiate prices and 

levels of benefits. For example, 5 U.S.C. 

8902(i) states that OPM may negotiate 

with carriers if it believes the rates 

charged do not ‘‘reasonably and 

equitably’’ reflect the cost of the benefits 

provided. In addition, rates may be 

determined ‘‘on a basis which, in the 

judgment of the Office, is consistent 

with the lowest schedule of basic rates 

generally charged for new group health 

benefit plans issued to large 

employers.’’ OPM is permitted to ensure 

that any adjustment in rates from one 

year to the next is consistent with the 

general practice of carriers which issue 

group health benefit plans to large 

employers. We interpret this to mean 

that we would have the authority not 

only to determine whether the bids 

submitted accurately reflect the costs of 

the plan, but also to determine whether 

the bids are in keeping with premiums 

charged in other insurance contexts. If 

bids increase at a rate higher than the 

premiums in the general insurance 

market (with appropriate adjustments 

for comparable populations), we may 

determine that further negotiations are 

needed. In addition, OPM has broad 

authority to negotiate the level of 

benefits, including the ability to 

prescribe ‘‘reasonable minimum 

standards for health benefits plans.’’

(See 5 U.S.C. 8902(c).) We are 

considering similar regulations to those 

used by OPM in 48 CFR Chapter 16 and 

are soliciting comments on this subject. 

To the maximum extent feasible and 

consistent with the appropriate 

discharge of our responsibilities, we 

prefer to rely on competition rather than 

negotiation. 

b. Bid and Benefit Package Review 

We believe we have the authority to 

negotiate in four broad areas—(1) 

administrative costs; (2) aggregate costs; 

(3) benefit structure; and, (4) plan 

management, if dissatisfied with some 

or all aspects of bid submissions. We 

would evaluate administrative costs for 

reasonableness in comparison to other 

bidders and in comparison to a PDP 

sponsor’s other lines of business. We 

would examine aggregate costs to 

determine whether the revenue 

requirements for qualified prescription 

drug coverage are reasonable and 

equitable. We would be interested in 

steps that the sponsor is taking to 

control costs, such as through various 

programs to encourage use of generic 

drugs. We would examine and discuss 

any proposed benefit changes. Finally, 

we would discuss indicators and any 

identified issues with regard to plan 

management, such as customer service. 

In addition to the negotiation process, 

we would assure that bids and plan 

designs meet statutory and regulatory 

requirements. In general, we would 

examine bids to determine whether the 

bid meets the standard of providing 

qualified prescription drug coverage, as 

described in § 423.104(b) of this 

proposed rule and in subpart C of this 

preamble. We would examine the 

actuarial analysis accompanying the bid 

to ensure that it has been prepared in 

accordance with our actuarial 

guidelines and properly certified. We 

would examine bids to determine 

whether the revenue requirements for 

qualified prescription drug coverage are 

accurate and reasonable, and that the 

requirements relating to actuarial 

determinations are met. We note that 

section 1860D–11(e)(2)(c) of the Act 

requires that the portion of the bid 

attributable to basic prescription drug 

coverage must be supported by the 

actuarial bases and reasonably and 

equitably reflect revenue requirements 

for benefits provided under the plan, 

less the sum of the actuarial value of 

reinsurance payments. We would also 

46680 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

review the structure of premiums, 

deductibles, copayments, and 

coinsurance charged to beneficiaries 

and other features of the benefit plan 

design to ensure that it is not 

discriminatory. We would review cost 

sharing both above and below the outof-pocket threshold with regard to its 

impact on groups of beneficiaries. We 

would also look to see that there is no 

differential impact on groups of 

beneficiaries by geographical location 

within the plan’s region or service area 

attributable to different levels of cost 

sharing between preferred and nonpreferred network providers. 

As required under section 1860D–

11(e)(2)(D)(i) of the Act and in 

§ 423.272(b)(2), the structure of the 

benefit design (including cost sharing 

provisions and formulary design) must 

not be discriminatory; that is, it must 

not discourage enrollment by any Part D 

eligible enrollee on the basis of health 

status, including medical condition 

(related to mental as well as physical 

illness), claims experience, receipt of 

health care, medical history, genetic 

information, evidence of insurability, 

and disability. In general, this means 

that we would review benefit plans for 

features that, when applied, have 

differential impacts on beneficiaries 

with particular medical conditions. 

Factors we would consider in 

determining whether a benefit structure 

is discriminatory include, but are not 

limited to—(1) the benefit design—

including the initial coverage limit, the 

tiered cost-sharing, the use of categories 

and classes in a formulary, and the 

choice of drugs provided in each 

category. (For example, if the tiered 

cost-sharing for drugs used to treat HIV 

is much higher than the cost-sharing for 

other types of drugs, we would view 

this benefit structure to be 

discriminatory); (2) the use of any 

discriminatory limits such as 90-day 

limits or requirements for preauthorization; and (3) supplemental 

benefits such as supplemental coverage 

of drugs that would encourage a 

healthier population to join the PDP. As 

provided in section 1860D–

11(e)(2)(D)(ii) of the Act, plans using 

formulary designs based on categories 

and classes that are consistent with the 

guidelines established by the U.S.P. as 

discussed in subpart C, will be 

recognized as satisfying the nondiscrimination design related to 

formulary structure as it pertains to 

categories and classes. However, 

adopting the USP model categories and 

classes would not prohibit us from 

reviewing other aspects, including the 

use of any limits or tiers, as discussed 

above. 

c. Approval of the Supplemental 

Premium 

As provided under section 1860D–

11(e)(2)(C)(ii) of the Act, we will 

determine that the portion of the bid 

attributable to supplemental benefits 

reasonably and equitably reflects the 

revenue requirements for that coverage 

under the plan. Unless the 

supplemental portion of the bid (which 

is paid by the enrollee in the form of the 

supplemental premium) is risk adjusted 

for the average level of risk among 

enrollees, plans with average risk scores 

above or below 1.0 would be over 

compensated or under compensated by 

enrollees for supplemental benefits. 

Therefore, on the basis of this authority, 

we are proposing to require additional 

information, consisting of estimates of 

the projected risk scores of the plan’s 

enrollees in the subsequent year, to be 

submitted by each plan for purposes of 

negotiating the appropriate risk 

adjustment of the supplemental portion 

of the bid. We would review and 

negotiate that information, and would 

approve a uniform supplemental 

premium reflecting the average risk 

factor for the plan’s expected 

enrollment. 

d. Rebate Reallocation for MA–PD Plans 

The negotiation process for MA–PD 

plans could include the resubmission of 

modified benefit structures (other than 

changes in that portion of their 

supplemental benefits related to drugs) 

once we know the outcome of the 

national average monthly bid 

calculation and its impact on 

beneficiary premiums. Part D drug 

benefits, including benefits offered 

through supplemental Part D coverage) 

could not be changed during this 

process because any changes would 

have an impact on government 

reinsurance payments and, therefore, on 

the portion of the bid related to basic 

drug benefits. The MMA requires that 

all MA bid and benefit package 

submissions be provided to us no later 

than the first Monday in June. In the 

prescription drug program enrollee 

premiums must be based on a 

percentage of the national average 

monthly bid amount that can only be 

calculated once all bids have been 

received, if not actually approved. 

(While the enrollment weights are 

determined from the previous year’s 

reference month, the bid amounts are 

not.) Therefore, the prescription drug 

portion of benefit packages submitted by 

MA–PD plans would be based on 

estimates of monthly beneficiary 

premiums. Some of these MA–PD plans 

would have allocated portions of their 

Part C rebates to buy-down of the Part 

D premium. Once the final national 

average monthly bid amount and the 

base beneficiary premium have been 

calculated, some of these rebate 

allocations in the bids could be either 

excessive or insufficient to achieve the 

desired premium level. 

Excessive rebate allocation would 

result in a portion of the rebate that is 

not provided to the beneficiary as 

required by law, since a premium of less 

than zero is not permitted. Compliance 

with the statute will require a 

reallocation of the excessive portion of 

the rebate credit back to other allowed 

uses of the Part C rebate, that is, to 

supplemental benefits (including 

reduced cost sharing other than cost 

sharing for Part D drugs) or to credits to 

the Part B or supplemental premiums. 

On the other hand, insufficient rebate 

allocation may result in minimal 

premiums that may be seen as 

burdensome by plans, enrollees, and the 

financial institutions managing 

electronic funds transfer. 

The statute does not address this 

situation, but section 1860D–11 of the 

Act does grant us broad authority to 

negotiate the terms and conditions of 

the proposed bids and benefit plans. 

Our proposed regulatory approach 

would be to allow the negotiation 

process for MA–PD plans to include the 

resubmission of modified benefit 

structures once the outcome of the 

premium finalization process is known. 

MA–PD plans would be able to 

redistribute their Part C rebates to 

correct for the difference between the 

projected and final national average 

monthly bid amounts and to achieve the 

previously proposed level of Part D 

premiums. Under no circumstances 

could plans submit modified bids. 

For example, an MA–PD organization 

submitted its bid and benefit package 

based on the assumption that the levels 

of the national average monthly bid 

amount and its prescription drug 

standardized bid would result in a 

$35.00 monthly beneficiary premium for 

basic coverage, and that it would use 

$35.00 of its Part C rebate to completely 

buy down the Part D premium. If the 

national average monthly bid amount is 

determined to be higher than expected, 

the plan’s bid would end up below the 

benchmark and its base beneficiary 

premium would be adjusted by 

subtracting the difference between the 

bid and national average monthly bid 

amount. Therefore, the plan’s monthly 

beneficiary premium would be less than 

the projected premium, for instance, 

$34.00, and the $35.00 amount allocated 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46681 

from the Part C rebate for Part D 

premium buy-down would be excessive. 

In that case, we would require the MA 

organization to amend its benefit 

package to reallocate the excessive $1.00 

of the Part C rebate credit to additional 

supplemental benefits (other than for 

Part D drugs) or to Part B or 

supplemental premium credits. These 

adjustments would be mandatory in 

order to ensure that the entire amount 

of the rebate was provided to the 

beneficiary in some form. 

Under an alternative scenario, the 

national average monthly bid amount is 

determined to be lower than expected 

and the plan’s bid ends up above the 

benchmark. In this case, the plan’s base 

beneficiary premium would be adjusted 

by adding the difference between the 

bid and national average monthly bid 

amount. Therefore, the plan’s monthly 

beneficiary premium would be higher 

than projected, for instance $36.00, and 

the $35.00 amount allocated from the 

Part C rebate for Part D premium buydown would no longer be sufficient to 

eliminate the Part D premium as 

planned. In that case, we would allow 

the MA organization to amend its 

benefit package to reallocate an 

additional $1.00 of the Part C rebate 

credit from additional supplemental 

benefits (other than for Part D drugs) or 

from Part B or supplemental premium 

credits to eliminate the Part D premium. 

These adjustments would be optional 

since the Part C rebate has already been 

provided to the enrollee. We would not 

permit an MA organization to simply 

eliminate a minimal premium instead of 

reallocating the rebate because doing so 

would mean that the cost of providing 

the prescription drug benefit had been 

overstated. However, the MA 

organization could elect to charge the 

new increased premium and to amend 

its benefit package submission 

accordingly. 

e. Private Sector Price Negotiation and 

Formulary Design 

The Act envisions that most price 

negotiation including discounts, rebates, 

or other direct or indirect subsidies or 

remunerations would take place 

between PDP sponsors or MA 

organizations (or their subcontractors) 

and pharmacies and pharmaceutical 

manufacturers. (Section 1860D–11(i) 

precludes CMS from interfering with 

negotiations between drug 

manufacturers and pharmacies, or PDP 

sponsors, or requiring a particular 

formulary or pricing structure.) In other 

words, price negotiation would be 

conducted by the private drug benefit 

managers and plans that are already 

familiar with negotiating prices of 

prescription drugs on a local, regional or 

national basis. Moreover, we expect that 

providing information on discounted 

drug prices to beneficiaries will 

encourage further competition on lower 

prices. Because beneficiaries will 

choose a drug plan based on drug prices 

and formulary coverage, the plans have 

strong incentives to negotiate lower 

prices on drugs that beneficiaries use—

just as private benefit managers 

currently do on behalf of the Federal 

government, state governments, and 

employer and retiree plans. We expect 

that in addition to price levels for drugs, 

these negotiations will also include 

such terms as prohibitions on 

substitutions of drugs if the net result 

would be higher costs for patients or the 

plans. The nature of the negotiations 

that we propose to conduct with bidders 

is discussed later with respect to fullrisk and limited-risk bids, and in 

subpart Q of this preamble with respect 

to fallback plans. 

We expect that the private 

negotiations between PDP sponsors and 

drug manufacturers would achieve 

comparable or better savings than direct 

negotiation between the government 

and manufacturers, as well as coverage 

options that better reflect beneficiary 

preferences. This expectation reflects 

the strong incentives to obtain low 

prices and pass on the savings to 

beneficiaries resulting from 

competition, relevant price and quality 

information, Medicare oversight, and 

beneficiary assistance in choosing a 

drug plan that meets their needs. This 

is similar to the conclusion of other 

analyses, for example, CBO’s recent 

statement that ‘‘Most single-source drugs 

face competition from other drugs that 

are therapeutic alternatives. CBO 

believes that there is little, if any, 

potential savings from negotiations 

involving those single-source drugs. We 

expect that risk-bearing private plans 

will have strong incentives to negotiate 

price discounts for such drugs and that 

the Secretary would not be able to 

negotiate prices that further reduce 

federal spending to a significant 

degree.’’ In accordance with the 

Medicaid best price exemption provided 

under section 1860D–2(d)(1)(c) of the 

Act and codified in § 423.104(h)(2) of 

our proposed rule, drug plans may even 

be able to negotiate better prices than 

those paid under Medicaid. It also 

reflects Medicare’s recent experience 

with drug price regulation for currentlycovered drugs, in which regulated 

prices for many drugs have significantly 

exceeded market averages. 

By not allowing us to require any 

particular formulary, the statute ensures 

that the Pharmacy and Therapeutics 

committees of prescription drug plans 

and MA–PD plans have the flexibility to 

make changes in their classifications 

and lists of preferred drugs based on the 

most current evidence-based 

information (subject to the limitations of 

§ 423.120(b)). We will evaluate plan 

formulary categories and classes in 

comparison to the model guidelines 

developed by U.S.P. In addition to 

evaluating any discriminatory features, 

as discussed above, we will evaluate the 

number of categories in formularies that 

do not meet the model guidelines and 

the choice of drugs available in those 

categories with respect to meeting the 

needs of the Medicare population. After 

the initial year of the program, we will 

also review the history of plan 

formulary appeals to identify issues 

with the plan’s formulary. We will 

conduct additional research on 

evaluating formularies and drug benefit 

designs and we would welcome 

comments on evaluation. As noted 

previously, we may also review plan 

cost sharing (that is, tiers). 

f. Bid Level Negotiation 

The FEHBP standard in 5 U.S.C. 

8902(i) requires us to ascertain that the 

bid ‘‘reasonably and equitably reflects 

the costs of benefits provided.’’ In 

addition, we note that section 1860D–

11(e)(2)(c) of the Act requires that the 

portion of the bid attributable to basic 

prescription drug coverage must 

‘‘reasonably and equitably’’ reflect 

revenue requirements * * * for benefits 

provided under that plan, less the sum 

* * * of the actuarial value of 

reinsurance payments.’’ Analogous to 

the manner in which FEHBP views its 

management responsibilities, we see 

this requirement as imposing the 

fiduciary responsibility to evaluate the 

appropriateness of the overall bid 

amount. 

In general, we expect to evaluate the 

reasonableness of bids submitted by atrisk plans by means of the actuarial 

valuation analysis. This would require 

evaluating the plan’s assumptions 

regarding the expected distribution of 

costs, including average utilization and 

cost by drug coverage tier, for example, 

in the case of standard coverage—(1) 

those with no claims; (2) those with 

claims up to deductible; (3) those with 

claims between the deductible and the 

initial coverage limit; (4) those with 

claims between the initial coverage limit 

and the catastrophic limit; and (5) those 

with claims in excess of the catastrophic 

limit. We could test these assumptions 

for reasonableness through actuarial 

analysis and comparison to industry 

standards and other comparable bids. 

Bid negotiation could take the form of 

46682 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

negotiating changes upward or 

downward in the utilization and cost 

per script assumptions underlying the 

bid’s actuarial basis. We ask for 

comment on the most effective and least 

burdensome way to obtain pricing and 

utilization data for use in our actuarial 

review, as well as comments on the 

broader issues discussed in this section. 

Arguably, appropriate assurance that 

plan bids reasonably and equitably 

reflect the revenue requirements 

associated with providing the Part D 

benefit requires knowing the final drug 

price levels the plans are paying that are 

implicit in their bids. Consequently, in 

addition to looking at final aggregate 

prices, if we found that a plan’s data 

differed significantly from its peers 

without any indication as to the factors 

accounting for this result, we could also 

ask bidders to provide information 

about rebates and discounts they are 

receiving from manufacturers and 

others, in order to ensure that they are 

negotiating as vigorously as possible. 

Section 1860D–11(b)(1)(C) of the Act 

allows us to ask for necessary 

‘‘information on the bid’’. In other 

words, we would be able to inquire as 

to the ‘‘net cost’’ of drugs since this is 

the key dollar value we would need to 

make accurate ‘‘apples to apples’’

comparisons on drug prices between 

PDPs. Under this approach, if the 

particular bids appear to be unusually 

high (or low), we could go back to the 

bidders and request that they explain 

their pricing structure, the nature of 

their arrangements with manufacturers, 

and we might ask further questions and 

take further action to perform due 

diligence to ensure that there is no 

conflict of interest leading to higher 

bids. For instance, we would look at 

certain indicators, such as unit costs or 

growth rates in the bid amounts to see 

if they are in keeping with private 

market experience to the extent feasible 

for a comparable population (for 

example, retirees). (In this case, we 

would be using the authority in 5 U.S.C. 

8902(i) to negotiate bids that are 

‘‘consistent with the group health 

benefit plans issued to large 

employers’’.) If the overall bids were 

unjustifiably high, we would have the 

authority to negotiate the bids down to 

a level that is more in keeping with bids 

that a private market would provide. 

While there is not a private drug-only 

insurance market, we could look at the 

rates used in overall coverage or 

determine which part of such coverage 

is made up by drug coverage, and make 

appropriate adjustments for Medicare 

utilization differentials. We could 

exercise our authority to deny a bid if 

we do not believe that the bid and its 

underlying drug prices reflect market 

rates. Our strong expectation, however, 

is that we will be able to rely on the 

incentives provided by competitive 

bidding, and we would use our 

authority under this part only on the 

rare occasion we find that a plan’s data 

differs significantly from its peers 

without any indication as to the factors 

accounting for this result. 

Under the previous M+C program, we 

permitted M+C organizations to waive 

premiums or to offer mid-year benefit 

enhancements to their benefit packages. 

However, in order to maintain the 

integrity of the bidding process, we 

believe that it is no longer appropriate 

to allow either MA organizations or PDP 

sponsors to waive premiums or offer 

mid-year enhancements as they would 

be de facto adjustments to benefit 

packages for which bids were submitted 

earlier in the year. These adjustments 

would be de facto acknowledgement 

that the revenue requirements submitted 

by the plan were overstated. Allowing 

premium waivers or mid-year benefit 

enhancements would render the bid 

meaningless. Excessive amounts 

included in the bid will be subject to 

recovery by the government in the risk 

corridor calculations following the 

coverage year. 

Consequently, we are proposing to 

interpret the statutory provisions on 

competitive price negotiation as 

prohibiting us from setting a regulated 

price of any particular drug or imposing 

by regulation an average discount in the 

aggregate on any group of drugs (such as 

single-source brand-name drugs, 

multiple-source brand name drugs, or 

generic drugs), but as allowing 

justification of aggregate price levels for 

groups of drugs. In addition, we could, 

under the specific circumstances 

previously discussed, negotiate 

regarding the level of the overall risk 

bid. This approach would allow us to 

exercise the authority similar to FEHBP 

as visualized in the MMA to ensure that 

per capita rates charged ‘‘reasonably and 

equitably’’ reflect the cost of the benefits 

provided, and that beneficiaries receive 

the full benefits of vigorous price 

negotiation by their drug plans. 

g. Approval of Plans 

After negotiations on the terms and 

conditions of the bid, we must approve 

or disapprove the bid. After 

negotiations, we would approve a plan 

only if—

• The plan is found to be in 

compliance with requirements specified 

in this regulation; 

• The plan meets the actuarial 

valuation requirements; and 

• The plan design does not 

discourage enrollment by certain 

eligible beneficiaries. 

In § 423.272(c), we would approve 

limited risk plans only if fewer than two 

qualifying prescription drug plans 

offered by different entities, one of 

which must be offered by a stand-alone 

PDP sponsor, were submitted and 

approved in a region. We would 

approve only the minimum number of 

limited risk plans needed to meet these 

access requirements and would give 

priority to plans bearing the highest 

levels of risk; however, we may take 

into account the level of the bids 

submitted by these plans. Except as 

authorized under section 1860D–11(g) 

of the Act and in § 423.863 with regard 

to fallback plans, we would not, under 

any circumstances, approve a plan that 

elected to bear no risk or a minimal 

level of risk. 

h. Special Rules for PFFS Plans 

As provided in section 1860D—21(d) 

of the Act, and codified in § 423.272(d), 

PFFS plans that offer prescription drug 

coverage are exempt from review and 

negotiation (under sections 1860D–11(d) 

and (e)(2)(C)) of their prescription drug 

bids and premium amounts but are 

otherwise subject to all other 

requirements under this part, with the 

following exceptions. While we will not 

negotiate PFFS bids, those bids must 

meet the actuarial valuation 

requirements applicable to all risk bids. 

These plans are not required to 

negotiate discounted prices for 

prescription drugs. If they do negotiate, 

the proposed requirements under 

§ 423.104(h) related to negotiated prices 

would apply. If the plan provides 

coverage for drugs purchased from all 

pharmacies, without charging additional 

cost sharing, and without regard to 

whether they are participating 

pharmacies. § 423.120(a) and § 423.132 

of this proposed rule (requiring certain 

network access standards and the 

disclosure of the availability of lower 

cost bioequivalent generic drugs) would 

not apply to the plan. PFFS plans are 

also exempt from drug utilization 

management program and medication 

therapy management program 

requirements. 

Finally, we note that section 1860D–

21(d)(7) of the Act provides that costs 

incurred for off-formulary drugs will not 

be excluded in determining whether a 

beneficiary has reached the out-ofpocket threshold if a PFFS plan does not 

use a formulary. We believe that section 

1860D–21(d)(7) is a tautology and 

simply states that PFFS plans without 

formularies, by definition, cannot have 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46683 

non-formulary drugs to exclude from 

the out-of-pocket threshold calculation. 

7. National Average Monthly Bid 

Amount 

In § 423.279, we outline the 

calculation of the national average 

monthly bid amount. For each year, 

beginning in 2006, we would compute 

a national average bid based on 

approved bids in order to calculate the 

national base beneficiary premium. As a 

practical matter, we realize that we 

might need to calculate and announce 

the national average monthly bid 

amount before negotiations on all bids 

were completed in order to allow time 

for finalization of premiums and benefit 

packages. Therefore, we anticipate that 

we would identify a date by which the 

national average monthly bid amount 

would be published, and we would use 

the bids that had passed a certain level 

of approval as of that date as the basis 

for the calculation. 

As provided in section 1860D–

13(a)(4)(A) of the Act, in computing the 

national average monthly bid amount, 

we would exclude bids submitted for 

MA private fee-for-service (PFFS) plans, 

specialized MA plans for special needs 

individuals, PACE programs under 

section 1894 of the Act (pursuant to 

section 1860D–21(f) of Act) and 

reasonable cost reimbursement contracts 

under section 1876(h) of the Act 

(according to section 1860D–21(e) of the 

Act). The exclusion from the calculation 

of bids of PFFS, cost plans, specialized 

MA plans, and PACE suggests that they 

are different from, and not comparable 

to, the average bid in some way. We 

interpret this difference to be based 

solely on price levels because the 

legislation—

• Does not define any other basis for 

determining these bids; 

• Continues to compare these bids to 

the national average bid amount to 

determine adjustments to enrollee 

premiums; and 

• Provides for payments to such plans 

(including risk adjustment) in the same 

manner as to non-excluded plan types. 

Therefore, these excluded plan types 

would still submit bids on the same 

basis as all other plans, that is, the 1.0 

risk prescription drug plan beneficiary, 

even though these bids are not included 

in the national average bid amount at 

this time. 

The national average bid amount 

would be equal to the weighted average 

of the standardized bid amounts for 

each PDP and for each MA–PD plan 

described in section 1851(a)(2)(A)(1) of 

the Act. The national average monthly 

bid amount would be a weighted 

average, with the weights being equal to 

the proportion of Part D eligible 

individuals enrolled in each respective 

plan in the reference month (as defined 

in § 422.258(c)(1)). For calendar year 

(CY) 2006, we would determine the 

enrollment weights on the basis of 

assumptions that we would develop. 

One possible approach would be to use 

the following procedure to assign 

weights to individual bids for PDPs and 

MA–PD plans for CY 2006: 

• Obtain total Medicare enrollment 

by region, and enrollment in each (local) 

MA plan that offers a drug benefit by 

region. These enrollments would be as 

of a specific date, for example, March 

31, 2005. 

• Assign each (local) MA–PD plan in 

each region a weight equal to its MA 

enrollment. 

• Subtract the MA enrollment from 

the total Medicare enrollment for each 

region to arrive at the PDP-eligible 

enrollment. 

• Divide the PDP-eligible enrollment 

for each region by the number of 

companies offering PDPs in each region 

to arrive at the weight for each company 

in each region. 

• For each company in a region, 

divide the company weight by the 

number of plans offered by that 

company to arrive at the PDP weight. 

• The regional average monthly bid 

amount would be calculated by 

weighting each plan’s bid by its 

assigned weight. 

• The national average monthly bid 

amount would be calculated by 

weighting each regional average 

monthly bid amount by the region’s 

proportion of Part D eligible individuals 

(Medicare enrollment) and summing 

these products. 

Using this methodology, after 

subtracting MA enrollments, each 

company offering PDP(s) in a region gets 

equal weight. An exception might occur 

based on capacity limits indicated by 

MA–PD plans. This assumes that 

beneficiaries would select a company, 

and then select a plan from that 

company. It also dilutes the effect of any 

potential artificially high bids designed 

solely to increase the national average 

monthly bid amount. If a company 

offers multiple plans in a region, each 

plan gets an equal allocated share of its 

company’s assigned weight. 

New MA–PDs would get a zero 

weight. This treatment is consistent 

with the weight assignment specified in 

the statute for subsequent years. Starting 

with the second year, all new plans 

would get zero weight because they 

have no prior year enrollment. We 

request comments on the ‘‘unequal’’

inclusion of plans in the calculation of 

the national average monthly bid. We 

note that many MA–PDs would operate 

in small geographic areas with small 

potential enrollment, and so we believe 

that the impact of this approach for new 

local MA–PDs is likely limited. We 

recognize, however, that this approach 

is perhaps more problematic related to 

the treatment of the new regional MA–

PD plans, as these plans in a given 

region are likely to have larger 

enrollment than local MA–PD plans. 

This particular approach implicitly 

assigns persons in new MA–PD plans 

(both local and regional) to the PDP 

weights, hence giving potentially too 

much weight to the PDPs. 

Alternatively, assigning equal weights 

to PDPs and new MA–PD plans (even if 

limited to just the regional MA–PDs) 

could likely assign too much weight to 

the new regional MA–PD plans, which 

at least in 2006 are expected to have 

lower enrollment. Another possible 

alternative would be to base weights on 

regional MA–PD plan projections of 

enrollment, subject to our assessment of 

reasonableness of the estimates. In this 

approach we would use the proportion 

of projected enrollment for each plan as 

weights. However, particularly in the 

first year or so, projections may be quite 

inaccurate, leading to a distorted and 

unrepresentative benchmark. We 

welcome comments on these and other 

alternative approaches for how to 

weight bids in 2006. 

The assigned weights are price 

inelastic, that is, the recommended 

weight assignment methodology implies 

that price is not a factor in plan 

selection. In the absence of experience 

on which to base the relationship 

between price and plan choice in this 

population, and, therefore, on how 

many people would be expected to join 

each plan, we believe that the fairest 

method for 2006 is simply to assume an 

equal weight for each plan. 

In subsequent years, the weights for 

the weighted average would be 

calculated as a percentage with the 

numerator equal to the number of Part 

D eligible individuals enrolled in the 

plan in the reference month and the 

denominator equal to the total number 

of Part D eligible individuals enrolled in 

all plans (except for those plans whose 

bids are not include in the national 

average bid amount, as described above) 

in the reference month. It represents the 

proportion of the Part D eligible 

enrolled individuals in the plan. We 

would multiply the portion of each plan 

bid attributable to basic benefits by its 

proportion of total Part D enrolled 

individuals and sum each product to 

arrive at the national average monthly 

bid. In § 423.279(c), we would also 

establish an appropriate methodology 

46684 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

for adjusting the national average 

monthly bid amount to take into 

account any significant differences in 

prices for covered Part D drugs among 

PDP regions. We welcome comments on 

the existence of regional price variation 

in drug prices and on any factors that 

could lead to that variation. As part of 

carrying out the Congress’ requirement 

that our geographic adjustment 

methodology be ‘‘appropriate,’’ we 

believe the method would first require 

gathering data from PDPs and MA–PDs 

on regional drug prices. Therefore, we 

may not implement a geographic 

adjuster for the first few years of the 

program unless we have acquired 

sufficient information on pricing to 

accurately characterize that variation. If 

we were to determine that there is 

significant geographic variation in 

prices, we anticipate that we would 

announce the adjustment factors in 

advance of the bidding process for any 

year in which geographic adjustment 

would be applied to bids in the 

calculation. (This would be subject to 

notice and comment like any other 

change in payment methodology.) If we 

were to determine that there is only 

minimal price variation, we would not 

implement a geographic adjuster for the 

national average monthly bid 

calculation. Additionally, we would 

implement any geographic adjuster in a 

budget neutral manner to avoid a 

change in aggregate payments from the 

total amount that would have been paid 

if we had not applied an adjustment. 

8. Rules Regarding Premiums 

In § 423.286, we propose that the 

monthly beneficiary premium would be 

the result of the calculation of a national 

base beneficiary premium subject to 

certain adjustments. Congressional 

intent was to arrive at an average 

monthly beneficiary premium in CY 

2006 representing a certain percentage 

of the average total estimated benefit 

provided by the drug plans on a 

national basis (including benefits 

subject to Federal reinsurance 

subsidies). Taking into account that 

projected reinsurance subsidies are 

excluded from plan bids, the applicable 

percentage becomes approximately 32 

percent, which is applied to the national 

average monthly bid amount. 

To determine the uniform plan 

premium, in § 423.286(d), we would 

adjust the base beneficiary premium for 

certain plan characteristics including 

whether the plan’s bid would be above 

or below the national average bid, and 

whether the plan offers supplemental 

benefits. (Since the bid has to be 

approved and premiums established for 

the entire year, we are interpreting the 

phrase ‘‘if for a month’’ in section 

1860D’13(a)(1)(B)(i) of the Act and 

1860D’13(a)(1)(B) (ii) of the Act as 

referring to the beneficiary premium as 

a monthly amount.) The base premium 

is adjusted to reflect the full difference 

between the plan’s standardized bid 

amount and the national average 

monthly bid amount (which may be 

adjusted for regional price differences). 

To the extent that the plan’s 

standardized bid amount is below the 

national average monthly bid amount, 

the base premium is adjusted downward 

by the difference. To the extent that the 

plan’s standardized bid amount is above 

the national average monthly bid 

amount, the base premium is adjusted 

upward by the difference. The base 

premium would also be adjusted by 

adding the premium amount approved 

after negotiations for risk adjustment of 

the supplemental benefits, if any (as 

discussed above). Table F–2 illustrates a 

calculation of the base beneficiary 

premium and the adjustment for the 

difference between the bid and the 

national average monthly bid amount. 

TABLE F–2.—PREMIUM ILLUSTRATION

Benchmark Plans in region Bids Beneficiary premium 

National average monthly bid amount 1 Plans Approved 

plan bid 

Amount by 

which bid 

exceeds 

benchmark 

Amount by 

which bid is 

below 

benchmark 

Applicable 

percent of 

nat’l premium ± difference 

Plan 1 ....................................................... 125 14.00 0.00 $50 

111 ............................................................ Plan 2 ....................................................... 111 0.00 0.00 36 

Plan 3 ....................................................... 101 0.00 (10.00) 26 

Est. Reinsurance Percentage .................................................................................................................. 21.25 (Assumed) 

Applicable Percent = ................................................................................................................................ 0.3238 (25.5 /(100¥ 21.25) 

Base Beneficiary Premium = ................................................................................................................... 36.00 (111 * .3238) 2

1A. Assumes no geographic adjustment. 2B. Rounded to nearest dollar. 

The sum of the base beneficiary 

premium, the adjustment for difference 

between the bid and the national 

average bid, and the supplemental 

benefit premium would be the monthly 

beneficiary premium. The monthly 

beneficiary premium (except for any 

supplemental premium) would be 

eliminated or reduced for low-income 

subsidy-eligible individuals, as 

described in section 1860D–14 of the 

Act and § 423.780. (This adjustment 

reflects the fact that the government 

would pay all or a portion of the 

monthly beneficiary premium for 

subsidy-eligible individuals.) 

In § 423.286(d)(3), the monthly 

beneficiary premium would be 

increased for enrollees subject to the 

late enrollment penalty. The penalty 

amount for a Part D eligible individual 

for a continuous period of eligibility (as 

described in § 423.46) would be the 

greater of an amount that we determine 

is actuarially sound for each uncovered 

month in the same continuous period of 

eligibility; or 1 percent of the base 

beneficiary premium for each uncovered 

month in that period. The beneficiary 

premium amount is cumulative which 

means that each month the beneficiary 

is subject to a penalty, the penalty 

accumulates. Once the beneficiary 

enrolls in Part D, that accumulated 

penalty would be added to their 

premium amount each month. So for 

example, if the penalty amount is $.36 

per month in 2004, and is subject to 12 

months of this penalty, the beneficiary 

would pay an additional $.36 * 12 or 

$4.32 per month for as long as they are 

enrolled in Part D. During the first 

several years of the program, we 

currently expect that we would specify 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46685 

the penalty amount would be 1 percent 

of the base beneficiary premium per 

month. Once we have sufficient data on 

experience under the program with 

respect to individuals who enroll after 

their Initial Enrollment Periods, we will 

be able to determine the appropriate 

penalty amount, that is, either one 

percent or a greater amount to be 

adopted. 

We note that achieving very high 

(indeed, virtually universal) access to 

prescription drug coverage for 

beneficiaries who participate in Part D 

was a key Congressional consideration 

in enacting MMA. We would encourage 

comments from insurers, actuaries, and 

others with experience, data, or 

expertise in this area. We are 

particularly interested in receiving 

comments on the most appropriate level 

for the late enrollment penalty, the 

likelihood of whether a $.36 per month 

of delay penalty (that is, 1 percent for 

each month of delayed enrollment) 

constitutes an adequate safeguard 

against selection bias, and the 

importance of strongly encouraging 

widespread enrollment to maximize the 

affordability and stability of Part D 

premiums.’’

Except as provided with regard to any 

enrollment penalty, low-income 

assistance, or employer group waivers 

under section 1857(i) and section 

1860D–22(b) of the Act and § 423.458(c) 

(as discussed in Subpart J of the 

preamble to our proposed rule), the 

monthly beneficiary premium for a 

prescription drug plan or MA–PD in a 

PDP region must be the same for all Part 

D eligible individuals enrolled in the 

plan. The monthly beneficiary premium 

charged under a fallback plan is 

discussed in § 423.867 of our proposed 

rules and in Subpart Q of this preamble. 

9. Collection of Monthly Beneficiary 

Premiums 

a. Means of Collection 

In § 423.293(a), the beneficiary would 

have the same options on the method 

for premium payments as under Part C. 

Section 1860D–13(c)(1) of the Act 

applies the provisions of section 1854(d) 

of the Act (as amended by the MMA) to 

Part D premium collection. The 

beneficiary would have the option of 

having the amount withheld from his or 

her social security benefit check similar 

to the way Part B premiums are 

withheld. Beneficiary premium 

payments could also be paid directly to 

the PDP sponsor or MA organization 

through an electronic funds transfer 

mechanism (for example, an automatic 

charge of an account at a financial 

institution or a credit or debit card 

account). We could specify other means 

of payment, including payment by an 

employer or under employer-based 

retiree health coverage (as defined in 

section 1860D–22(c)(1) of the Act) on 

behalf of an employee or former 

employee (or dependent). All premium 

payments withheld from social security 

checks would be credited to the 

appropriate Trust Fund (or Account) 

and would be paid by us to the PDP 

sponsor or MA organization involved. 

Premiums from beneficiaries enrolled in 

fallback plans would not be collected by 

the plan. Instead, these premiums 

would be withheld from social security 

checks (or from other benefits as 

permitted under section 1840 of the 

Act). Beneficiaries who do not receive 

social security checks or otherwise have 

premiums deducted from other benefits 

or annuities would pay us directly. 

Failure to make premium payments 

could result in disenrollment as 

provided under section 1854(d)(1) of the 

Act and § 423.44(d) of our proposed 

regulations. 

b. Collection of Late Enrollment 

Penalties 

Concerning collection of the late 

enrollment penalty calculated under 

§ 423.286(d)(3), after the early years of 

the program we would estimate and 

specify the portion of the penalty that 

would be attributable to increased 

actuarial costs assumed by the PDP 

sponsor or MA organization (and not 

taken into account through risk 

adjustment provided under 

§ 423.329(b)(1) or through reinsurance 

payments under § 423.329(c)) as a result 

of that late enrollment. When the 

premium is withheld from social 

security benefits, we would pay only the 

portion of the late enrollment penalty 

attributable to the increased actuarial 

costs to the PDP sponsor or MA 

organization. When the premium is paid 

directly to the plan, we would reduce 

payments otherwise made to the PDP 

sponsor or MA organization by an 

amount equal to the amount of the 

enrollment penalty not attributable to 

increased actuarial cost. (Fallback plans 

would not receive any enrollment 

penalties applicable to their enrollees 

because they are not at risk.) 

At least in the initial years of the 

program we do not anticipate paying 

plans additional funds related to late 

enrollment individuals. In the initial 

years there will not be a significant 

number of people who can have delayed 

enrollment for a significant period of 

time. Moreover, in the initial years of 

the program the risk corridors are more 

generous and afford more protection. 

Consequently we do not think it is 

necessary to provide a portion of the 

enrollment penalty to plans until 

experience indicates that actual risk has 

increased. 

G. Payments to PDP Sponsors and MA 

Organizations Offering MA–PD Plans for 

All Medicare Beneficiaries for Qualified 

Prescription Drug Coverage 

1. Overview (§ 423.301) 

Subpart G of part 423 implements 

section 1860D–15 and the deductible 

and cost sharing provisions of 1860D–

14(a) of the Act. This section sets forth 

rules for the calculation and payment of 

CMS direct and reinsurance subsidies 

for prescription drug plans and MA–PD 

plans; the application of risk corridors 

and risk-sharing adjustments to 

payments; and retroactive adjustments 

and reconciliations to actual enrollment 

and interim payments. References to 

part 422 of our regulations are to the 

new MA rules published elsewhere in 

this issue of the Federal Register. 

2. Definitions 

We propose definitions for a number 

of terms used in the computation of 

payments under this subpart, such as 

‘‘allowable reinsurance costs’’, ‘‘actually 

paid’’ and ‘‘coverage year’’ in § 423.308 

of our regulations, but discuss these 

separately in the appropriate sections of 

this preamble. We do this because these 

terms are complex and are best clarified 

in the context of the discussion of the 

pertinent provisions. 

3. General Payment Provisions 

(§ 423.315) 

The payment provisions required by 

section 1860D–15 of the Act include 4 

different payment mechanisms. The first 

payment mechanism involves monthly 

payments that (along with reinsurance 

subsidies) subsidize on average 74.5 

percent of the value of the basic 

prescription drug benefit, thereby 

maintaining beneficiary premiums for 

basic coverage on average at 25.5 

percent. The direct subsidy is 

determined based on a national bidding 

process. Sponsors who wish to offer 

plans submit bids based on the 

projected costs of an average 

beneficiary. After our review and 

approval, these bids become the basis 

for the direct subsidy that is equal to the 

plan’s standardized bid, risk-adjusted 

for health status as provided in 

§ 423.329(b), minus the base beneficiary 

premium (as determined in § 423.286(c) 

and as adjusted for any difference 

between the standardized plan bid and 

the national average monthly bid 

amount (as described under 

§ 423.286(d)(1))). The risk-adjustment 

46686 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

applied to the bid compensates the plan 

for individual enrollee differences in 

health status from the average 

beneficiary and thus reduces the impact 

from any adverse risk selection. Further 

adjustments to the direct subsidy 

payments would be made to account for 

actual enrollment and updated health 

status information. 

The second and third payment 

mechanisms would substantially reduce 

the uncertainty and risk of participating 

in this new program. Since the Medicare 

prescription drug benefit is new, there 

is uncertainty surrounding the 

utilization, costs, and risk profiles 

(participation rates and characteristics) 

of potential enrollees. Federal 

reinsurance subsidies and risk corridor 

payment adjustments work along with 

the risk-adjustment included in the 

direct subsidy to substantially reduce 

the uncertainty and risk of participating 

in this new program. Through 

reinsurance subsidies, in which we act 

as the re-insurer, we would subsidize a 

large portion of any catastrophic 

expenses (defined as expenses over an 

individual’s out-of-pocket limit) through 

a reinsurance subsidy. Through risk 

corridor arrangements, exposure to 

unexpected non-catastrophic expenses 

would be limited. These risk sharing 

arrangements are structured by the 

statute as symmetrical risk corridors, 

that is, agreements to share a portion of 

the losses or profits resulting from 

expenses above or below expected 

levels, respectively. 

Finally, according to section 1860D–

14 of the Act, PDP sponsors and MA 

organizations would receive payments 

to cover certain premium, cost-sharing, 

and extended coverage subsidies for 

low-income subsidy eligible 

individuals. With the exception of 

interim estimated payments of costsharing subsidies, these payments are 

discussed separately in subpart P of this 

preamble and in § 423.780 of our 

proposed regulations. 

Certain payments would be 

exceptions to these general payment 

provisions. Under private fee-for-service 

(PFFS) plans, reinsurance would be 

calculated differently and risk sharing 

would not be available. Reinsurance 

subsidies and risk sharing would not be 

available for fallback plans, and are paid 

in accordance with contractual terms 

related to actual costs and management 

fees tied to performance measures. 

4. Requirement for Disclosure of 

Information (§ 423.322) 

a. Data Submission. 

As provided under sections 1860D–

15(c)(1)(C), 1860D–15(d)(2) and 1860D–

15(f) of the Act and in § 423.322 of our 

proposed regulations, we would 

condition program participation and 

payment upon the disclosure and 

provision of information needed to carry 

out the payment provisions. Such 

information would encompass the 

quantity, type, and costs of 

pharmaceutical prescriptions filled by 

enrollees that can be linked to 

individual enrollee data in our systems; 

that is, linked to the Medicare 

beneficiary identification number 

(HIC#). We would appreciate comments 

on the content, format and optimal 

frequency of data feeds. We believe that 

more frequent feeds than annually 

(weekly, monthly, quarterly) would 

allow us to identify and resolve data 

issues and assist the various payment 

processes. 

We are evaluating our minimum data 

requirements with regard to prescription 

drug claims. Our goal would be to 

determine the least burdensome data 

submission requirements necessary to 

acquire the data needed for purposes of 

accurate payment and appropriate 

program oversight. Our view is that we 

will need at least the following data 

items for 100 percent of prescription 

drug claims for the processes discussed 

below: 

• Beneficiary name (first, middle 

initial, last). 

• Beneficiary HIC#. 

• Beneficiary birth-date. 

• Eleven-digit NDC code. 

• Quantity dispensed. 

• Prescription drug cost before copayment (ingredient cost, dispensing 

fee, sales tax amount). 

• Beneficiary co-payment amount, 

and 

• Date prescription filled. 

We assume that ingredient cost and 

dispensing fee reflect point of sale price 

concessions in accordance with 

purchase contracts between plans (or 

their agents, such as PBMs) and 

pharmacies, but do not reflect 

subsequent price concessions from 

manufacturers, such as rebates. We 

anticipate that we will need similar data 

on prescription drug claims for 

appropriate risk-adjustment, 

reconciliation of reinsurance subsidies, 

calculation of risk sharing payments or 

savings, and program auditing. Data will 

also be required for assessing and 

improving quality of care. We will 

welcome comments on the nature and 

format of data submission requirements 

for the following processes: 

• Risk adjustment process would 

require 100 percent of drug claims in 

order to develop and calibrate the 

weights for the model for this new 

benefit. Consequently, PDP sponsors 

and MA organizations offering MA–PD 

plans would be required to submit 100 

percent of prescription drug claims for 

Part D enrollees for the coverage year. 

Risk adjustment would require the 

submission of prescription drug agent 

identifying information, such as NDC 

codes and quantity, in order to allow the 

standardized pricing of benefits in the 

model. Because we would use 

standardized pricing, cost data on each 

prescription is not a requirement for risk 

adjustment, although it is needed for 

other purposes. 

• The reinsurance subsidy payment 

process would require 100 percent of 

claims for each enrollee for whom the 

plan claimed allowable reinsurance 

costs. (Although reconciliation of the 

reinsurance subsidy does not require 

NDC codes or quantities, it does require 

member, cost and date of service data.) 

All claims for enrollees with expenses 

in excess of the out-of-pocket limit 

would be necessary to verify that the 

costs were allowable because the totality 

and order in which the claims are 

incurred would define which claims 

would be eligible for reinsurance 

payments. While the start of reinsurance 

payments begins with claims after the 

out-of-pocket threshold has been 

reached, which is $5,100 in total 

spending (2006) for defined standard 

coverage, it may be associated with a 

higher dollar total spending amount 

under alternative coverage. Whatever 

the level, we would need to receive all 

claims by date of service including the 

amount of beneficiary cost sharing in 

order to determine the occurrence of the 

out-of-pocket threshold. Any planincurred costs for claims for 

supplemental benefits cannot be 

included in determining whether the 

out-of-pocket threshold has been met. 

• The risk sharing process would 

require 100 percent of claims for all 

enrollees for the calculation of total 

allowable risk corridor costs. The plan 

would need to segregate costs 

attributable to supplemental benefits 

from those attributable to basic benefits 

since supplemental benefit costs are not 

subject to the risk corridor provisions. 

Again, all claims would be necessary to 

verify that the costs were allowable 

because the order in which the claims 

were incurred would help determine 

whether the claims were solely for basic 

coverage. For instance, a claim 

processed between a beneficiary’s 

deductible and initial coverage limit (in 

standard coverage) would count towards 

risk sharing, but another claim 

(processed identically but immediately 

after the initial coverage limit has been 

reached) would not. Unlike the 

reinsurance subsidy, which is limited to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46687 

individuals with expenses in excess of 

the out-of-pocket threshold, risk sharing 

involves costs (net of discounts, 

chargebacks and rebates, and 

administrative costs) for all enrollees for 

basic coverage, but only those costs that 

are actually paid by the sponsor or 

organization. Because all plans 

participate in risk sharing, potentially 

all claims for all Part D enrollees in all 

plans must be reviewed. Like the 

reinsurance reconciliation, risk sharing 

does not require NDC codes or 

quantities, but does require member, 

cost, and date of service data. 

• The program audit process would 

require at least a statistically valid 

random sample of all Part D drug 

claims. We believe that several points of 

reference including HIC#, cost, date of 

service, and NDC code would be 

required for unique identification of 

individual claims in any random sample 

drawn from the population. If we 

receive 100 percent claims to support 

the payment processes, this sample 

could be drawn from our records. We 

believe it would be useful to obtain the 

prescribing physician’s National 

Provider Identifier (NPI) number, as 

required by the administrative 

simplification provisions of HIPAA, in 

the elements of collected data for 

purposes of fraud control once it is 

available. Prior to May 2007 when the 

NPI is expected to be used, we would 

be interested in alternative means for 

identifying the physician prescriber. 

(Nothing in this data collection 

discussion should be construed as 

limiting OIG authority to conduct any 

audits and evaluations necessary for 

carrying out our proposed regulations.) 

b. Allowable Costs 

Section 1860D–15(b)(2) and 1860D–

15(e)(1)(B) of the Act and § 423.308 of 

our proposed regulations, specify that to 

determine ‘‘allowable costs’’ for 

purposes of both the reinsurance and 

risk corridor payments, only the net 

costs actually paid after discounts, 

chargebacks, and average percentage 

rebates, as well as administrative costs, 

are to be counted. We encourage 

comments on appropriate 

methodologies and data sources that can 

be used in making these adjustments. 

For example, we would like to receive 

comments on how price concessions 

(discounts, chargebacks, rebates, or any 

other periodic financial remuneration) 

would be most accurately and 

efficiently applied to prescription drug 

claims data to satisfy this requirement. 

We would also be interested in any 

information or data on the effect on 

costs such adjustments can be expected 

to yield. We are particularly interested 

in how data would be appropriately 

allocated and applied to the reinsurance 

subsidy tied to individual expenses in 

excess of the out-of-pocket limit. 

We understand that much of the 

rebate accounting is not applied in the 

context of point of sale claims data, but 

rather in periodic accounting 

adjustments, and that rebates are 

frequently reported along with 

administrative fees paid by the 

manufacturer. We are concerned that 

these accounting practices would be 

incompatible with the need to report all 

price concessions for purposes of 

determining allowable reinsurance and 

risk corridor costs and we, therefore, are 

proposing to require that they be 

segregated. Moreover, we are proposing 

to require that any administrative fees 

paid to Part D plans be based on the fair 

market value of services rendered, and 

that any fees determined to be above or 

below fair market value would be 

considered additional price 

concessions. 

Due to the nature and timing of rebate 

accounting, we believe that this will 

require a form of step-down cost 

reporting in which rebates received at 

the aggregate level may be apportioned 

down to the level of plan enrollees 

incurring reinsurance expenses on a 

reasonable basis. Since Medicare 

beneficiaries would be expected to have 

higher per capita prescription drug 

utilization than other populations, we 

believe it would be appropriate to 

allocate rebates (and other similar price 

concessions) on the basis of percentage 

of dollars spent rather than of covered 

lives. Alternatively, one could create a 

ratio of total rebate amounts to total 

spending and reinsurance-related 

spending to total spending to derive the 

share of rebates to be allocated to 

reinsurance, and then adjust down the 

reinsurance amount. A similar ratio 

could be created for risk corridor 

spending. Another way that the current 

market expresses these relationships is 

in an average rebate per script value that 

could even be differentiated by brand 

versus generic rebates per script. In 

apportioning rebates and other financial 

remunerations to Medicare costs, we 

would look to ensure that plans 

appropriately take into account the 

distribution of claims between basic and 

supplemental benefits, and apportion 

price concessions in a proportionally 

accurate way. 

In whatever manner price concessions 

will be apportioned, plans must require 

and keep accurate records on all price 

concessions and ensure that these are 

clearly accounted for and segregated 

from administrative fees. All cost 

reporting would be subject to inspection 

and audit (including periodic audits) by 

us and the OIG. As stated below, to the 

extent either we or the OIG discover that 

a sponsor was overpaid for reinsurance 

or risk sharing (that is, the records do 

not support the payments made, or there 

is insufficient documentation to 

determine whether the payments are 

correct), we may recoup the 

overpayments. The reopening and 

overpayment provisions are discussed at 

the end of this part G. 

c. Coverage Year 

In § 423.308 we propose that the term 

‘‘coverage year’’ would mean a calendar 

year in which covered Part D drugs are 

dispensed if the claim for such drugs 

(and payment on such claim) is made 

not later than 3 months after the end of 

the year. In other words, drug claims 

paid past the close of the 3-month 

period would not be considered part of 

that coverage year (or the next), and 

would not be used to calculate that 

year’s payments or in reconciling risk 

adjustment payments for the year. 

This limit would be imposed in order 

to provide timely closure for payment 

determination processes such as 

reinsurance, risk corridors and 

employer subsidies. While the period of 

3 months would be significantly less 

than the fee-for-service Medicare 

medical claims standard of 18 months, 

we believe that a shorter period is 

warranted due to the highly automated 

and point of sale nature of prescription 

drug claim processing. We understand 

that the vast majority of prescriptions 

are not filled without the claim being 

simultaneously processed and therefore, 

there is a much shorter claims lag to be 

considered. We believe that the number 

and value of drug claims that would 

potentially be missed would be 

immaterial, consisting primarily of 

paper claims. The 3-month close-out 

window would not limit the liability of 

the plan or its claims processing 

contractor for reimbursing any lagging 

claims, but would simply establish a 

timely cut-off for finalizing payments. 

Any rebates for the coverage year not 

reflected in the fourth quarter data (sent 

to close out the year) must be credited 

against future payments. Although we 

are closing the year for claims purposes, 

the plan must account for all rebates 

that occur throughout the coverage year 

and send us all the data. 

A shorter period would allow for 

payment processes that are dependent 

on the knowledge of total allowable 

costs for each coverage year to be 

concluded on approximately the same 

schedule as other reconciliations 

involving enrollment or risk adjustment 

data. On this schedule, calculations of 

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risk sharing could begin as soon as five 

to six months after the close of the 

payment year. If the claims submission 

standard were a longer period, final 

reconciliations would be significantly 

delayed. We are interested in receiving 

comments on this timetable, specifically 

whether we should adopt a shorter or 

longer period than 3 months, and 

including data with which to estimate 

the proportion and value of drug claims 

that could be excluded with a 3-month 

close-out window. 

5. Determination of Payment (§ 423.329) 

a. Direct Subsidies 

As directed in section 1860D–15(a)(1) 

of the Act and codified in § 423.329(a), 

we would provide direct subsidies to 

PDP sponsors and MA organizations 

offering MA–PD plans. These subsidies 

would be in the form of advance 

monthly payments. Payments would be 

equal to the plan’s standardized bid, 

risk adjusted for health status as 

provided in § 423.329(b), minus the base 

beneficiary premium (as determined in 

§ 423.286(c) and adjusted for any 

difference between the standardized 

plan bid and the national average 

monthly bid amount (as described 

under § 423.286(d)(1))). The 

standardized bid would be the portion 

of the plan’s bid attributable to basic 

coverage. This portion would be riskadjusted by multiplying by the 

prescription drug risk score attributable 

to each enrollee. Between the 

government direct subsidy and the 

adjusted base beneficiary premium, the 

plan would receive its entire riskadjusted standardized bid in advance 

each month. Payment for supplemental 

benefits would come from enrollees in 

the form of additional premium. By 

statute, the sponsor must bear all risk 

for such supplemental benefits. 

We would note that a plan’s total per 

capita payment could never exceed its 

bid, risk-adjusted for the beneficiary’s 

health status. This would be the case 

even if the difference between the plan’s 

bid and the national average monthly 

bid amount were greater than the 

beneficiary monthly premium, 

mathematically resulting in a ‘‘negative 

premium’’ amount. We do not believe 

that the statute envisions plan payments 

in excess of negotiated costs, since this 

would violate the revenue requirements 

provisions discussed in the Subpart F of 

this preamble. 

b. Risk Adjustment 

In section 1860D–15(c)(1) of the Act, 

we are directed to develop and publish 

a prescription drug risk adjustment 

methodology taking into account the 

similar methodologies under 

§ 422.308(c)(1) to adjust payments to 

MA organizations for benefits under 

Part C on the basis of costs incurred 

under original Medicare. In § 423.329(c) 

we propose to establish this risk 

adjustment methodology. We would 

develop and publish this risk 

adjustment methodology in the 45-day 

notice for the announcement of 2006 

Medicare Advantage rates. Section 

1860D–15(c)(1)(D) of the Act requires us 

to publish the risk adjustment for Part 

D at the same time we publish risk 

adjustment factors under section 

1853(b)(1)(B)(i)(II) of the Act. Because 

these risk adjustment factors under Part 

C can only be published after 45-day 

advance notice under section 1853(b)(2) 

of the Act, we would use the same 

notice procedures we use under Part C 

for risk adjustment. We believe this 

would promote consistency and 

uniformity in the process, and, 

especially for MA–PD plans, allow 

entities to review notices published on 

the same day for purposes of 

commenting on or learning about risk 

adjustment. As usual, the 45-day notice 

would solicit public comment on any 

change in proposed payment 

methodologies. We are expecting that 

this new prescription drug risk 

adjustment methodology would initially 

be based on the relationship of 

prescription drug utilization within the 

entire Medicare population to medical 

diagnoses, and that it would be applied 

at the individual beneficiary level. Our 

longer-term plan would be to refine the 

risk adjustment model to account for 

predictable risk based on both medical 

and drug claim data. 

Section 1860D–15(c)(1)(C) of the Act 

and § 423.329(b)(3) of this proposed rule 

authorize us to specify and require the 

submission of data from PDP sponsors 

regarding drug claims that can be linked 

at the individual level to part A and part 

B data in a form and manner similar to 

the Medicare Advantage process 

provided in § 422.310 and such other 

information as we determine necessary. 

Similarly, MA organizations that offer 

MA–PD plans must submit data 

regarding drug claims that can be linked 

at the individual level to other data that 

these organizations are required to 

submit to us. A primary requirement, 

therefore, would be claims linked to the 

Medicare beneficiary HIC#. Other 

proposed data submission elements are 

discussed in section 3(a) of this part of 

the preamble. We may also be interested 

in linking this data to the plan level and 

would then require the inclusion of the 

PDP or Medicare Advantage plan 

identifier (H#). We would use this data 

to further refine our prescription drug 

risk adjustment factors and 

methodology in order to make payments 

that accurately reflect plan risk. 

Any risk adjustment methodology we 

adopt should adequately account for 

low-income subsidy (LIS) individuals 

(and whether such individuals incur 

higher or lower-than average drug 

costs). Our risk adjustment methodology 

should provide neither an incentive nor 

a disincentive to enrolling LIS 

individuals, and we request comments 

on this concern and suggestions on how 

we might address this issue. 

Our particular concern is that a risk 

adjustment methodology, coupled with 

the statutory limitation restricting lowincome subsidy (LIS) payments for 

premiums to amounts at or below the 

average, could systematically underpay 

plans with many LIS enrollees 

(assuming LIS enrollees have higher 

costs than average enrollees). If the riskadjustor fails to fully compensate for the 

higher costs associated with LIS 

recipients, an efficient plan that attracts 

a disproportionate share of LIS eligible 

individuals would experience higher 

costs to the extent the actual costs of the 

LIS beneficiaries are greater than the 

risk-adjustment compensation. Failing 

to discourage enrollment by LIS 

beneficiaries in 2006, the plan would 

experience higher than expected costs 

in that year and presumably be driven 

to reflect these higher costs (due to 

adverse selection, not efficiency) in its 

bid for 2007. In this hypothetical, plans 

would have a disincentive to attracting 

a disproportionate share of LIS 

beneficiaries. One possible solution 

would be to assure that the initial riskadjustment system, which will be 

budget neutral across all Part D 

enrollees, does not undercompensate 

plans for enrolling LIS beneficiaries. In 

fact, to the extent that an initial riskadjustor might at the margin tend to 

overcompensate for LIS beneficiaries, 

plans would have a strong incentive to 

disproportionately attract such 

beneficiaries. Plans could attract LIS 

beneficiaries both by designing features 

that would be attractive to such 

beneficiaries but also by bidding low. 

We would appreciate comments on this 

concern and suggestions on how we 

might address this potential problem. 

c. Risk Adjustment Budget Neutrality 

In accordance with section 1860D–

15(c)(1)(A) of the Act and 

§ 423.329(b)(1), our risk adjustment 

methodology would be implemented in 

a budget-neutral manner. A requirement 

for budget neutrality assumes that there 

is a known budget. We interpret the 

statute to require that the risk 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46689 

adjustment methodology must not result 

in a change in aggregate amounts 

payable in section 1860D–15(a)(1) of the 

Act, that is, the risk adjustment 

methodology must be ‘‘budget neutral’’

to some aggregate of direct subsidy 

payments made before risk adjustment. 

(Since direct subsidy payments are 

made only to full-risk or limited risk 

plans, this budget by definition would 

not include payments to fallback plans.) 

For comparison, in the current M+C 

(now Medicare Advantage) program the 

budget for risk-adjustment budget 

neutrality is defined to be the aggregate 

government payments made to plans 

under the 100 percent demographic 

payment system. Since the healthstatus-risk-adjustment methodology 

currently results in lower aggregate 

payments than the demographic 

methodology, M+C budget neutrality 

distributes among participating plans 

the difference between total payments 

under the 2 methodologies via a factor 

that allocated the difference in the same 

proportion as the allocation of riskadjusted payments. However, there is no 

corresponding predetermined limit to 

aggregate payments in Title I, that is, to 

the aggregate government direct subsidy 

payments made before risk adjustment, 

so there is no amount to use as a basis 

for comparison in determining budget 

neutrality. 

In the M+C program, the reason for 

the difference between the total 

payments under the demographic 

methodology and total payments under 

health status risk adjustment is that the 

average health status of enrollees in 

M+C is different than the average health 

status for the program as a whole (that 

is, M+C plus original Medicare). In Part 

D, there is no equivalent to original 

Medicare since beneficiary access 

subsidized coverage through enrollment 

in private plans. The Part D risk 

adjustment system would be based on 

these enrollees. Since there is no group 

of beneficiaries outside the system like 

there is under Part C, total payments 

with and without risk adjustment are 

always equal or budget neutral. 

Therefore, we believe that risk 

adjustment as applied to Part D benefits 

should be budget neutral to the risk of 

the individuals who actually enroll 

without any additional adjustment. We 

would appreciate comments on this 

approach. 

d. Reinsurance Subsidies 

i. Allowable Reinsurance Costs 

As provided in section 1860D–15(e) of 

the Act and § 423.329(c), we would 

reduce the risk of participating in this 

new program by providing reinsurance 

subsidies. Subsidies would be limited to 

80 percent of allowable reinsurance 

costs for drug costs incurred after an 

enrollee has reached the annual out-ofpocket threshold. The annual out-ofpocket threshold would be $3,600 in 

2006. Under standard coverage this 

corresponds to total gross covered 

prescription drug costs of $5,100, and 

would be increased annually as 

provided in section 1860D–

2(b)(4)(B)(i)(II) of the Act and 1860D–

2(b)(4)(B)(ii) (with regard to rounding). 

In meeting the various actuarial tests 

required of alternative coverage, there 

could be instances where a sponsor 

wanting to provide basic alternative 

coverage would have to enhance plan 

benefits in order to meet the test of 

equal total actuarial value relative to 

defined standard coverage. This could 

occur with the use of a tiered co-pay 

benefit structure that could shift 

utilization to a cheaper set of drugs, 

thus allowing plans to lower cost 

sharing to achieve the same total dollar 

value as defined standard coverage. In 

these instances, since cost sharing is 

reduced relative to defined standard 

coverage, the out-of-pocket threshold 

would be associated with a higher total 

drug costs than the $5,100 under 

standard coverage in 2006. For sponsors 

offering enhanced alternative coverage, 

the out-of-pocket threshold would also 

be associated with higher total drug 

spending. In this instance, however, it 

would be due to fact that the plan’s 

supplemental benefits would be 

displacing part of the cost sharing that 

enrollees would otherwise have 

incurred. 

Allowable reinsurance costs are a 

subset of gross covered prescription 

drug costs. Gross covered prescription 

drug costs are those costs incurred 

under the plan, excluding 

administrative costs, but including costs 

related to the dispensing of covered Part 

D drugs during the year and costs 

relating to the deductible. These costs 

are determined whether paid by the 

individual or under the plan, and 

regardless of whether the coverage 

under the plan exceeds basic 

prescription drug coverage. Allowable 

reinsurance costs, on the other hand, are 

the subset of these costs that are 

attributable solely to basic or standard 

benefits and that are actually paid by 

the sponsor or organization or by (or on 

behalf of) an enrollee under the plan. 

Actually paid—means that these costs 

must be net of any discounts, 

chargebacks, and average percentage 

rebates, and would exclude any 

amounts not actually incurred by the 

sponsor. The reinsurance payments are 

then calculated by determining the 

portion of allowable reinsurance costs 

that are incurred after the enrollee has 

reached the out-of-pocket threshold 

($3,600 out of pocket in 2006). The 

reinsurance subsidy would provide 80 

percent of such excess amount. 

ii. Payment of Reinsurance Subsidy 

Since allowable reinsurance costs can 

only be fully known after all costs have 

been incurred for the payment year, we 

would propose to make payments on an 

incurred basis to assist PDP sponsors 

and MA organizations with cash flow. 

Under § 423.329(c)(2)(i), we would 

provide for payments of reinsurance 

amounts based on plan actual 

reinsurance-eligible allowable costs 

with a one-month lag period. In other 

words, no payments would be made 

until enrollees reached the true out-ofpocket threshold. This would require 

timely submission of drug claim data. In 

this approach rebates would be 

recognized in the month after they were 

received and would be offset against the 

previous month’s actual costs. 

Alternatively, we could consider 

payments of reinsurance amounts on a 

monthly prospective basis based on the 

reinsurance assumptions submitted and 

negotiated with each plan’s approved 

bid. We would take these assumptions 

into account in developing either a 

plan-specific or program-wide 

approach. We note that any programwide approach involving some kind of 

average of the amounts included in the 

bids would have to adjust for the fact 

that plans providing enhanced 

alternative benefits would incur lower 

reinsurance costs. We are also aware 

that allowable reinsurance costs would 

be predominantly incurred in the latter 

parts of the coverage year and are 

considering the most appropriate 

methodology for distributing interim 

payments. One possible approach 

would require the submission of a 

schedule of the estimated timing of 

incurred allowable reinsurance costs 

along with the bid. For example, we 

might take schedules from each plan or 

we could propose an incremental 

schedule (X% of the total in January, 

Y% in February, etc.). We are aware that 

the prospective payment of estimated 

costs would create an incentive to 

overstate reinsurance, however, and are 

interested in ensuring that payments are 

not excessive. Since equal payments 

would be most compatible with our 

systems, in the first two years of the 

program (and for the first two years of 

new plans thereafter) we could also 

consider another approach paying 1⁄12th 

of the net present value of estimated 

allowable reinsurance costs in each 

month of the coverage year. The net 

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present value would be calculated on 

the basis of all estimated reinsurance 

payments due at the end of the year and 

discounted by the most recently 

available rate for one-year Treasury 

bills. We would welcome comments on 

these approaches and on the appropriate 

treatment of interest in such a system. 

For subsequent years of the program, 

we could consider an approach of 

paying 1⁄12th of the two-year prior year’s 

actual expenses. Such an approach 

would need to be trended forward by an 

appropriate index to account for 

expected growth in plan costs. In other 

words, in 2008 the interim payments 

would be based on actual reconciled 

reinsurance payments for 2006 trended 

forward by an estimated two-year 

growth factor. Regardless of which 

process we used for making reinsurance 

payments, as discussed below, if, at the 

end of the year, the data demonstrates 

the sponsor was overpaid through the 

interim payments—or if there is 

insufficient evidence to support the 

reinsurance payments claimed—we 

would recover the overpayments either 

through a lump sum recovery or by 

reducing future payments during the 

coverage year. Similarly, if the data 

demonstrates that the sponsor was 

underpaid, we would pay the sponsor. 

iii. Adjustments to Reflect the True Outof-Pocket Threshold 

The statute provides that the 

reinsurance subsidy would be paid only 

for the plan’s share of individual 

expenses in excess of an enrollee’s true 

out-of-pocket (TrOOP) threshold. As 

indicated above, if the PDP sponsor 

offers enhanced alternative coverage or 

an MA–PD plan offers benefits beyond 

basic coverage as part of its 

supplemental benefits, the plan’s 

spending for these benefits would not 

count toward the TrOOP threshold. 

Since benefits beyond basic coverage 

reduce cost sharing that would 

otherwise be incurred, they shift the 

effective prescription drug catastrophic 

limit beyond the associated total 

spending under the standard benefit 

($5,100 in 2006) and raise the effective 

reinsurance attachment point at the 

same time. 

In addition, to the extent that plan 

cost sharing is paid or reimbursed by 

secondary insurance coverage or 

otherwise, that cost sharing does not 

count toward the out-of-pocket 

threshold. Beneficiaries are required to 

report the existence of secondary 

coverage or other types of coverage we 

identify and plans must identify these 

payments and ensure that true out-ofpocket spending is accounted for 

accurately in claims processing. This is 

more fully discussed in subpart C and 

subpart J of this preamble. 

iv. Adjustments for the Insurance Effect 

of Supplemental Coverage 

Supplemental benefits increase the 

level of total drug spending after which 

reinsurance payments begin 

(reinsurance attachment point). 

Assuming 2 identical groups of 

enrollees with respect to utilization, one 

enrolled in enhanced alternative 

coverage and one in defined standard 

coverage, the total allowable 

reinsurance costs for the group with 

standard coverage would be greater than 

for the group with enhanced alternative 

coverage. Thus, one might hold that the 

differences in benefit packages are 

accounted for without the need for 

further adjustment. If one would 

examine average total spending for both 

groups, however, one would find that 

the average spending under enhanced 

alternative coverage would be greater 

than the average under defined standard 

coverage because of the impact of the 

insurance effect (or ‘‘moral hazard’’, that 

is, the tendency of increased coverage 

resulting in increased utilization due to 

decreased financial stake in the costs 

associated with utilization). All other 

things being equal, this higher total 

spending would result in higher 

allowable reinsurance costs than would 

otherwise occur if the total spending 

under enhanced alternative coverage 

were comparable to that under standard 

coverage. 

We are therefore proposing (in the 

definition of allowable reinsurance 

costs) to adjust allowable reinsurance 

costs to reflect the impact of this 

induced utilization. We would make 

this adjustment to comply with the 

requirement in section 1860D–15(b)(2) 

of the Act that in no case shall the 

allowable reinsurance costs exceed the 

costs ‘‘that would have been paid under 

the plan if the * * * coverage * * * 

were standard prescription drug 

coverage’’. We are looking for comments 

on whether this adjustment should be 

made and how best to adjust the 

experience of PDPs with enhanced 

alternative coverage or MA–PD plans 

offering supplemental coverage to 

account for the insurance effect. 

v. Reinsurance Subsidies to Private FeeFor-Service Plans 

As provided under section 1860D–

21(d)(4) of the Act and proposed in 

§ 423.329(c)(3), we would base 

reinsurance payments for PFFS plans on 

an alternative methodology. Rather than 

negotiating reinsurance assumptions 

submitted with the PFFS plan bid or 

otherwise adjusting for potential price 

level differences between PFFS and 

other MA organization bids, we would 

estimate the amount of reinsurance 

payments that would be payable if the 

plan were an MA–PD plan described in 

section 1851(a)(2)(A)(i) of the Act. In 

doing so we would take into account the 

average reinsurance payments made 

under § 423.329(c)(2) for basic benefits 

for populations of similar risk under 

such MA–PD plans. Estimated payments 

would not be subject to any 

reconciliation process to compare the 

amounts paid to the actual allowable 

reinsurance expenses, and would not 

allow for payment recoveries in the 

event that actual allowable reinsurance 

costs exceed payments. 

6. Low-Income Cost-Sharing Subsidy 

Interim Payments 

As provided under section 1860D–14 

of the Act and in § 423.780 of our 

proposed regulations, CMS will provide 

additional assistance for certain lowincome beneficiaries in the form of 

premium, deductible and cost-sharing 

subsidies. Since actual expenses 

incurred by these low-income 

beneficiaries can only be fully known 

after all costs have been incurred for the 

payment year, we would propose to 

make estimated payments on an interim 

basis to assist PDP sponsors and MA 

organizations with cash flow. Under 

§ 423.329(d)(2)(i), we would provide for 

interim payments of low-income 

deductible and cost-sharing amounts on 

a monthly prospective basis based on 

estimates of low-income cost sharing 

submitted and negotiated with each 

plan’s approved bid. Like the possible 

option of reinsurance subsidy interim 

payments discussed above, a decision 

on whether these assumptions would be 

taken into account in developing a planspecific or program-wide approach has 

yet to be determined. 

We are aware that low-income cost 

sharing would not necessarily be 

incurred evenly throughout the coverage 

year and are considering the most 

appropriate methodology for 

distributing interim payments. Since 

equal payments would be most 

compatible with our systems, in the first 

two years of the program (and for the 

first two years of new plans thereafter) 

we are considering an approach paying 

1⁄12th of the net present value of 

estimated low-income cost sharing in 

each month of the coverage year. The 

net present value would be calculated 

on the basis of all estimated costs due 

at the end of the year and discounted by 

the most recently available rate for oneyear Treasury bills. An alternative 

approach would require the submission 

of a schedule of the estimated timing of 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46691 

incurred low-income cost sharing along 

with the plan bid. For example, we 

might take schedules from each plan or 

we could propose an incremental 

schedule (X% of the total in January, 

Y% in February, etc.). We are aware that 

the prospective payment of estimated 

costs creates an incentive to overstate 

low-income cost sharing, and are 

interested in ensuring that our interim 

payments are not excessive. We would 

welcome comments on these 

approaches and on the appropriate 

treatment of interest in any 

methodology. For subsequent years of 

the program, we are considering an 

approach of paying 1⁄12th of the two-year 

prior year’s actual expenses. Such an 

approach would need to be trended 

forward by an appropriate index to 

account for expected growth in plan 

costs. In other words, in 2008 the 

interim payments would be based on 

actual reconciled low-income cost 

sharing subsidy payments for 2006 

trended forward by an estimated twoyear growth factor. Again, any 

reconciliation at the end of the year 

would need to be based on the sponsor 

providing adequate information in order 

to determine the subsidy amounts for 

the year. If the sponsor could not 

provide such information, interim 

payments would be recovered. In 

addition, the low-income payments 

would be subject to the same inspection 

and audit provisions applying to the 

other payments made under section 

1860D–15 of the Act. 

7. Risk Sharing Arrangements 

a. Risk Sharing Methodology and the 

Target Amount 

As provided under section 1860D–

15(e) of the Act and proposed in 

§ 423.336, we would establish risk 

corridors. Risk-sharing payments would 

limit exposure to unexpected expenses 

not already included in the reinsurance 

subsidy or taken into account through 

risk adjustment. These would be 

structured as symmetrical risk corridors 

that are agreements to share a portion of 

the losses or profits resulting from 

expenses for basic benefits either above 

or below expected levels, respectively. 

However, plans would always be at full 

financial risk for all spending on 

supplemental drug coverage. In 

addition, in accordance with section 

1860D–21(d)(5) of the Act and section 

1860D–15(g) of the Act, the risk sharing 

provisions are not available to PFFS and 

fallback plans. 

The expected level of expenses for 

basic benefits included in the 

standardized bid is known as the ‘‘target 

amount’’. The target amount for any 

plan would be equal to the total amount 

of direct subsidy payments from us, and 

premium payments from enrollees to 

that plan for the year based upon the 

risk-adjusted standardized bid amount, 

less the administrative expenses and 

return on investment assumed in the 

standardized bid. Since the 

standardized bid is the portion of the 

accepted bid amount attributable to 

basic prescription drug coverage, the 

target amount can be thought of as 

‘‘prepayments’’ of prescription drug 

expense for basic benefits. The 

standardized bid has also taken into 

account (and excludes) any utilization 

effects of offering supplemental 

coverage. The objective of risk sharing 

would be to compare total actual 

incurred prescription drug expenses to 

the prepayments, to compute the 

difference, and to reimburse or recover 

a portion of the difference. 

In § 423.336(a)(2)(A), we would 

establish risk corridors, defined as 

specified risk percentages above and 

below the target amount. For instance, 

in § 423.336(a)(2)(ii), for 2006 and 2007, 

the first risk corridor is defined as 2.5 

percent above the target amount and the 

second as 5 percent above the target 

amount. This means that, for 2006 and 

2007, the first risk corridor is between 

100 percent and 102.5 percent of the 

target amount and the second risk 

corridor is between 102.5 percent and 

105 percent of the target amount. A 

third risk corridor is above 105 percent 

of the target amount. 

The term, symmetrical risk 

corridors—means that the same size 

corridors exist below the target amount 

as above it. The actual upper or lower 

limits of each corridor equal the target 

amount plus or minus the product of the 

risk percentage times the target amount, 

as illustrated in Table G–1. Since these 

risk corridors would be symmetrical, 

plans with adjusted allowable costs 

below the 1st threshold lower limit 

would have to share the savings with 

the government. 

b. Allowable Risk Corridor Costs 

The costs applicable to the 

computation of risk sharing are known 

as allowable risk corridor costs. These 

costs are defined in section 1860D–

15(e)(1)(B) of the Act and proposed in 

§ 423.308 as the part of costs for covered 

Part D drugs that are only attributable to 

basic benefits. Allowable risk corridor 

costs cannot include costs attributable 

to benefits outside the basic benefit. We 

would interpret this as both the actual 

differences in benefits structure and the 

insurance effect of supplemental 

coverage on basic coverage. In section 

1860D–15(e)(1)(B) of the Act, reference 

is made to section 1860D–11(c)(2) of the 

Act that provides for a utilization 

adjustment using as its reference point 

standard prescription drug coverage. We 

are interpreting this to mean the 

statutorily defined standard prescription 

drug coverage described in Subpart C. 

Also, allowable risk corridor costs must 

actually be paid by the sponsor or 

organization under the plan and must be 

net of any chargebacks, discounts or 

average percentage rebates. The 

allowable risk corridor costs also do not 

include any administrative expenses of 

the sponsor or organization. 

(Administrative expenses would not 

include costs directly related to 

dispensing of Part D drugs during the 

year.) Note that unlike allowable 

reinsurance costs, allowable risk 

corridor costs do not include any 

amount paid by the enrollee. In 

§ 423.336(a)(1), we propose that 

allowable risk corridor costs must be 

adjusted in accordance with section 

1860D–15(e)(1)(A) of the Act, by 

subtracting expenses reimbursed 

through other separate payments. Thus, 

reinsurance payments made under 

§ 423.329(c)(2) and the non-premium 

low-income subsidy payments made 

under § 423.782 [in Subpart P] of these 

proposed regulations to the sponsor of 

the plan for the year must be subtracted. 

The PDP sponsor or MA organization 

would already have received 

compensation for these costs, and thus 

they do not fall within the construct of 

risk corridors that are directed at 

limiting exposure to unexpected 

expenses. 

If adjusted allowable risk corridor 

costs exceed the prepayments by a 

certain amount, we would reimburse a 

percentage of the difference to help 

plans with a portion of the 

unanticipated expenses associated with 

their drug coverage. On the other hand, 

if prepayments exceed adjusted 

allowable risk corridor costs, we would 

reduce future payments or otherwise 

recover a percentage of the difference to 

reduce the impact on the Trust Fund of 

excessive bids. 

46692 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

TABLE G–1.lILLUSTRATION OF RISK SHARING ARRANGEMENTS FOR HYPOTHETICAL PLAN

A. Assumptions in bid Actual costs for basic benefit 

PMPM Totals PMPM Totals 

Enrollees .............................................................................. ........................ 10,000 ........................ ........................ ........................

(Subsidy-eligible) ........................ 0 ........................ ........................ ........................

Avg. Payment ...................................................................... 114.00 ........................ ........................ ........................ ........................

Premium .............................................................................. 30.60 ........................ ........................ ........................ ........................

Avg. Direct Subsidy ............................................................. 83.40 ........................ ........................ ........................ ........................

Admin .................................................................................. 17.00 ........................ ........................ ........................ ........................

Est. Allowable Cost ............................................................. 97.00 970,000 ........................ 100.00 1,000,000 

Reinsurance Cost ................................................................ 0.00 ........................ ........................ ........................ ........................

Total Premiums ................................................................... ........................ 306,000 ........................ ........................ ........................

Total Direct Subsidy ............................................................ ........................ 834,000 ........................ ........................ ........................

Less Total Admin ................................................................ ........................ (170,000 ) ........................ ........................ ........................

Target Amount ..................................................................... ........................ 970,000 ........................ ........................ ........................

B. Risk corridor limits 

Risk 

Corridor limit 

% 

C. Threshold Risk sharing 

% 

Allowable 

costs minus 

threshold 

Payment 

change 

2nd upper limit ................................................................................. .050 1,018,500 80% ........................ ............

1st upper limit ................................................................................... .025 994,250 50% 5,750 +2,875

Target Amount ................................................................................. .000 970,000 0% ........................ ............

1st lower limit ................................................................................... (.025 ) 945,750 (50%) ........................ ............

2nd lower limit .................................................................................. (.050 ) 921,500 (80%) ........................ ............

In Table G–1, a hypothetical plan 

with average payments of $114 permember-per-month (PMPM), based on 

expected prescription drug costs of $97 

PMPM, actually incurs costs equal to 

$100 PMPM. In this simplified example 

there are no reinsurance or low-income 

subsidies. The actual incurred costs are 

compared to the ‘‘prepayment’’ included 

in the risk-adjusted standardized bid (in 

this case the target amount of $970,000) 

by looking at the risk corridors in which 

they fall. The risk corridors have been 

calculated based on the target amount 

plus or minus the risk percentages 

associated with each risk corridor limit. 

For instance the 1st upper limit is 

defined as the target amount ($970,000) 

plus 2.5 percent of the target amount 

($24,250), so the 1st upper limit is 

calculated to be $994,250. The actual 

allowable costs of $1,000,000 fall 

between the 1st upper limit and the 2nd 

upper limit, so the costs eligible for risk 

sharing is the difference between the 

allowable costs ($1,000,000) and the 1st 

threshold upper limit ($994,250), or 

$5,750. Since the amount of risk sharing 

in this corridor is set at 50 percent, the 

actual change in payment due to risk 

sharing is 50 percent of $5,750, or an 

additional $2,875. 

As mentioned above, in order to 

arrive at a value for actual risk corridor 

costs that can be appropriately 

compared to the target amount, 

allowable risk corridor costs would be 

adjusted to remove expenses reimbursed 

through total reinsurance payments and 

non-premium low-income subsidy 

payments. The statute indicates that 

allowable risk corridor costs should be 

reduced by reinsurance payments and 

by the subsidy payments for low-income 

individuals. The subsidy payments for 

low-income individuals under section 

1860D–14 of the Act include subsidies 

for both premium and for cost sharing. 

We are proposing to interpret ‘‘the total 

subsidy payments made under section 

1860D–14’’ under section 

1860D15(e)(1)(A)(ii)(II) of the Act in the 

context of ‘‘costs incurred by the 

sponsor or organization’’ in the 

definition of allowable risk corridor 

costs. Since premiums are not a cost, we 

propose to limit our interpretation of 

‘‘the total subsidy payments’’ to 

payments related to cost sharing. 

In proposing this interpretation, we 

note that when adjusted allowable risk 

corridor costs are calculated by 

subtracting only non-premium 

subsidies, as we are proposing to do, the 

results are the same as for an identical 

plan without any subsidy-eligible 

individuals. However, if the adjusted 

allowable risk corridor costs are 

calculated by subtracting total lowincome subsidies (that is, for premiums, 

cost sharing and coverage above the 

initial coverage limit), the risk sharing 

calculation results in lower recouped 

costs on the part of the plan and a 

different outcome from that in a plan 

without subsidy-eligible individuals. 

Since there should be no difference in 

these amounts, the calculation 

subtracting only non-premium subsidies 

must be the appropriate one. We believe 

that to do otherwise would result in a 

major disincentive for PDP and MA–PD 

plans to enroll individuals eligible for 

the low-income subsidies, and we do 

not believe that this would be the 

logical outcome that was intended by 

the statute. We would welcome 

comments on our interpretation. 

c. Changes in Risk Corridor Limits and 

Percentages (§ 423.336(a) and 

(§ 423.336(b)) 

The risk corridors and the percentage 

of risk to be shared would be set at 

certain levels for 2006 and 2007 with 

flexibility for us to increase the risk 

sharing percentage if bids, and therefore 

target amounts, are off during the early 

years of the program by a certain 

percentage set by the statute in section 

1860D–15(e)(2)(B)(iii) of the Act. During 

2006 and 2007, plans would be at full 

risk for adjusted allowable risk corridor 

costs within 2.5 percent above or below 

the target. Plans with adjusted allowable 

costs above 102.5 percent of the target 

would receive increased payments. If 

their costs were between 102.5 percent 

of the target (1st threshold upper limit) 

and at or below 105 percent of the target 

(2nd threshold upper limit), they would 

be at risk for 25 percent of the increased 

amount; that is, their additional 

payments would equal 75 percent of 

adjusted allowable costs for spending in 

this range. If their costs were above 105 

percent of the target they would be at 

risk for 25 percent of the costs between 

the first and second threshold upper 

limits and 20 percent of the costs above 

that amount. That is, their additional 

payments would equal 75 percent of the 

difference between the first and second 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46693 

threshold upper limits and 80 percent of 

the adjusted allowable costs over the 

second threshold upper limit. 

Conversely, if plan spending fell below 

the 97.5 percent of target, plans would 

share the savings with the government. 

They would have to refund 75 percent 

of the savings for any costs less than 

97.5 percent of the target amount but at 

or above 95 percent of the target level, 

and 80 percent of any savings below 95 

percent of the target. 

In § 423.336(b)(2)(iii) the program will 

cover a higher percentage of the risk for 

costs between the 1st and 2nd upper 

threshold limits would apply in 2006 

and 2007 if we were to determine that 

(1) 60 percent of prescription drug plans 

and MA–PD plans have adjusted 

allowable costs that are more than the 

first threshold upper limit for the year; 

and (2) these plans represent at least 60 

percent of beneficiaries enrolled in such 

plans. In this case, additional payments 

to plans would increase from 75 percent 

to 90 percent of adjusted allowable costs 

between the first and second upper 

threshold limits. Conversely, there 

would be no change in savings shared 

with the government if costs fell below 

97.5 percent of the target level. 

For 2008–2011, the risk corridors and 

the percentage of risk to be shared 

would be modified so that PDP and 

MA–PD sponsors would assume an 

increased level of risk. Plans would be 

at full risk for drug spending within 5 

percent above or below the target level. 

Plans would be at risk for 50 percent of 

spending exceeding 105 percent and at 

or below 110 percent of the target level. 

Additionally, they would be at risk for 

20 percent of any spending exceeding 

110 percent of the target level. Payments 

would be increased by 50 percent of 

adjusted allowable costs exceeding the 

first threshold upper limit and up to the 

second threshold upper limit and 80 

percent for any additional costs 

exceeding the second threshold upper 

limit. Conversely, if plan spending fell 

below the target, plans would share the 

savings with the government. They 

would have to refund 50 percent of the 

savings if costs fell between 95 percent 

and 90 percent of the target level, and 

80 percent of any amounts below 90 

percent of the target. 

For years after 2011, we would 

establish the risk threshold percentage 

as deemed necessary to create 

incentives for plans to enter the market. 

The only required parameters would be 

that the first threshold risk percentage 

could not be less than 5 percent and the 

second threshold risk percentage could 

not be less than 10 percent of the target 

amount. 

d. Risk Sharing Payments or Recoveries 

As proposed in § 423.336(c), we will 

make payments or recover savings after 

a coverage year after obtaining all of the 

information necessary to determine the 

amount of payment. In § 423.336(c)(1) 

we are proposing that within six months 

of the end of a coverage year, the PDP 

sponsor or MA organization offering a 

MA–PD plan would provide us with the 

information necessary to calculate the 

risk sharing as discussed in section 3(a) 

of this part of the preamble. This would 

include prior final reconciliation of 

reinsurance and low-income subsidies 

since allowable risk corridor costs must 

be reduced by the total reinsurance 

payments and non-premium lowincome subsidies for the year. Once this 

information has been received, under 

§ 423.336(c)(2) we would either make 

lump-sum payments or adjust monthly 

payments in the following payment year 

based on the relationship of the plan’s 

adjusted allowable risk corridor costs to 

the predetermined risk corridor 

thresholds in the coverage year. We 

would not make payment if we did not 

receive the necessary information from 

the PDP sponsor or MA organization. In 

addition, as stated, below, we are 

considering certain corrective actions to 

recoup risk-sharing payments, in the 

event of lack of information. 

8. Retroactive Adjustments and 

Reconciliation (§ 423.343) 

In § 423.343(a) and § 423.343(b) we 

propose to make retroactive adjustments 

to the aggregate monthly payments to a 

PDP or MA–PD for any difference 

between the actual number and 

characteristics, including health status, 

of enrollees and the number and 

characteristics on which we had based 

the organization’s advance monthly 

payments. Reconciliation of actual 

payments made would be done as 

needed. In order for total payments to be 

properly accounted for in all steps, the 

order of reconciliation processes would 

be first, enrollment; second, risk 

adjustment; third, low-income cost 

sharing; fourth, reinsurance; and finally, 

risk sharing. 

Under § 423.343(c) and (d), we would 

provide for a final reconciliation process 

to compare the payments for 

reinsurance subsidies and low-income 

cost-sharing subsidies made during the 

coverage year to actual allowable 

reinsurance expenses and low-income 

cost sharing and to make additional 

payments or payment recoveries 

accordingly. The form and manner in 

which actual allowable reinsurance 

costs would be submitted for 

reconciliation has yet to be determined. 

We are proposing that PDP sponsors and 

MA organizations offering a MA–PD 

plan would provide us with the 

information necessary to finalize 

reinsurance payments as discussed in 

section 3(a) of this part of the preamble 

within six months of the end of a 

coverage year. Once complete data were 

received for a coverage year, we would 

compare 80 percent of the allowable 

reinsurance costs attributable to that 

portion of gross covered prescription 

drug costs incurred in the coverage year 

after an individual has incurred costs 

that exceed the annual out-of-pocket 

threshold to the monthly reinsurance 

payments and compute the difference. 

We would then either make lump-sum 

payments or adjust monthly payments 

throughout the remainder of the 

payment year following the coverage 

year to pay out or recover this 

difference. 

If an entity did not provide us with 

sufficient documentation for us to 

reconcile payments, we would reconcile 

by recovering payments for which the 

entity lacked documentation. For 

example, if CMS makes interim 

payments during the year for the lowincome subsidy, but at the end of the 

year, the PDP sponsor or MA 

organization cannot provide 

documentation demonstrating the 

amounts of beneficiary cost-sharing, the 

reconciliation process would involve 

recouping the interim payments for 

such subsidy. The need to provide 

sufficient documentation to support 

final payment determinations applies 

even in the event of a change of 

ownership. Thus, new owners of a PDP 

sponsor or MA organization would be 

responsible for obtaining the 

documentation necessary to support 

payment, and the reconciliation process 

would be used to recover any payments 

for which the new owner lacked 

documentation. We believe this 

authority stems from the direction of the 

Congress that each PDP sponsor and 

MA–PD organization ‘‘provide the 

Secretary with such information as the 

Secretary determines is necessary to 

carry out this section,’’ (section 1860D–

15(f)(1)(A) of the Act) and that 

‘‘payments under this section * * * are 

conditioned upon the furnishing to the 

Secretary in a form and manner 

specified by the Secretary, of such 

information as may be required to carry 

out this section,’’ (section 1860D–

15(d)(2)(A)of the Act)). 

We also request comment on the 

remedy that should be imposed in the 

event a PDP sponsor or MA organization 

offering an MA–PD plan fails to provide 

us with adequate information regarding 

risk-sharing arrangements. In the case of 

46694 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

risk corridor costs, the organization or 

sponsor may owe the government 

money if, for example, prepayments 

exceed adjusted allowable risk corridor 

costs. In this case, failure to provide 

information could result in a shortfall to 

the government, since the entity would 

not have the information necessary for 

the Secretary to establish the proper 

amount owed. Although we have not 

proposed regulations on this issue, some 

of the remedies we are considering for 

the final rule are: (1) Assume that the 

sponsor’s or organization’s adjusted 

allowable risk corridor costs are 50% of 

the target amount; (2) assume that the 

sponsor’s or organization’s adjusted 

allowable risk corridor costs are the 

same percentage of the target amount as 

the mean (or median) percentage 

achieved by all PDPs or MA–PDs whose 

costs are lower than the target amount; 

(3) assume that the sponsor’s or 

organization’s adjusted allowable risk 

corridor costs are the same percentage of 

the target amount as the mean (or 

median) percentage achieved by all 

PDPs or MA–PDs (whose costs are both 

higher and lower than the target 

amount). We use a 50% threshold for 

option (a) because we believe this 

threshold would constitute a lower 

limit; and it would be unlikely for any 

organization or sponsor to have costs 

lower than 50% of their total payments. 

We request comments on these options, 

as well as proposals of other options 

that would allow us to recoup risksharing payments in the event a sponsor 

fails to provide us the adequate 

information necessary to determine 

appropriate risk-sharing payments. 

9. Reopening (423.346) 

Finally, we believe that the provision 

in 1860D–15(f)(1) of the Act providing 

the Secretary with the right to inspect 

and audit any books and records of a 

PDP sponsor or MA organization 

regarding costs provided to the 

Secretary would not be meaningful, if 

upon finding mistakes pursuant to such 

audits, the Secretary were not able to 

reopen final determinations made on 

payment. In addition, we believe that 

sections 1870 and 1871 of the Act 

provide us with the authority to reopen 

final determinations of payment to PDP 

sponsors and MA organizations. 

Therefore, we propose in this rule to 

include reopening provisions patterned 

after those used in Medicare claims 

reopening, found in Part 405 of the 

regulations, subparts G and H. Including 

reopening provisions would allow CMS 

to ensure that the discovery of any 

overpayments or underpayments could 

be rectified. Under our proposed 

provisions, reopening could occur for 

any reason within one year of the final 

determination of payment, within four 

years for good cause, or at any time 

when there is fraud or similar fault. 

CMS could initiate a reopening on its 

own, or a sponsor or organization could 

request reopening, but such requests 

would be at the discretion of CMS. The 

Supreme Court has determined that in 

the context of reopening cost reports, a 

fiscal intermediary’s decision not to 

reopen a final determination is not 

subject to judicial review, see Your 

Home Visiting Nurse Services, Inc. v. 

Shalala, 525 U.S. 449, 456 (1999), and 

we believe the same reasoning would 

apply in the context of Part D. 

Good cause would be interpreted in 

the same manner as in Part 405 (see 

Medicare Carriers Manual section 

12100). Thus, good cause would exist, if 

(a) new and material evidence, not 

readily available at the time of the 

determination, is furnished; (b) There is 

an error on the face of the evidence on 

which such determination or decision is 

based; or, (c) There is a clerical error in 

determination. In order to meet the 

standard under (a) the evidence could 

not have been available at the time the 

determination was made. A clerical 

error constitutes such errors as 

computational mistakes or inaccurate 

coding. An error on the face of the 

evidence exists if it is clear based upon 

the evidence that was before CMS when 

it reached its initial determination that 

the initial determination is erroneous. 

Thus, for example, good cause would 

exist in cases where it is clear from the 

files that rebates or administrative costs 

were not appropriately accounted for, 

where computation errors had been 

made, where a sponsor or organization 

included non-Part D drugs in their 

calculations, where individuals not 

enrolled in the plan were included in 

calculating payment, and in similar 

situations. Reopening could occur at 

any time in cases of fraud or similar 

fault, such as in cases where the sponsor 

or organization knew or should have 

known that they were claiming 

erroneous Medicare payment amounts. 

I. Organization Compliance With State 

Law and Preemption by Federal Law 

1. Overview 

In our proposed regulation at 

§ 423.401 we would implement the 

requirements of section 1860D–12(a) of 

the Act that address licensing, the 

assumption of financial risk for 

unsubsidized coverage and solvency 

requirements for unlicensed sponsors or 

sponsors who are not licensed in all 

States in the region in which it wants to 

offer a PDP. The provisions of this 

section specify that a sponsor of a PDP 

must be organized and licensed under 

State law as a risk bearing entity eligible 

to offer health insurance or health 

benefits coverage in each State that it 

offers a PDP. However, as required by 

section 1860D–12(a)(1) of the Act, we 

have provided in our proposed 

regulations at § 423.410 for a waiver of 

the State licensure requirement for the 

reasons and under the conditions set 

forth under section 1860D–12(c) of the 

Act. In addition, under the requirements 

of section 1860D–12(a) of the Act, to the 

extent an entity is at risk, it must 

assume financial risk on a prospective 

basis for covered benefits that are not 

covered by reinsurance. The PDP 

sponsor can obtain insurance or make 

other arrangements for the cost of 

coverage provided to enrollees to the 

extent that the sponsor is at risk for 

providing the coverage. 

In § 423.420, we specify that sponsors 

that have been granted a waiver by us 

or those operating in States that do not 

have licensing requirements for PDPs 

must maintain reasonable financial 

solvency and capital adequacy. We 

intend to develop these reasonable 

standards through guidance, after 

consulting with the National 

Association of Insurance Commissioners 

(NAIC), as required by statute. The 

guidance would be issued by January 1, 

2005. Although we believe these 

standards would be interpretive 

guidance, we are interested in receiving 

comments on the issue. In addition, as 

noted in § 423.410, we would establish 

an application and certification process 

for waiver applicants. 

We expect that the development of 

solvency standards for purposes of PDP 

sponsors under Part D will be less 

complex than the situation presented to 

us by the development of solvency 

standards for provider-sponsored 

organizations (PSOs) under the 

Balanced Budget Act of 1997. (PDP 

sponsors in contrast to PSOs are fairly 

straightforward insurance risk models 

whereas the PSO situation involved 

having to consider such issues as the 

role that physical plant assets played in 

establishing solvency standards.) 

Although drug only plans are not a 

common product in the insurance 

market today, there are other single 

lines of business plans licensed by 

States (for example, dental plans, 

behavioral mental health plans) that can 

provide some possible models. 

We also have experience from 

determining solvency standards for 

federally qualified health maintenance 

organizations under Title XIII of the 

Public Health Service Act and 

competitive medical plans under 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46695 

Section 1876 of the Social Security Act. 

In addition, we are aware that the 

solvency standards have been applied to 

at least two drug-only plans (Medica 

and PacifiCare) and believe that these 

could also provide a model for the 

licensing of the entities. However, we 

believe that these two products are lines 

of business operated under a current 

insurance license, and therefore, our 

greatest concern would be how to go 

about developing standards for 

organizations that may have experience 

managing a drug benefit but have not 

had any experience as risk bearing 

entities and/or are not structured as 

risk-bearing entities. We would 

welcome comments regarding this issue. 

Factors which may be considered in 

discussions with the NAIC include the 

ability of an organization to maintain 

assets greater than total unsubordinated 

liabilities and the ability of the 

organization to generate a surplus on a 

consistent basis as demonstrated by 

history or an acceptable financial plan. 

2. Waiver To Expand Choice 

a. Overview 

In our regulations at § 423.410 we 

would implement the provisions of 

section 1860D–12(c) of the Act that 

address waiver of certain requirements 

to expand choice. Generally, section 

1860D–12(c) of the Act specifies that in 

order to expand access to prescription 

drug plans, we may waive the State 

licensure requirement under 

circumstances similar to those 

permitted under Part C for providersponsored organizations, as described in 

section 1855(a) of the Act. However, we 

note that the States would be expressly 

preempted from regulating in all areas 

except licensure and solvency (see 

section 1860D–12(g) of the Act and 

§ 423.440). Additional requirements 

referenced under section 1855(a) of the 

Act such as State consumer protection 

and quality standards, do not apply to 

and are not incorporated in these 

regulations 

b. Waiver When State Imposes Certain 

More Stringent Standards 

Section 1860D–12(c) of the Act 

provides that a prospective PDP sponsor 

may request a waiver from State 

licensure requirements from us under 

the waiver provisions at section 

1855(a)(2)(B), 1855(a)(2)(C) and 

1855(a)(2)(D). Because the Congress 

directed us to use many of the same 

grounds for approving a waiver as used 

pursuant to § 1855(a)(2)(B), 

§ 1855(a)(2)(C), and § 1855(a)(2)(D), We 

have adopted the regulatory provisions 

in proposed § 422.372. Thus, our 

regulation at § 423.410(c)(1) would use 

the same standard used in 

§ 422.372(b)(1) and allows a waiver 

when the State has failed to complete 

action on a licensing application within 

90 days of receipt of a substantially 

complete application. 

c. Distinct Waivers 

Proposed § 423.410(c)(2) uses the 

same standards as used in 

§ 422.372(b)(2) for determining when a 

State has denied an application based 

on discriminatory treatment. The 

regulation provides that the following 

activities may also constitute a basis for 

us to waive State licensure 

requirements: (1) The State denies an 

application based on requirements that 

are not generally applicable to PDP 

sponsors or other entities engaged in a 

similar business or (2) the State requires 

as a condition of licensure that the PDP 

sponsor offer any product or plan other 

than a prescription drug plan. 

Section 423.410(c)(3) of our proposed 

regulations, addresses denial of an 

application based on application of 

different solvency requirements—when 

a State imposes solvency requirements 

that are more stringent than the 

solvency standards that would be 

established by us under § 423.420. In 

addition, a waiver may be granted if the 

State imposes procedures or standards 

relating to solvency that are different 

from the solvency requirements 

established by us. CMS will utilize a 

waiver application process similar to 

that used under its federally waivered 

PSO program in which the waiver 

applicant will be required to submit 

certain documents that would indicate 

that the State is imposing procedures or 

standards relating to solvency that are 

different from CMS standards. CMS 

would utilize this documentation in its 

waiver determination process. 

In our regulations at § 423.410(c)(4), 

we would implement section 1860D–

12(c)(2)(A)(ii) of the Act, which 

provides that we may grant a waiver 

when a State imposes requirements 

other than those required under Federal 

law. 

Section 1860D–12(c)(2)(B) of the Act 

also establishes special rules for the 

approval of a waiver by us. We propose 

to implement these special rules at 

§ 423.410(d) and (e) of these regulations. 

The special rules allow that we will 

grant a waiver when a State does not 

have any licensing process for PDP 

sponsors. Also, even if a State does have 

a licensing process for years beginning 

before January 1, 2008, a waiver will be 

granted if the PDP sponsor merely 

submits its completed application for 

licensure to the State. The PDP sponsor 

seeking a waiver will submit a waiver 

application indicating its understanding 

of State law which CMS will confirm 

through contacts with the State 

regulator. 

d. Relationship of Waiver to State 

Regulation 

The statute requires, at section 

1860D–12(c)(3) of the Act, that the 

waivers granted under the provisions of 

section 1855 of the Act must also meet 

the conditions of approval established at 

section 1855(a)(2)(E), 1855(a)(2)(F) and 

1855(a)(2)(G) of the Act. Accordingly, 

we would implement the applicable 

waiver requirements from section 

1855(a)(2)(E) and 1855(a)(2)(F) that 

relate to licensure or solvency in the 

regulations at § 423.410(f)(1) through 

§ 423.410(f)(3). 

Section 423.410(f)(1) of our proposed 

regulations establishes that except in 

States without a licensing process for 

PDP sponsors and except in the case of 

regional plan waivers described in 

§ 423.410 (b), a waiver only applies to 

a specific State, is effective for 36 

months and cannot be renewed. We 

propose to implement section 

1855(a)(2)(F) of the Act at § 423.410(f)(2) 

where we specify our requirement 

concerning prompt action on 

applications. This requirement would 

establish that we would grant or deny a 

waiver application under this section 

within 60 days after we determine that 

a substantially complete waiver 

application has been filed. A 

substantially complete application 

would have to clearly demonstrate and 

document a PDP sponsor’s eligibility for 

a waiver. In addition, section 1860D–

12(c)(3) of the Act establishes that if a 

State does not have a licensing 

requirement for PDP sponsors, then the 

requirements of section 1855(a)(2)(E)(i) 

and section 1855(a)(2)(E)(ii) do not 

apply. We propose to implement these 

provisions at § 423.410(f)(3) where we 

would establish that if a State does not 

have a licensing process for PDP 

sponsors, we would approve a waiver 

for a PDP sponsor that meets our 

solvency standards and that this waiver 

would not be time limited. 

With respect to section 

1855(a)(2)(E)(i) of the Act, we believe 

that the most reasonable interpretation 

of this provision is that when a PDP 

sponsor is granted a waiver (because the 

State does not have a PDP sponsor 

licensing process), one waiver that we 

grant can be applied to all States in 

which there are no PDP sponsor 

licensing requirements. However, the 

waiver granted on the basis that a State 

does not have a licensing process cannot 

be applied in a State that does have a 

46696 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

PDP sponsor licensing process. In a 

State that may have denied licensure to 

the entity in question, one of the other 

bases for approving a waiver may be 

applicable. In addition, a waiver granted 

for other reasons such as failure to act 

on an application on a timely basis, or 

denial based on discriminatory 

treatment will apply only to the States 

in question and not other States. 

We would implement the regional 

plan waiver rule provided at section 

1860D–12(c)(1)(B) of the Act in the 

regulations at § 423.410(b) of our 

proposed rule. This allows us to use the 

proposed waiver authority at section 

1858(d) of the Act—Temporary Waiver 

of State Licensure Requirement for the 

licensing of PDPs. This temporary 

waiver would be available in the event 

a prospective PDP sponsor proposes that 

its prescription drug plan would cover 

a multi-State region, but is not yet 

licensed in all of the States. (Under 

those circumstances, we can waive the 

State licensure requirement until the 

State has completed processing of the 

application.) In the interim, the PDP 

sponsor would be required to comply 

with the solvency standards established 

by us. In the event the State ultimately 

denies the application, we can extend 

the waiver through the contract year as 

we deem appropriate to provide for 

transition. 

3. Preemption of State Laws and 

Prohibition of Premium Taxes 

Section 1860D–12(g) of the Act 

incorporates section 1856(b)(3) of the 

Act which states: ‘‘the standards 

established under this part shall 

supersede any State law or regulation 

(other than State licensing laws or State 

laws relating to plan solvency) for MA 

organizations under this part.’’

Accordingly, we specify in our 

proposed regulations that to the extent 

there are Federal standards, those 

standards supersede any State Law. For 

purposes of this section, with the 

exceptions of State licensing laws or 

State laws related to plan solvency, 

State laws do not apply to prescription 

drug plans and PDP sponsors. 

We do not believe, however, that the 

language in 1856(b)(3) means that each 

and every State requirement applying to 

PDP sponsors would now become null 

and void. In areas where we have 

neither the expertise nor the authority to 

regulate, we do not believe that State 

laws would be superseded or 

preempted. For example, State 

environmental laws, laws governing 

private contracting relationships, tort 

law, labor law, civil rights laws, and 

similar areas of law would, we believe, 

continue in effect and PDP sponsors in 

such States would continue to be 

subject to such State laws. Rather, our 

Federal standards would merely 

preempt the State laws in the areas 

where Congress intended us to regulatesuch as the rules governing pharmacy 

access, formulary requirements for 

prescription drug plans, and marketing 

standards governing the information 

disseminated to beneficiaries by PDP 

sponsors. We believe this interpretation 

of our preemption authority is in 

keeping with principles of Federalism, 

and Executive Order 13132 on 

Federalism, which requires us to 

construe preemption statutes narrowly. 

By the same token, in areas where 

Congress specifically stated that State 

law would not be preempted—that is, 

State licensing laws and State laws 

related to plan solvency—we would 

construe the preemption exception 

narrowly, and only view the exception 

as applying to true licensing or solvency 

requirements. By this we mean that if a 

State conditioned licensing on a PDP 

sponsor meeting requirements in an area 

we also regulate outside of licensure or 

solvency, then such condition could not 

be viewed as a ‘‘licensing’’ law and 

would not be excepted from 

preemption. For example, if a State 

conditioned licensure on a PDP sponsor 

adhering to the State’s guidelines for 

prescription drug plan marketing 

materials, we would not view the 

marketing guidelines as a licensure 

requirement and we would still view 

the Federal marketing rules as 

preempting the State requirements. 

Additionally, in accordance with the 

incorporation of section 1854(g) of the 

Act into section 1860D–12(g) of the Act, 

States are expressly prohibited from 

imposing a premium, or similar type of 

tax, on premiums paid by us to 

prescription drug plans or PDP 

sponsors, on premiums applicable to 

Medicare enrollees of the prescription 

drug plans under Part F, or on any other 

payments made by us to PDP sponsors 

under subpart G of the regulations,—

including the direct subsidy, 

reinsurance payments and risk corridor 

payments. 

J. Coordination Under Part D Plans With 

Other Prescription Drug Coverage 

1. Overview and Terminology 

We propose in subpart J of part 423 

to implement sections 1860D–2(a)(4), 

1860D–2(b)(4)(C), 1860D–2(b)(4)(D), 

1860D–11(j), 1860D–21(c), 1860D–22(b), 

1860D–23(a), 1860D–3(b), 1860D–23(c), 

1860D–24(a), 1860D–24(b), and 1860D–

24(c) of the Act that were added by 

section 101 of the MMA. We provide a 

brief summary of each of these 

provisions. Following this overview we 

provide a more detailed discussion of 

how we propose implementing each of 

these statutory provisions in this 

subpart. 

We propose to implement section 

1860D–21(c) of the Act at § 423.458 of 

the proposed rule and explain that the 

requirements of Part D generally apply 

under Part C for prescription drug 

coverage offered by MA–PD plans 

although certain waivers are available. 

We propose to implement section 

1860D–22(b) of the Act at our proposed 

§ 423.458(c) that provides employer 

group waiver authority for prescription 

drug plans. 

We outline options that we have 

identified related to the data-exchange 

that will be necessary between both 

State pharmaceutical assistance 

programs and other insurers and Part D 

plans in order to accurately apply 

incurred costs to appropriate Part D 

enrollee records. For purposes of this 

subpart, provisions in the statute that 

address coordination requirements 

generally apply in a similar manner to 

both State pharmaceutical assistance 

programs and other drug plans and to 

both prescription drug plans and MA–

PD plans. The main difference between 

coordination requirements related to 

SPAPs and other drug plans is that we 

are prohibited from charging user fees to 

SPAPs. On the other hand, Part D plans 

may impose fees only related to the cost 

of coordination on both SPAPs and 

other drug plans. 

We propose to implement section 

1860D–11(j) of the Act at § 423.464(a) of 

the proposed rule and require sponsors 

of Part D plans to coordinate with State 

pharmaceutical assistance programs and 

other prescription drug plans. In this 

section we specify the other plans with 

which Part D plans must coordinate 

benefits in accordance with section 

1860D–24(b) of the Act and define State 

Pharmaceutical Assistance Programs, in 

accordance with section 1860D–23(b) of 

the Act. 

a. Part D Plans 

Wherever we mention or reference 

‘‘Part D plans’’ we mean any or all of 

‘‘MA–PD plans, prescription drug plans 

(PDPs) and fallback prescription drug 

plans’’. Likewise, the term ‘‘Part D plan 

sponsor’’ refers to MA organizations 

offering MA–PD plans, PDP sponsors, 

and eligible fallback entities offering 

fallback plans. If a statement or 

reference applies exclusively to a 

specific type of plan, we use that exact 

term to limit the reference. 

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b. Employer-sponsored Group 

Prescription Drug Plan 

Section 1860D–22(b) applies to 

‘‘employment-based retiree health 

coverage’’ that is defined under section 

1860D–22(c)(1) of the Act. This term 

means coverage for individuals (or their 

spouses and dependents) under a group 

health plan based on their status as 

retired participants. We use the term 

‘‘employer-sponsored group prescription 

drug plan’’ to mean a prescription drug 

plan under a contract between a PDP 

sponsor and employers, labor 

organizations, or the trustees of funds 

established by one or more employers or 

labor organizations to furnish 

prescription drug benefits under 

employment-based retiree health 

coverage. 

c. State Pharmaceutical Assistance 

Program 

A State Pharmaceutical Assistance 

Program is a program operated by or 

under contract with a State for purposes 

of this part if it: (1) Provides financial 

assistance for the purchase or provision 

of supplemental prescription drug 

coverage or benefits on behalf of Part D 

eligible individuals; (2) provides 

assistance to Part D eligible individuals 

in all Part D plans without 

discriminating based upon the Part D 

plan in which an individual enrolls; (3) 

meets the benefit coordination 

requirements specified in this part; and 

(4) does not change or affect the primary 

payor status of a Part D plan. Since an 

SPAP cannot discriminate under the 

Part D plans with respect to either 

eligibility or the amount of assistance 

provided, in accordance with section 

1860D–23(b)(2) of the Act and in our 

proposed rule at § 423.464(e)(1)(ii), to 

the extent that a program does 

discriminate it cannot, by definition, be 

considered an SPAP. A non-conforming 

State program that did discriminate in 

either of these ways (eligibility or 

amount of assistance provided) would 

not meet the definition of a State 

Pharmaceutical Assistance Program. 

We are interpreting the nondiscrimination language to mean that 

SPAPs, if they offer premium assistance 

or supplemental assistance on Part D 

cost sharing, must offer equal assistance 

by all PDPs or MA–PD plans available 

in the State and may not steer 

beneficiaries to one plan or another 

through benefit design or otherwise. 

State programs cannot, for example, use 

the threat of withholding SPAP 

enrollees to negotiate coverage, 

premium or formulary changes with 

PDPs or MA–PD plans. Violations of the 

non-discrimination rule will jeopardize 

the program’s special status with respect 

to true out-of-pocket costs. That is, a 

State program that discriminates does 

not qualify under the definition of an 

SPAP, and consequently, its 

contributions to cost sharing do not 

count toward the out-of-pocket limit. 

Section 1860D–23(b) of the Act also 

provides that an SPAP is a State 

program that provides financial 

assistance for the purchase or provision 

of prescription drugs, and we interpret 

this to mean that it provides that 

assistance with State funds. Therefore, 

the definition of SPAP would exclude 

State Medicaid programs, section 1115 

demonstration programs, and any 

program where program funding is from 

Federal grants, awards, contracts, 

entitlement programs, or other Federal 

sources of funding. (We would clarify 

that this does not exclude some Federal 

administrative funding or incidental 

Federal monies.) 

For purposes of this part, we are 

proposing that a Pharmacy Plus 

demonstration waiver under section 

1115 of the Act shall not be considered 

a State pharmaceutical assistance 

program. Pharmacy Plus waivers are 

granted to allow states to treat these 

individuals as Medicaid eligible for the 

purposes of receiving drugs and primary 

care services. Expenditures for these 

limited services receive federal 

matching payments in the same manner 

as do services for full benefit Medicaid 

beneficiaries. We do not believe that 

these waivers, having expenditures that 

are federally matched in this manner, 

should be considered SPAPs as the 

effect of this would be to allow federally 

matched payments to be used to meet an 

out of pocket expense to gain further 

payments from the Federal Medicare 

program. 

2. Application of Part D Rules to MA–

PD Plans on and After January 1, 2006 

(§ 423.458) 

In accordance with section 1860D–

21(c)(1) of the Act, and as provided 

under proposed § 423.458(a), the 

provisions of Part D apply under Part C 

to prescription drug coverage provided 

by an MA–PD in lieu of other Part C 

provisions that would apply to such 

coverage, unless otherwise provided. As 

permitted under section 1860D–21(c)(2) 

of the Act, we will waive Part D 

provisions to the extent that we 

determine they duplicate, or conflict 

with, provisions under Part C, or as 

necessary in order to improve 

coordination of Part D benefits with the 

Part C program. For instance, under 

section 1860D–21(c)(3) of the Act, we 

will waive the pharmacy network access 

requirements as described at 

§ 423.120(a)(3) of the proposed rule in 

the case of an MA–PD plan that 

provides access (other than through 

mail’order pharmacies) to qualified 

prescription drug coverage through 

pharmacies owned and operated by the 

MA organization if we determine that 

the organization’s pharmacy network is 

sufficient to provide comparable access 

for enrollees under the plan. As 

discussed in other parts of this 

preamble, Part D rules generally apply 

to section 1876 cost HMOs/CMPs and 

PACE organizations in the same or in a 

similar manner as the rules apply to 

MA–PD local plans. The waiver 

provision under section 1860D–21(c)(2) 

of the Act applicable to MA–PD plans 

similarly extends to section 1876 cost 

HMOs/CMPs and PACE organizations. 

We provide for this waiver authority for 

cost HMOs/CMPs and PACE 

organizations by adding a paragraph (d) 

to section 423.458 of our proposed rule. 

In reviewing requested waivers we 

will follow a process similar to the 

process we initially established under 

the M+C program related to the 

employer group waiver authority 

provided in section 1857(i) of the Act 

and codified in regulation at 

§ 422.106(c). Under § 422.106(c), MA 

organizations could submit written 

requests to our permission to waive 

requirements that hinder the design of 

or offering of MA plans to employers. 

We would make approved waivers 

available to all similarly situated MA 

organizations that meet the conditions 

of the waiver. Accordingly, we will use 

a similar approach to the one we 

established under § 422.106(c) in 

implementing our authority to waive 

those Part D provisions that can be 

shown to (1) duplicate or conflict with 

Part C requirements or (2) should be 

waived in order to improve 

coordination of the benefits provided 

under Parts C and D of Medicare. 

However, we will not, under our waiver 

authority, waive Part D rules that are 

specifically directed to MA–PDs or to 

the Part C program. We ask for your 

comments on both the process we 

propose for authorizing additional 

waivers under this section and for what 

additional waivers should, or should 

not, be permitted under this waiver 

authority. 

3. Application to PACE Plans 

Section 1860D–21(f) of the Act 

indicates that Part D provisions shall 

apply to PACE organizations in a 

manner that is similar to those of an 

MA–PD local plan and that a PACE 

organization may be deemed to be an 

MA–PD local plan. As discussed in 

detail in Subpart T, PACE organizations 

46698 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

would not be deemed as MA–PD plans 

but would be treated in a manner that 

is similar to MA–PD plans for purposes 

of payment. Proposed § 423.458(d) 

establishes regulatory authority for CMS 

to waive Part D provisions for PACE 

organizations and indicates that PACE 

organizations may request waivers from 

CMS. Because many of the Part D 

requirements duplicate, conflict with, or 

inhibit coordination of existing PACE 

requirements, we anticipate a significant 

number of waivers would necessary for 

PACE organizations. We are concerned 

about the potential burden this would 

place on PACE organizations and 

propose to include a provision that 

would allow for CMS to identify all Part 

D provisions requiring waivers and 

waive these provisions on behalf of 

PACE organizations. In other words, we 

are considering a special rule for PACE 

organizations that would automatically 

apply the waivers granted in the final 

rule (see discussion in subpart T of this 

preamble) without a plan-specific 

application process. 

We would like to receive comments 

on this proposed approach and on any 

other related suggestions for minimizing 

burden on PACE plans. 

4. Application to Employer Groups 

a. Employer Group Waivers 

Section 1860D–22(b) of the Act 

extends the waiver authority that is 

provided for MA organizations related 

to Part C by section 1857(i) of the Act 

and implemented at § 422.106(c) to 

prescription drug plans related to Part 

D. This waiver authority is intended to 

provide prescription drug plans an 

opportunity, similar to the opportunity 

afforded MA organizations under Part C, 

to furnish Part D benefits to participants 

or beneficiaries of employment-based 

retiree health coverage sponsored by 

employers and labor organizations in 

the most efficient and effective manner 

possible. Section 1860D–21(b) of the Act 

specifically authorizes prescription drug 

plans to establish separate premium 

amounts for Part D enrollees who are 

participants or beneficiaries of 

employment-based retiree health 

coverage sponsored by employers and 

labor organizations. It also contemplates 

separate Part D plans for participants 

and beneficiaries of such employmentbased retiree health coverage. In 

administering this waiver, we propose 

to follow the template first established 

at § 422.106(c) that we created under 

Part C to implement the waiver 

authority under section 1857(i) of the 

Act. 

While we discuss coordination of Part 

D coverage with employment-based 

retiree health coverage at some length 

later in this part, we believe it is 

important to include a brief discussion 

here on the Part D waivers that we 

specifically would not permit related to 

employer group retiree coverage under 

the authority provided in section 

1860D–22(b) of the Act. Although the 

statute permits ‘‘* * * in relation to 

employers, including authorizing the 

establishment of separate premium 

amounts for enrollees in a prescription 

drug plan * * *’’ we interpret ‘‘separate 

premium amounts’’ to mean the amount 

of premium the retiree or the enrollee 

pays. Under the MA program many 

employer groups subsidize the 

premiums that would otherwise be 

payable by their retirees through partial 

or full payment or subsidization of the 

MA plan premiums on their members’

behalf. We believe that a similar 

practice related to PDP Part D plan 

premiums would be permissible and 

find support in section 1860D–

22(a)(6)(B) of the Act. Alternatively, we 

do not believe that the statutorily 

defined Part D premium could be 

different for employees or retirees than 

it is for individuals enrolled in the same 

PDP plan. Thus, the combined Part D 

premium contributed by the employee 

or retiree and the employer group would 

need to be identical to the premium 

charged to an individual enrolled in the 

same PDP plan. These principles apply 

to waiver requests by MA–PD plans 

under section 1857(i) of the Act. 

Generally, we also would not permit 

waivers that directly increase Medicare 

spending. For example, a section 

1860D–22(b) waiver would not be 

permitted that had the effect of changing 

the definition (in Subpart C of our 

proposed rules) for incurred costs 

(which are defined for purposes of 

calculating the true out-of-pocket 

threshold—TrOOP). An alternative 

example of a waiver we would not 

permit would be a waiver that would 

increase the premium subsidy. We also 

note that section 1860D–22(b) applies to 

‘‘prescription drug plans,’’ not non-Part 

D plans that ‘‘wrap around’’ or 

supplement the benefits provided 

under, the PDP. Consequently, section 

1860D–22(b) of the Act would not apply 

to a request to waive rules under this 

Part that effect an employer-sponsored 

non-Part D plan that wraps around a 

Part D plan, including the TrOOP rules. 

The exclusion of costs paid by group 

health plans from TROOP is irrelevant 

when the group health plan is itself a 

part D plan (in other words, the 

exclusion applies when the group 

health plan pays costs not otherwise 

covered under the part D plan). 

We invite comment on the process we 

propose for authorizing additional 

waivers that prescription drug plan 

sponsors can request under this section. 

We also ask for comment on the manner 

in which additional waivers should be 

permitted and what additional waivers, 

if any, we should not allow. 

b. Employer Options 

The enactment of Title I of the MMA 

has provided sponsors of retiree 

prescription drug plans with multiple 

options for providing drug coverage to 

their retirees. For the benefit of the 

employers and unions, we discuss these 

options. We believe the availability of 

these various options will make it easier 

for sponsors to continue to assist their 

retirees in having access to high-quality 

prescription drug coverage. 

Generally, employers and unions who 

offer drug benefits to their retirees (and 

their dependents) who are eligible for 

Medicare Part D may do so as follows: 

1. Provide prescription drug coverage 

through employment-based retiree 

health coverage. If those coverage is at 

least actuarially equivalent to the 

standard prescription drug coverage 

under Part D, the sponsor is eligible for 

a special Federal subsidy for each 

individual enrolled in the sponsor’s 

employment-based retiree health 

coverage who is eligible for Part D but 

elects not to enroll in Part D, directly 

reducing the cost of providing a highquality drug benefit. It is important to 

note that employers can still make 

arrangements with Medicare Advantage 

organizations to offer a Medicare 

Advantage (MA) only plan without the 

Part D benefit, but then still take the 

retiree drug subsidy and through a 

separate private contract with the MA 

organization arrange for an employersponsored retiree drug benefit that is not 

subject to the application of the true 

out-of-pocket provision and retains the 

employer’s flexibility to design a benefit 

that is at least equivalent to the Part D 

benefit. 

2. Provide prescription drug coverage 

that supplements, or ‘‘wraps-around,’’

the coverage offered under the PDP or 

MA–PD plans in which the retirees (and 

their dependents) enroll. For example, 

this option would permit beneficiaries 

who receive retiree coverage from 

employers who provide some financial 

assistance, but not enough to qualify for 

the retiree drug subsidy, to supplement 

the new drug benefit subsidy from 

Medicare with their existing employer 

assistance and thereby receive more 

generous coverage than they have now. 

3. Subsidize the monthly beneficiary 

premium for whatever PDP or MA–PD 

plan in which the employer or union’s 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46699 

retirees (and their dependents) elect to 

enroll. 

4. Provide a prescription drug plan 

(PDP) or Medicare Advantageprescription drug plan (MA–PD plan) 

either under contract with a PDP 

sponsor or Medicare Advantage (MA) 

organization or by directly sponsoring a 

PDP or an MA–PD plan. This plan may 

consist of enhanced alternative coverage 

(as defined under proposed 

§ 423.104(g)), or drug coverage that is 

more generous than that offered under 

the standard prescription drug coverage 

under Part D (as defined under 

proposed § 423.104(e)). Medicare would 

subsidize the cost of this coverage 

through direct and reinsurance 

subsidies (as calculated under proposed 

§ 423.329(a)(1) and (2)). At its option, 

the employer or union may elect to 

subsidize the monthly beneficiary 

premium (as calculated under proposed 

§ 423.286). Many employers already 

have arrangements with Medicare 

Advantage plans and we expect that this 

will continue, as well as new 

arrangements being established. 

The first option is the subject of 

subpart R of this preamble. The latter 

three options, all of which involve the 

employer or union’s retirees (and their 

dependents) enrolling in Part D, are 

discussed in this subpart. 

We note that if employers or unions 

elect to sponsor enhanced alternative 

coverage under Part D or to provide 

supplemental coverage that wraps 

around Part D, either election will have 

an impact on when its retirees (and their 

dependents) are eligible for the 

additional Medicare subsidies for 

catastrophic drug coverage. By delaying 

the provision of government-financed 

catastrophic coverage, these plans 

would lower the cost of Part D to the 

Federal government by lowering our 

reinsurance payments while preventing 

beneficiaries from facing any gaps in 

coverage. As discussed in Subpart C, 

individuals enrolled in a PDP or MA–

PD plan are eligible for Medicare 

subsidies on top of their employer 

subsidies for catastrophic drug coverage 

after they incur out-of-pocket drug costs 

in the amount specified under proposed 

§ 423.104(e)(5)(iii). Under the 

reinsurance provisions discussed in 

subpart G, Medicare would reimburse 

PDP sponsors and MA organizations 

offering MA–PD plans 80 percent of 

their gross costs for providing this 

catastrophic coverage (excluding 

administrative costs and net of 

discounts, rebates, and similar price 

concessions). Only drug costs paid by a 

Part D enrollee, or on behalf of a Part D 

enrollee by another person, would count 

toward the annual out-of-pocket 

threshold, with the exception of 

amounts reimbursed by insurance or 

otherwise, a group health plan, or 

another third-party payment 

arrangement. We refer to those drug 

expenditures that count toward the outof-pocket threshold as ‘‘true out-ofpocket (TrOOP) expenditures.’’

Under these rules, employers and 

unions who provide retirees (and their 

dependents) enhanced alternative 

coverage or wrap-around coverage in 

effect push out the total drug spending 

that triggers the Medicare subsidy for 

catastrophic coverage, since participants 

in the plan will have lower cost-sharing, 

and thus have lower out of-pocket costs. 

This approach limits the ‘‘crowd-out’’ of 

employer contributions by the new 

Medicare subsidy, resulting in more 

comprehensive coverage at a lower cost 

to the Federal government by lowering 

reinsurance payments. 

When an employer or union elects to 

provide a PDP or MA–PD plan under 

contract with the PDP or MA–PD 

sponsor, the PDP sponsor, under 

proposed § 423.458(c), or the MA 

organization, under 42 CFR 422.106(c), 

may submit written requests to us for 

permission to waive requirements under 

Part D that hinder the design of or 

offering of PDP or MA–PD plans to 

employers. We believe these waivers 

will help efficient administration and 

integration of their enhanced Part D 

coverage with other retiree health 

benefits offered by the sponsor. For 

example, the PDP sponsor or MA 

organization could request permission 

to restrict enrollment in its PDP or MA–

PD plan to the sponsor’s retirees (and 

their dependents) and offer a benefit 

that resembles or enhances the 

sponsor’s existing coverage. We 

encourage employers and unions to 

carefully review each option and 

determine which one is most beneficial 

to it and its retirees (and their 

dependents). The variety of options 

gives employers many ways to retain 

and enhance drug coverage for their 

retirees, and we seek comment on how 

we can use all of these subsidized 

options to maximize enhancements in 

retiree coverage. 

c. Implications for Beneficiaries 

For beneficiaries, the significance of 

the above discussion, as well as of the 

earlier discussion (in subpart C) of 

incurred costs that count toward the 

true out-of-pocket threshold, is that 

these rules would lead to new options 

for drug coverage. All Medicare Part D 

coverage would at a minimum provide 

basic coverage, funded with a generous 

Federal subsidy that did not exist 

before. In addition, there would be a 

number of ways in which some 

beneficiaries can get access to more 

comprehensive benefits, such as filling 

in any coinsurance requirements in 

coverage in whole or in part. Such 

access will be dependent on individual 

eligibility for other subsidies or 

coverage, and individual willingness to 

continue to pay for enhancements in 

their coverage, such as: 

• If they are eligible for a more 

comprehensive retiree health benefits 

policy sponsored by their former 

employer, their retiree plan sponsor 

may qualify for a subsidy payment. 

• If they have limited income, they 

may be eligible for Part D low-income 

subsidies of premium and cost sharing 

through a Part D plan. 

• They may be eligible for financial 

assistance through a State 

Pharmaceutical Assistance Program that 

can pay for an enrollee’s cost sharing 

and still have these payments count 

toward the out-of-pocket limit. 

• They may qualify for charitable 

assistance from bona fide non-profit 

charities that can also pay for an 

enrollee’s cost sharing and still have 

these payments count toward the out-ofpocket limit. 

• They may have access to a PDP or 

MA–PD (through either individual 

enrollment or employer group 

enrollment) that offers an enhanced 

alternative prescription drug plan for an 

additional premium. In this case, either 

the plan sponsor and/or the beneficiary 

must bear some of the drug costs that 

would otherwise have been subsidized 

by Part D reinsurance subsidies. While 

they would consequently not receive the 

additional subsidy until they reached a 

higher level of drug expenditures, the 

substantial savings in drug costs as a 

result of the highly subsidized, standard 

drug benefit would permit such 

coverage to be financed while still 

saving money for the beneficiary and 

the plan sponsor. 

5. Medicare Secondary Payer 

Procedures 

Section 1860D–2(a)(4) of the Act 

extends the Medicare secondary payer 

(MSP) procedures applicable to MA 

organizations under section 1852(a)(4) 

of the Act and 42 CFR 422.108 to PDP 

sponsors. Section 1852(a)(4) of the Act 

provides that an MA organization may 

charge or authorize a provider to seek 

reimbursement for services from a 

beneficiary or third parties to the extent 

that Medicare is made a secondary 

payer under section 1862(b)(2) of the 

Act. Accordingly, under § 423.462 of 

this proposed rule, PDP sponsors would 

be required to follow the same rules as 

MA organizations regarding: 

46700 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

• Their responsibilities under MSP 

procedures; 

• Collection of payment from 

insurers, group health plans and large 

group health plans, the enrollee, or 

other entities for covered Part D drugs; 

and 

• The interaction of MSP rules with 

State laws. 

Because Medicare would not pay for 

covered Part D drugs to the extent that 

there is a third party that is to be the 

primary payer under the provisions of 

section 1862(b)(2) of the Act and 42 CFR 

part 411, PDP sponsors must, for each 

prescription drug plan: (1) identify 

payers that are primary to Medicare 

under section 1862(b)(2) of the Act and 

42 CFR part 411, (2) determine the 

amounts payable by those payers, and 

(3) coordinate their benefits to plan 

enrollees with the benefits of the 

primary payers. 

The PDP sponsor may charge other 

individuals or entities for covered Part 

D drugs for which Medicare is not the 

primary payer. If an enrollee receives 

from a PDP sponsor covered Part D 

drugs that are also covered under State 

or Federal workers’ compensation, nofault insurance, or any liability 

insurance policy or plan, including a 

self-insured plan, the PDP sponsor may 

charge the insurance carrier, the 

employer, any other entity that is liable 

for payment for the covered Part D drugs 

under section 1862(b) of the Act and 42 

CFR part 411, or the prescription drug 

plan enrollee, to the extent that he or 

she has been paid by the carrier, 

employer, or entity for covered Part D 

drugs. 

When Medicare, and thus a Part D 

plan, is secondary to other payers, 

beneficiary costs incurred for covered 

Part D drugs would not be considered 

‘‘covered’’ costs under the Part D plan. 

Consequently, these costs would be 

excluded from a beneficiary’s incurred 

costs, as described in section II.C.2.a of 

this preamble and would not count as 

incurred costs against the annual 

deductible or the out-of-pocket 

threshold. 

When Medicare is a secondary payer 

to employer coverage in the case of 

certain working Medicare beneficiaries, 

a PDP sponsor may charge a group 

health plan (GHP) or large group health 

plan (LGHP) for covered Part D drugs it 

furnishes to a Medicare enrollee who is 

also covered under the GHP/LGHP, and 

may charge the Medicare enrollee to the 

extent that he or she has been paid by 

the GHP/LGHP. 

Because Medicare Part D coverage is 

a Federal program operated under 

Federal rules, State laws do not—and 

should not—apply, with the exception 

of State laws regarding licensing or 

related to plan solvency or as otherwise 

provided by statute or regulation. Given 

the requirement in section 1860D–

2(a)(4) of the Act that we extend MSP 

procedures applicable to MA 

organizations to PDP sponsors, PDP 

sponsors would also be permitted, 

under section 1852(a)(4) of the Act, to 

fully recover from liable third parties 

according to section 1862(b)(2) of the 

Act. In accordance with section 1860D–

12(g) of the Act that extends the State 

preemption provisions under section 

1856(b)(3) to Part D, under § 423.462 of 

our proposed rule that mirrors 

§ 422.108(f), States would be prohibited 

from exercising authority over 

prescription drug plans in any area 

governed by Medicare Part D (including 

our regulations under chapter 423) other 

than State licensing laws and State laws 

relating to plan solvency. This is 

consistent with specific preemption 

authority now provided by section 

1856(b)(3) of the Act with respect to MA 

organizations. 

6. Coordination Of Benefits With Other 

Providers Of Prescription Drug Coverage 

Section 1860D–23(a) of the Act 

authorizes us to establish procedures 

and requirements to promote the 

effective coordination of benefits 

between a Part D plan and a State 

Pharmaceutical Assistance Program 

with respect to payment of premiums 

and coverage, and payment for 

supplemental prescription drug 

benefits. We are to establish procedures 

and requirements before July 1, 2005, to 

ensure effective coordination. In 

developing these procedures and 

requirements, we are to consult with 

State pharmaceutical assistance 

programs, prescription drug plan 

sponsors, MA organizations, States, 

pharmaceutical benefit managers, 

employers, data processing experts, 

pharmacists, pharmaceutical 

manufacturers, and other experts. In 

addition, as specified at section 1860D–

24(a) of the Act and implemented in this 

section of the regulations, we will apply 

the coordination requirements for State 

pharmaceutical assistance programs to 

other prescription drug plans including 

Medicaid (including a plan operating 

under a waiver under section 1115 of 

the Act), group health plans, the Federal 

employees health benefits plan, military 

coverage (including TRICARE), and 

other coverage that we specify. Under 

section 1860D–23(c)(1) of the Act, 

coordination between State 

pharmaceutical assistance programs and 

Part D plans does not change or affect 

the primary payor status of a Part D plan 

with respect to a State pharmaceutical 

assistance program. Nor does it affect 

the primary or secondary payment 

position of the Part D plan related to the 

payments made by other plans 

providing prescription drug coverage. 

Under the requirements of section 

1860D–11(j) of the Act, Part D plan 

sponsors will not be permitted to 

impose fees on SPAPs or other plans 

providing prescription drug coverage 

that are unrelated to the costs of that 

coordination. 

The elements to be coordinated would 

include enrollment file sharing, claims 

processing, payment of premiums for 

both basic and supplemental drug 

benefits, third-party reimbursement of 

out-of-pocket costs, application of 

protection against high out-of-pocket 

expenditures (defined in section 1860D–

2(b)(4) of the Act), and other 

administrative processes and 

requirements that we specify. 

Enrollment file sharing might include 

information such as beneficiary name, 

date of birth, health insurance claim 

number, sex, name and address of 

benefit administrator, insured’s 

identification number, electronic 

transaction routing information (RxBin, 

RxPCN, RxGRP), group number, patient 

relationship, and coverage effective 

dates. Claims processing information 

might include collecting information 

similar in nature to that currently 

contained in a Medicare provider 

Remittance Advice statement. 

Information must be sufficient to 

successfully link with enrollment files 

and in order to allow Part D plans to 

make a correct determination of true 

out-of-pocket (TrOOP) expenditures on 

the part of beneficiaries. 

On rare occasions Part D plans would 

also be required to coordinate benefits 

with other Part D plans. In the event 

that a beneficiary disenrolled from one 

plan mid-year and enrolled in another, 

the two plans would be required to 

exchange information sufficient to allow 

the beneficiaries’ claims to be processed 

as if there had been no break in 

enrollment. Specifically, the second 

plan would need to obtain the enrollee’s 

claim data and adjust its claims 

processing system accumulators to 

reflect that a certain level of 

expenditures and out-of-pocket costs 

had already been incurred in order that 

the correct sequence of claims 

processing could be maintained. This is 

not to say that the second plan could 

claim the first plan’s costs as their own 

allowable costs, but that their systems 

would process future claims as if the 

earlier costs had been incurred by the 

second plan. We solicit comments on 

any other issues that may be involved in 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46701 

coordination of benefits between Part D 

plans. 

We may impose user fees for the 

transmittal of information necessary for 

benefit coordination related to third 

party reimbursement (other than by a 

SPAP) of Part D enrollees’ costs for 

covered Part D drugs. Please see our 

later discussion on options we are 

considering related to coordination of 

benefits under the Part D program and 

also the critical nature of securing 

accurate and timely information for 

purposes of the TrOOP calculation. As 

we mention in that discussion, the 

statute permits us to impose user fees on 

the employer (or other third party) plan, 

but not on SPAPs under any method of 

operation, for the transmittal of benefit 

coordination information under Part D. 

Section 1860D–24(a)(3) of the Act 

specifically provides authority for 

imposing user fees under Part D similar 

to the authority under section 

1842(h)(3)(B) of the Act for collection of 

user fees (otherwise known as ‘‘claimbased cross-over fees’’) under fee-forservice coordination with Medicare 

supplemental policies. However, we are 

also provided authority to retain a 

portion of these users fees to offset costs 

we incur for determining whether 

enrollee out-of-pocket costs are being 

reimbursed by third parties and for 

alerting Part D plans when, in fact, they 

are being reimbursed. 

As we also later discuss in this 

preamble, any user fees, if collected, 

would not be assessed until the benefit 

is implemented in 2006. Before that 

time, we will fund the development and 

implementation of coordination of 

benefit requirements. We will also fund 

the development and implementation of 

a system to assist in the coordination of 

benefits—if and when it is determined 

that our development of the system is 

the appropriate option. We request 

comment on the method we should 

employ in imposing user fees and 

especially concerning whether it would 

be advisable to impose user fees on a 

monthly or quarterly basis based on the 

volume of data exchanged, and whether 

we should require electronic payment of 

user fees. 

In section 1860D–24(c)(1) of the Act, 

a Part D plan sponsor may continue to 

use cost management tools (including 

differential payments) when 

administering benefits. This could 

include cost management tools related 

to managing supplemental benefits 

financed by a State pharmaceutical 

assistance program or another plan 

providing prescription drug coverage 

offered through a Part D plan. However, 

we believe that the intent of the statute 

at section 1860D–24(c)(1) of the Act is 

clear in allowing Part D plans to 

continue to use cost management tools 

(such as tiered or differential cost 

sharing) even if an SPAP or other drug 

plan provides wrap-around or 

supplemental coverage for individuals 

enrolled in the Part D plan. We solicit 

comment on how we can ensure that 

wrap-around coverage offered by SPAPs 

and other insurers does not undermine 

or eliminate the cost management tools 

established by Part D plans. We also 

request comment on the most effective 

way to administer this provision 

without creating undue administrative 

burden on either Part D plans or the 

SPAPs and other insurers that might 

choose to provide wrap-around coverage 

for eligible individuals. 

a. Coordination With SPAPs 

The statute envisions a closer 

coordination of benefits between SPAPs 

and Medicare drug plans. For example, 

as provided in § 1860D–23(c) and in 

§ 423.464(e)(3), a Part D enrollment card 

may also be used to access benefits 

under an SPAP, and the SPAP’s emblem 

may be used on the card. Additionally, 

payments for beneficiary cost sharing 

made by an SPAP may be counted 

toward the incurred costs that count in 

the calculation of the true out-of-pocket 

(TrOOP) threshold in providing 

protection against catastrophic costs as 

provided in § 1860D–2(b)(4)(C)(ii) and 

in § 423.464(e)(2) of this proposed rule. 

SPAPs have filled a significant gap in 

prescription drug coverage for many 

Medicare beneficiaries in the absence of 

a Medicare drug benefit. Now that so 

many States are involved and so many 

beneficiaries have relationships with 

these programs, it will be important to 

ensure that coordination between 

Medicare Part D and SPAPs occurs as 

efficiently and effectively as possible. 

However, section 1860D–23(c)(5) of the 

Act provides that nothing in the statute 

should be construed to require that a 

State Pharmaceutical Assistance 

Program coordinate or provide financial 

assistance with respect to any Part D 

plan. 

For purposes of this part, we are 

proposing that a Pharmacy Plus 

demonstration waiver program under 

section 1115 of the Act not be 

considered an SPAP. We grant 

Pharmacy Plus waivers that allow States 

to treat individuals participating in 

these waiver programs as Medicaid 

eligible only for the purpose of receiving 

prescription drug and primary care 

services. We do not believe that 

Pharmacy Plus waiver programs should 

be considered SPAPs. The statute makes 

a clear distinction between SPAPs, 

defined in section 1860D–23(b) of the 

Act, and the Medicaid program (which 

includes State plans operating under 

Title XIX of the Act as well as State 

plans operating under a waiver under 

section 1115 of the Act) described in 

section 1860D–24(b)(1) of the Act. In so 

far as the Pharmacy Plus waiver 

programs operate under 1115 waivers, 

they are considered part of the Medicaid 

program and thus are not considered 

SPAPs. This distinction is important for 

purposes of the application of TrOOP. 

Section 1860D–2(b)(4)(C)(ii) of the Act 

is clear in allowing only a person, CMS, 

or an SPAP to make payments that will 

count toward TrOOP for an individual 

Part D enrollee. In so far as beneficiary 

cost sharing is reimbursed under Title 

XIX of the Act, including a waiver 

operating under section 1115 of the Act, 

or through any other mechanism 

including public assistance, it cannot be 

counted toward TrOOP. However, since 

the MMA allows states to use state-only 

SPAP funds to assist beneficiaries with 

out-of-pocket expenditures, States 

would be better off using their current 

contributions to wrap around the 

Federal Medicare Part D benefit than in 

continuing their Pharmacy Plus 

programs. 

Medicare Part D plans may coordinate 

with SPAPs in a number of ways 

including accepting premiums for basic 

Part D or enhanced alternative coverage; 

accepting a lump sum per capita 

payment from the State for enrollee 

coverage through Part D plans; and 

coordinating on a claim-specific basis 

when Part D plan pays first and the 

SPAP is the secondary payor. All data 

exchanges between SPAPs and Part D 

plans are to be consistent with 

applicable privacy laws, in order to 

ensure the confidentiality of 

individually identifiable beneficiary 

information. In accordance with section 

1860D–23(c)(2) of the Act, and in order 

to help coordination between State 

pharmacy assistance programs and Part 

D plans, a single card may be used to 

access benefits under both Part D and 

State pharmacy assistance programs. 

These cards may contain an emblem or 

symbol indicating that a connection 

between the two programs exists. We do 

not know how SPAPs will actually 

choose to coordinate with Medicare 

drug plans, and we welcome comment 

in this regard—particularly from States. 

We would like to better understand 

what SPAPs plan to do in 2006 relative 

to Part D interaction (such as in 

payment of premiums or claim-specific 

wrap-around), and how Medicare can 

assist State preferences in this regard. 

Our goal is to make the coordination of 

benefits process as functional for the 

46702 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

beneficiary, pharmacy, and States as 

possible. 

We assume that some SPAPS will pay 

Part D plans’ premiums on behalf of 

enrollees. For SPAPs that choose to 

wrap-around coverage rather than 

paying premiums, we propose to 

include SPAP information in a 

coordination of benefits system 

described below. In this way, 

pharmacies will know that a claim 

should be sent to the SPAP following 

adjudication by the Part D plan. 

We request comment on this proposed 

approach, including the feasibility of 

the approach for SPAPs and the ease of 

administration for pharmacies. We also 

request comment on whether or not 

SPAPs that choose to coordinate 

benefits on a wrap-around basis should 

be required to provide feedback on how 

much of the remainder of the claim they 

have actually paid. Since SPAP 

payments count as true out-of-pocket 

spending toward catastrophic coverage, 

the Part D plans could simply assume 

that any amounts not paid by the Part 

D plan and sent to an SPAP for 

reimbursement would count toward 

calculating TrOOP. We are concerned 

that we may need information from 

SPAPs to determine more precisely the 

SPAP contribution or payment. But we 

are also mindful of systems implications 

for States and would appreciate 

comments in this regard, particularly 

from SPAPs. 

b. Coordination With Other Prescription 

Drug Coverage 

Other plans providing prescription 

drug coverage that Part D plans would 

need to coordinate with are any of the 

following (1) Medicaid programs 

(including a State plan operated under 

a waiver under section 1115 of the Act); 

(2) Group health plans, as defined in 

§ 411.101; (3) FEHBP; (4) Military 

Coverage (including TRICARE) under 

chapter 55 of title 10 of the United 

States Code; and (5) other prescription 

drug coverage as we specify. We discuss 

coordination issues in detail in sections 

(d) and (e), below. 

There is a relatively limited 

applicability of coordination of benefits 

between Part D plans and State 

Medicaid programs under the statute. 

The drugs that must be excluded from 

Medicare coverage are, with limited 

exception, drugs that may also be 

excluded from Medicaid coverage under 

section 1927(d)(2) of the Act. We 

anticipate that there may be situations 

involving State Medicaid programs that 

choose to continue coverage of a drug 

that is excluded from Medicare Part D 

coverage. For example, States may wish 

to continue coverage for barbiturates, 

benzodiazepines, or prescription 

vitamins. In these situations, a Part D 

plan providing primary coverage would 

need to coordinate this coverage with a 

State on behalf of a dually eligible 

beneficiary. We request public comment 

on other situations that may involve 

benefit coordination between States and 

Part D plans (other than situations 

where the State is acting as an 

employer). In general, we invite 

comment on the other administrative 

processes and requirements that we 

might identify in order to help 

coordination between Part D of 

Medicare and other prescription drug 

plans. 

c. Coordination of Benefits 

Sections 1860D–23(a)(1) and 1860D–

24(a)(1) of the Act require that, by July, 

1, 2005, we establish requirements for 

coordination of benefits between Part D 

plans and SPAPs and other insurers 

including Medicaid programs, group 

health plans, the Federal Employees 

Health Benefits Plan (FEHBP), military 

coverage (including TRICARE), and 

other coverage we may specify at a later 

date. As discussed previously, the 

elements that are to be coordinated must 

include: Enrollment file sharing; claims 

processing and payment; application of 

the protection against high out-of-pocket 

expenditures (by tracking TrOOP and 

the annual out-of-pocket threshold); 

and, other processes we specify. 

We envision a system of information 

sharing between Medicare, Part D plans, 

SPAPs, group health plans, insurers, 

and other third-party arrangements. Our 

goal is that the design and 

implementation of a Part D coordination 

of benefits system enable pharmacies to 

obtain information about secondary 

insurers as well as the correct billing 

order. Ideally, we would anticipate that 

a pharmacy would query the system and 

be provided with information it can use 

to bill all the insurers involved in the 

correct order, as well as ascertaining 

and applying the correct TrOOP 

calculation in order to assess the correct 

beneficiary co-payment at the point of 

service. Since prescription drug benefits 

are administered at the point of sale, 

coordinating insurance coverage at the 

point of sale is a technical 

communications challenge. In the case 

of administering a drug benefit, the goal 

is that the beneficiary pays the correct 

coinsurance or co-payment at the point 

of sale and that the pharmacy is 

subsequently reimbursed the correct 

amount from the other source or 

sources. Unlike coordination of benefits 

under Medicare when data is exchanged 

in only a single direction (from 

Medicare to the employer or other 

insurer), coordination of benefits for 

beneficiaries enrolled in Part D plans 

must include a reliable feedback loop of 

paid claims data from the employer, 

union or other insurer back to the Part 

D plan for purposes of tracking TrOOP. 

Additionally, given the real-time claims 

environment for pharmacy benefits, the 

feedback would ideally be in real-time 

so that beneficiary liability (if any) can 

be known at the point of sale, the 

correct insurer pays the correct share of 

the total drug cost, and the TrOOP 

calculation can be updated as quickly 

and accurately as possible. This suggests 

the need for an organized system to 

share, update, and push data back and 

forth between pharmacy benefit 

managers and pharmacies. This will be 

further discussed in the section on 

tracking true out-of-pocket (TrOOP) 

costs, below. 

As mentioned above, under section 

1860D–23(c)(1) of the Act, coordination 

between State pharmaceutical assistance 

programs and Part D plans does not 

change or affect the primary payor 

status of a Part D plan with respect to 

a State pharmaceutical assistance 

program. Nor does it affect the primary 

or secondary payment position of the 

Part D plan related to the payments 

made by other plans providing 

prescription drug coverage. Part B of 

Medicare has historically included 

limited coverage of certain outpatient 

prescription drugs. Part A of Medicare 

covers prescription drugs more 

extensively, but only when an 

individual is an inpatient in a Medicarecertified facility receiving Medicarecovered inpatient care. In additional 

circumstances, for instance when a 

person has elected Medicare hospice 

coverage, prescription drugs are also 

covered under original Medicare. 

The new statutory definition of a 

covered Part D drug excludes drugs 

covered and paid for under Part A or 

Part B of Medicare for a given 

individual. Section 1860D–2(e)(2)(B) of 

the Act provides that a drug that would 

otherwise be a covered Part D drug will 

not be so considered if payment for the 

drug as so prescribed and dispensed or 

administered is available under Parts A 

or B for that individual. This language 

indicates that the Congress was aware 

that some drugs could qualify for 

payment under Part A or B in some 

circumstances, and Part D in other 

circumstances, depending on setting of 

dispensing or administration. This 

means, for example, that if a form of 

administration of a drug is covered 

under Part B in a region when injected 

incident to a physician office visit, that 

drug administered in that manner in 

that setting cannot meet the definition 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46703 

of a covered Part D drug. However, that 

same drug can be covered under Part D 

when picked up at a retail pharmacy to 

be self-administered by the patient. For 

another example, in certain instances a 

drug could be covered under Part B at 

certain times and under Part D at other 

times. Many patients, for instance, take 

their medicines at specific times 

throughout the day. If these patients 

receive a service in a hospital outpatient 

department and remain in the hospital 

for several hours of post surgery 

observation, he/she may receive one or 

more doses from the hospital pharmacy. 

This medication would be considered 

part of their Part B service and covered 

under the hospital OPD payment. 

We note that individuals can elect 

Part D of Medicare if they are entitled 

to Part A or enrolled in Part B. This 

means that individuals with only Part A 

or only Part B will still have access to 

Part D. Although most Medicare 

beneficiaries have both Parts A and B, 

there are nearly 2 million Medicare 

beneficiaries who have only Part A, 

while there are approximately 500,000 

Medicare beneficiaries who have only 

Part B. We interpret the definition of 

covered Part D drug to exclude coverage 

under Part D for drugs otherwise 

covered and available under Parts A or 

B for individuals who choose not to 

enroll in either program. We interpret 

the words ‘‘payment is available’’ to 

mean that payment would be available 

to any individual who could sign up for 

A or B, regardless of whether they are 

actually enrolled. All individuals who 

are entitled to premium-free Part A are 

eligible to enroll in Part B. This includes 

individuals who are entitled to Part A 

based on age, disability, and ESRD. All 

individuals who are entitled to Part B 

only are age 65 and, in almost all 

instances, not eligible for premium-free 

Part A. However, they are eligible to buy 

into Part A for a premium. Thus, for all 

Part D individuals, Part A drugs and 

Part B drugs are ‘‘available’’ if they 

choose to pay the appropriate 

premiums. Consequently, Part D would 

not be required to pay for drugs covered 

under Parts A and B on the basis of a 

Part D eligible individual’s status with 

regard to Parts A and B. In addition, we 

believe that the phrase ‘‘for that 

individual’’ in § 1860D–2(e)(2)(B) of the 

Act is intended to capture the fact that 

under local medical review policies, a 

drug that might be covered under Part 

B for an individual in one area of the 

country may not be covered under Part 

B in another area of the country. Thus, 

what is covered ‘‘under Part B for that 

individual’’ may be different in different 

geographic regions. The result of these 

interpretations would be that any drug 

covered under A or B could not be 

covered under D, whether it was 

covered for that individual or not. 

We would wish to ensure that Part D 

coverage coordination works seamlessly 

for beneficiaries with Parts A and B of 

Medicare, and that beneficiaries do not 

lose Medicare coverage otherwise 

available to them due to unforeseen 

difficulties encountered in the 

coordination process. This is a critical 

consideration for effective and efficient 

coordination between the original 

Medicare program and the new coverage 

provided under Part D. Specific options 

concerning coordination of benefit 

procedures that we are considering are 

outlined below. 

Pharmacy-dispensed drugs covered by 

Part B (for instance, DME drugs, 

immunosuppressive drugs, and oral 

anti-cancer drugs) are not reimbursed 

unless the pharmacy has a Medicare 

supplier number; thus, a beneficiary 

could lose Part B coverage by filling a 

prescription at the wrong pharmacy. 

(We recognized this problem in the 

interim final rule on the discount card 

program and stated that, for drugs 

potentially covered by Part B, ‘‘nonMedicare participating pharmacies 

should refer the beneficiary to a 

participating pharmacy.’’ See 68 FR 

69840, 69852). To reduce this risk, we 

are proposing to—

1. Encourage Part D plans to enroll 

pharmacies with Medicare supplier 

numbers in their networks; 

2. Encourage Part D plans to inform 

beneficiaries whether their network 

pharmacies have a Medicare supplier 

number, and explain why this is 

important when filling prescriptions for 

drugs potentially covered by Part B; and 

3. Develop educational materials 

reminding pharmacies without 

Medicare supplier numbers that they 

must refund any payments collected 

from beneficiaries enrolled in Part B for 

Part B drugs unless they first notify the 

beneficiary (through an advanced 

beneficiary notice (ABN)) that Medicare 

likely will deny the claim. 

Statutory ‘‘refund requirements’’

apply to claims for ‘‘medical equipment 

and supplies’’ that Medicare denies 

because the supplier lacked a supplier 

number, unless—

1. The beneficiary signed an ABN 

notifying him or her that Medicare 

would deny payment, and agreed to be 

personally responsible for payment; or 

2. The supplier did not know and 

could not reasonably have known that 

Medicare would deny payment. 

For this purpose, coverage of medical 

equipment and supplies includes 

durable medical equipment (DME), 

certain drugs and other supplies 

necessary for use of an infusion pump, 

oral immunosuppressive drugs and anticancer drugs, and ‘‘such other items as 

the Secretary may determine.’’ (See the 

Medicare Claims Processing Manual, 

Chapter 30, sections 150.1.3 and 

150.1.5.) Suppliers are presumed to 

know that Medicare will not pay for 

medical equipment and supplies 

furnished by a supplier that lacks a 

supplier number. (See section § 150.5.4 

of Chapter 30 of the Medicare Claims 

Processing Manual.) We are considering 

whether a drug denied Part B coverage 

for this reason should become a covered 

Part D drug, and the claim should thus 

be processed under Part D, and would 

like to receive comments on the relative 

likelihood of this occurrence and on 

alternative means of addressing such 

circumstances. 

We are also considering whether a 

drug denied Part B coverage for any 

other reason should become a covered 

Part D drug. For instance, we believe 

that a drug denied Part B coverage and 

payment for therapeutic 

inappropriateness, drug-disease 

contraindication, incorrect drug dosage, 

duration of drug treatment or for similar 

reasons related to medical necessity 

should not be considered a covered Part 

D drug. Rather, we believe that such a 

denial or non-coverage decision under 

Part B, while appealable under Part B, 

would not cause the drug to become a 

covered Part D drug. We welcome 

comment in this area. 

For drugs potentially covered by Part 

B that are dispensed by a pharmacy that 

is a Medicare supplier, we are 

considering the development of 

automatic cross-over procedures. That 

is, we are considering requiring that: (1) 

The pharmacy submit the claim to the 

appropriate Part B carrier; and (2) the 

carrier, if it denies the claim, submit the 

claim automatically to the PDP (or its 

claims processing agent) through which 

the beneficiary has Part D coverage. This 

assumes that the beneficiary receives 

Part D through a PDP. For beneficiaries 

enrolled in MA–PD plans, coordination 

of benefits will generally occur 

internally within the MA organization. 

(Similar cross-over procedures are used 

today in connection with dualeligibles—individuals entitled to both 

Medicare and Medicaid and related to 

coordination between Medicare and 

Medicare supplemental insurers.) 

We also believe that similar cross-over 

procedures for any physicianadministered drugs that may be covered 

under Part B or Part D will need to be 

developed. This would involve: (1) The 

physician submitting the claim to the 

appropriate Medicare carrier; and (2) the 

46704 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

carrier automatically submitting the 

claim to the Part D plan (or its claims 

processing agent) if it denies payment 

under Part B. We particularly welcome 

comment on the feasibility of these 

proposed Part D and Part B coordination 

of benefits proposals and welcome 

suggestions on other methods or 

procedures that might be more efficient 

or better suited to coordination of 

prescription drug benefits. 

Another type of coordination of 

benefits occurs when Medicare pays 

secondary to another insurance (MSP). 

Medicare currently pays secondary 

when payment has been made or can 

reasonably be expected to be made by 

another party such as workers 

compensation, automobile insurance, a 

liability insurance policy, or another 

health insurance policy (for example, 

when a beneficiary’s spouse has primary 

insurance through their employment). 

Beneficiaries provide information, when 

available, regarding third party coverage 

as part of the initial enrollment 

questionnaire. Medicare also attempts to 

identify additional situations in which 

Medicare should pay secondary, and 

when we believe this is the case we 

follow up with employer plans for 

information. We do not anticipate 

significant changes to this mechanism, 

except that Medicare will now, in 

relatively limited circumstances, pay 

secondary for a Part D beneficiary who 

has other insurance. We do not know 

how many beneficiaries with employersponsored insurance that is the primary 

payor to Medicare will enroll in Part D. 

We do know that approximately twothirds of individuals with primary 

employer-sponsored insurance do 

voluntarily pay for Part B coverage. We 

request public comment on the 

likelihood that beneficiaries with 

primary employer-sponsored insurance 

will elect Part D. We believe that the 

number of instances where automobile, 

workers’ compensation or liability 

insurance will be paying primary on 

behalf of Part D enrollees will be 

relatively small. So, generally, we 

believe that most instances of 

coordination of benefits of under Part D 

will occur when Medicare is primary 

and another insurer is secondary. 

d. Collection of Data on Third Party 

Coverage 

Section 1860D–2(b)(4)(D)(i) of the Act 

authorizes us to establish procedures for 

determining whether a beneficiary’s Part 

D out-of-pocket costs are actually 

reimbursed by a group health plan, 

insurance or otherwise, or another thirdparty arrangement. These procedures 

provide for—

• Determining whether costs for a 

Part D enrollee are being reimbursed 

through insurance or otherwise, a group 

health plan, or other third-party 

arrangement; and Alerting Part D plans 

in which beneficiaries are enrolled 

about reimbursement of prescription 

drug costs they receive through 

insurance or otherwise, a group health 

plan, or other third party arrangement. 

• Section 1860D–2(b)(4)(D)(ii) of the 

Act permits Part D plans to request 

information on third party insurance 

from beneficiaries. We would expect 

Part D plans to update Medicare records 

based on the information provided by 

beneficiaries to reflect changes in 

coverage, including the primary or 

secondary status of such coverage 

relative to Medicare. As discussed in the 

subpart B preamble, beneficiaries who 

materially misrepresent (as defined in 

standards and processes we propose to 

establish in § 423.108(b)(4)(iv) of the 

proposed rule) information on third 

parties may be disenrolled from any Part 

D plan for a period specified by CMS 

and may also be subject to late 

enrollment penalties upon enrollment 

in another plan. 

In the current Medicare fee-for-service 

claims processing environment, 

coordination of benefits when Medicare 

is the primary payor and another insurer 

is secondary (for example, employerbased retiree insurance, Medicaid, or 

Medigap) is performed as a convenience 

to the beneficiary and employer plan 

(coordination of benefits is required by 

statute for claims involving Medigap 

plans) and is voluntary on the part of 

the employer plans. The coordination of 

so-called ‘‘cross-over’’ claims is a oneway communication of claims 

information from Medicare to the 

secondary plan. This ‘‘cross-over’’ does 

not occur in real time. Instead, Medicare 

communicates with employer plans on 

a batch basis, and claims information 

may not reach the secondary insurer 

until weeks after the covered service is 

rendered. Coordination of benefits is, 

nonetheless, a valuable service to 

employers and Medicaid since these 

payors get an electronic claim that has 

already been subjected to claims edits 

and on which Medicare has already 

paid its portion. As a matter of fact, the 

service is so cost effective that 

employers willingly pay Medicare for 

the ‘‘cross-over’’ service. We have 

agreements with numerous employers 

purchasing ‘‘cross-over’’ data. In 2004 

Medicare expects approximately 550 

million Part A and Part B claims to 

‘‘cross-over’’ to a secondary insurers 

including Medigap, Medicaid, 

employers, other insurers, and third 

party administrators providing wraparound coverage. 

Section 1860D–2(b)(4)(D)(i) of the Act 

authorizes us to establish procedures for 

determining if costs for Part D enrollees 

are reimbursed by other payors, and for 

alerting Part D plans about such 

arrangements. This provision could be 

read to mean that we only have to 

determine the presence of alternative 

coverage and merely has to alert Part D 

plans of such. However, it could also be 

read to mean that we have to determine 

if specific claim costs have been 

reimbursed by alternative coverage. In 

contrast, section 1860D–24(a) of the Act 

directs us to establish requirements for 

Part D plans to coordinate benefits with 

other payors in the same manner as we 

are directed to coordinate Part D 

benefits with SPAPs. This provision 

could mean that the responsibility for 

coordination of benefits lies with the 

Part D plans. However, section 1860D–

24(c)(2) of the Act provides that the 

requirements of section 1860D–24 shall 

not affect the application of procedures 

established under section 1860D–

2(b)(4)(D) of the Act. This arguably 

preserves the flexibility CMS has under 

the later section to impose requirements 

on alternative coverage arrangements. In 

addition, section 1871 of the Act 

generally authorizes us to prescribe 

such regulations as may be necessary to 

carry out administration of the 

insurance programs under title XVIII of 

the Act that now includes Part D. 

We assume that employer and union 

plans may respond to the new Medicare 

prescription drug benefit in a number of 

ways. We expect that many of the 

employers and unions that currently 

provide supplemental drug coverage to 

their retirees will opt to pay premiums 

to Part D plan sponsors. In today’s 

Medicare Advantage market, the most 

prevalent model is one that employers 

and unions pay premiums to MA 

organizations. We expect this model to 

continue to have wide appeal under Part 

D. In the case of the PDP market, while 

many employers and unions may 

choose to pay premiums to PDPs for 

Part D for their retirees, others may 

choose to coordinate benefits with 

PDPs. In general, employers and unions 

that continue to offer assistance to 

Medicare-eligible retirees will either (1) 

provide qualified coverage of 

prescription drugs in such a way that 

retiree-beneficiaries do not need to 

enroll in Part D of Medicare, in which 

case the employer may qualify for a 

Federal subsidy under section 1860D–

22(a) of the Act; or (2) provide 

assistance that requires retireebeneficiaries to enroll in Part D (either 

by paying Part D basic or supplemental 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46705 

premiums); or (3) provide supplemental 

(‘‘wrap-around’’) benefits through 

alternative secondary coverage. The last 

option has implications for coordination 

of benefits between Part D plans and 

employer/union-sponsored retiree drug 

coverage, and in particular, on the 

accurate processing of claims with 

respect to the out-of-pocket threshold. 

e. Tracking True Out-of-Pocket (TrOOP) 

Costs 

As we discuss in the preamble to 

subpart C of this rule, section 1860D–

2(b)(4)(C) of the Act provides that 

beneficiary costs for covered Part D 

drugs are only considered incurred 

when those costs are incurred by a Part 

D enrollee for covered part D drugs 

covered under (or treated as covered 

under) a Part D plan that are not paid 

for under the Part D plan due to the 

application of any annual deductible or 

other cost-sharing rules for covered part 

D drugs prior to the Part D enrollee 

satisfying the out-of-pocket threshold 

under proposed § 423.104(e)(5)(iii), 

including any price differential for 

which the Part D enrollee is responsible 

under proposed § 423.120(a)(6) and 

§ 423.124(b)(2). Further, section 1860D–

2(b)(4)(C)(ii) of the Act provides that 

costs shall be treated as incurred by a 

Part D eligible individual only when 

they are paid by another person (such as 

a family member, on behalf of the 

individual) and the individual (or other 

person) is not reimbursed by insurance 

or otherwise, a group health plan, or 

other third-party arrangements, with the 

exception of amounts reimbursed by a 

SPAP or under the low-income subsidy 

provided for under proposed § 423.782. 

We refer to beneficiary expenditures for 

covered Part D drugs meeting these 

requirements as ‘‘true out-of-pocket 

costs’’, or TrOOP. We are considering a 

number of options for facilitating the 

exchange of data needed to track 

TrOOP, and will discuss alternatives 

around both mandatory versus 

voluntary reporting of claim and out-ofpocket costs, and centralized versus 

distributed responsibility for tracking 

the information in the extended 

discussion, below. 

The case in which the employer or 

union arranges wrap-around coverage 

through a third party administrator or 

insurer other than through a Part D plan 

in which the retiree-beneficiary is 

enrolled is the potentially complex and 

challenging to administer, especially 

given the true out-of-pocket costs 

(TrOOP) requirements. The degree of 

difficulty in making coordination of 

benefits work with respect to wraparound coverage is related to the ability 

of plans to efficiently coordinate 

insurance coverage at the point of sale. 

We cannot estimate the number of 

employer/labor plans that might choose 

to wrap-around prescription drug 

coverage other than through a Part D 

plan. We welcome comment that would 

help us estimate the scope and impact 

of such coverage, as well as the impact 

on the operational capabilities of plans 

(and their subcontractors). 

Medicare Part D plans will need to be 

particularly involved with employer/ 

union plans that wrap-around Part D 

coverage due to the implications such 

wrap-around coverage has for 

administering TrOOP maximums. 

Payments made on behalf of a 

beneficiary by a third party (such as by 

employer/labor-sponsored supplemental 

prescription drug coverage) are not 

considered incurred costs and, 

therefore, do not count in the TrOOP 

calculation. Thus, employer/laborsponsored wrap-around coverage 

effectively pushes out the total spending 

‘‘attachment point’’ or starting point at 

which protection from high out-ofpocket beneficiary expenditures begins. 

As discussed in subpart G of this 

preamble, although Part D plans will 

receive reinsurance payments from us 

for a portion of the costs they incur for 

prescription drug coverage provided to 

beneficiaries after the true out-of-pocket 

threshold has been met, Part D plans 

will also bear ‘‘risk’’ for a portion of the 

costs they incur above the threshold. 

The critical nature of the TrOOP 

calculation makes coordination of 

benefits under the Part D program of 

vital interest to all parties. Both CMS 

and Part D plans must know how much 

an employer/union-based plan or other 

plan pays on a prescription drug claim 

following adjudication of that claim by 

the Part D plan. Likewise, beneficiaries 

have a vested interest in the TrOOP 

calculation due to the financial relief 

they receive after meeting the annual 

out-of-pocket threshold. 

Responsibility for tracking TrOOP 

costs is somewhat unclear. On the one 

hand, the government is given authority 

to establish procedures for tracking 

TrOOP costs. For instance, as we 

discuss later in this preamble section 

and as we propose to codify in 

regulation at § 423.464(c), section 

1860D–24(a)(3) of the Act authorizes us 

to impose user fees for disseminating 

information necessary for benefit 

coordination. On the other hand, 

responsibility for obtaining and 

applying the necessary information to 

prescription drug claims is assigned to 

the Part D plan sponsors. It is of great 

importance to establish clear 

responsibilities for TrOOP tracking and 

calculation processes in regulation in 

order to ensure that qualified 

beneficiaries receive appropriate 

coverage once they have met the out-ofpocket cost limit. 

There is sufficient ambiguity in the 

statutory language to support a proposal 

to mandate that group health plans, 

insurers, and otherwise, and other thirdparty arrangements provide claims data 

for Part D enrollees to us for purposes 

of administering TrOOP. Exercising 

such authority would not be in violation 

of HIPAA confidentiality requirements. 

However, exercising such authority 

would impose administrative burden on 

group health plans, insurers, and 

otherwise, and other third-party 

arrangements that provide coverage or 

reimbursement of health care expenses 

to Medicare Part D beneficiaries. 

Moreover, mandatory reporting of 

enrollment file and claims data will not 

be sufficient, in and of itself, to capture 

all forms of enrollee cost-sharing 

reimbursement. 

For instance, if the third party 

reporting of claims payments and 

reimbursements are strictly voluntary, 

serious challenges to implementing a 

system for tracking TrOOP will continue 

to exist. A voluntary system would be 

incomplete and all payors that rely on 

voluntarily reported data would need to 

have back-up procedures for accounting 

for initially unreported data. A 

voluntary system would also leave CMS 

and Part D plans open to criticism that 

the data is incomplete and that benefits 

paid out based on TrOOP calculations 

are inaccurate. However, group health 

plans, insurers and otherwise, and other 

third-party arrangements might prefer a 

voluntary system. 

By way of comparison, the current 

(voluntary) Medicare Secondary Payor 

(MSP) program achieves $4.5 billion in 

savings. This means that there is some 

compliance with the provisions even 

though there is no mandatory insurerreporting requirement. However, under 

the MSP provisions there are 

enforcement provisions. There are tax 

penalties for non-compliance with the 

MSP rules. In addition, there is a 

mandated reporting of some information 

through the IRS/SSA/CMS data match 

project that obtains tax and spousal 

information from the IRS and SSA. Our 

contractor then sends the employer a 

questionnaire concerning the identified 

Medicare beneficiary or spouse of a 

beneficiary to determine if there is 

coverage that is primary to Medicare. 

Failure to complete the questionnaire 

can result in the imposition of a Civil 

Monetary Penalty. However, even with 

these enforcement provisions, it is 

estimated that Medicare is still losing 

millions of dollars where employer 

46706 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

plans should be primary. Payments 

made by plans primary to Medicare 

under the Medicare Secondary Payer 

provisions 1862(b) would not count 

against the TrOOP. 

In the cross-over area discussed 

previously in this section of the 

preamble, we are more successful, but 

there are still numerous payers who do 

not have cross-over agreements with us. 

So although there is substantial 

participation related to cross-over 

claims, there is also significant room for 

improvement. In the context of the 

current discussion, the issue is 

primarily that the sending of paid 

claims data to us for its use in the 

TrOOP calculation will be an added 

administrative cost on third-party 

payers, which (without explicit 

reporting requirements in the statute or 

an even an enforcement mechanism) 

may lead to lower compliance. 

We are considering the following 

options for operationalizing the data 

exchange related to the Part D 

coordination of benefits system and 

TrOOP accounting: 

Option 1: The PDPs and MA–PD plans 

would be solely responsible for tracking 

TrOOP costs. This option places the 

entire responsibility for tracking TrOOP 

costs with the PDPs and MA–PD plans. 

As part of their overall benefit 

management responsibility they would 

be responsible for establishing the 

systems infrastructure and ensuring that 

all data points are reporting timely and 

accurate data about beneficiaries’ Part D 

costs. Each PDP and MA–PD plan must 

establish arrangements with all payers 

for enrollment file sharing and claims 

payment information exchanges. This 

coordination applies equally to plans 

that are primary or secondary payer to 

Medicare. Under this scenario, any 

payer who had a beneficiary on behalf 

of whom they expected to make either 

a primary or secondary payment to 

Medicare Part D would need to be able 

to (1) identify the Part D plan in which 

the beneficiary was enrolled, (2) 

establish the telecommunications links; 

(3) transmit enrollment information to 

the specific PDP or MA–PD plan in 

which their covered individual is 

enrolled, and (4) transmit claims 

payment data to the PDP or MA–PD 

each time a claim was paid which may 

need to be included in the TrOOP 

calculation. Data collected by a PDP or 

MA–PD plan would be annotated to the 

Medicare Beneficiary Database and be 

available to pharmacies for the purposes 

of proper billing. 

Option 2: We would procure a TrOOP 

facilitation contractor to establish a 

single point of contact between payers, 

primary or secondary. Under this 

scenario, we would procure a TrOOP 

facilitation contractor based on a 

strategy of voluntary compliance, 

similar to the existing MSP coordination 

of benefits model. We would procure a 

contractor to receive enrollment and 

claims payment information from all 

plans primary and secondary to 

Medicare. This would establish a single 

point of contact between the Medicare 

program and employers, State Pharmacy 

Assistance Programs, as well as primary 

and secondary payers for enrollment 

and claims payment information. 

Under this single point of contact 

option, a payer primary or secondary to 

a Part D plan would be required to send 

an enrollment file to the TrOOP 

facilitation contractor (a contractor 

procured by us). The TrOOP facilitation 

contractor would match the payer 

enrollment information to Medicare 

enrollment records and update the 

Medicare Beneficiary Database with the 

information. The other payer enrollment 

file information would also be used the 

TrOOP facilitation contractor to match 

claims payment data which would also 

be submitted to the TrOOP facilitation 

contractor. Once a claim was matched 

against the enrollment data, the TrOOP 

facilitation contractor would aggregate 

the claim records files by Part D plan 

and transmit the information. The PDP 

or MA–PD plan would be responsible 

for using the data in applying the 

TrOOP and applying other TrOOP 

requirements such as the application of 

a formulary. 

PDPs and MA–PD plans would also 

request information about other 

coverage during the enrollment process 

and could add change or delete 

information input into the system by the 

TrOOP facilitation contractor. We can 

use existing fee-for-service coordination 

of benefits processes to implement 

many of the processes needed to 

implement these provisions. 

Information concerning primary and 

secondary plans would be shared with 

and PDPs and MA–PD plans, as well as 

annotated in the Medicare common 

working file/Medicare Beneficiary 

Database to enhance pharmacy billing 

and beneficiary customer service. 

Under either option, we would enter 

into voluntary data sharing agreements 

with employers/unions and other plans 

to participate in a shared system. The 

same mechanism would accept 

information provided directly by Part D 

plans, SPAPs, group health plans, 

FEHBP, military plans, and other 

insurance or payors as we may specify. 

We are committed to ensuring that 

claims are processed appropriately 

under Part D. Therefore, to foster proper 

billing and coordination of benefits we 

are also considering the establishment 

of the Medicare beneficiary eligibility 

and other coverage query system using 

the HIPAA 270/271 eligibility query. 

Information collected under this section 

for the purpose of TrOOP application 

would be available to be queried by 

pharmacies to facilitate proper billing. 

We are concerned that with the 

significant expansion of health care 

options available to beneficiaries that 

providing information to pharmacies 

about Medicare and other coverage is 

essential to facilitate proper claims 

processing. We are requesting comments 

concerning the development of this 

system. 

In either event, the system(s) would 

need to be operational by January 1, 

2006. Note that user fees might be 

imposed on third-party payers (but not 

on SPAPs) for the transmittal of 

information under either model. Were 

responsibility to reside solely with Part 

D plans to develop and operate a 

coordination of benefits system or 

systems (without a defined role for us in 

such development and operation), the 

statute would still permit imposition 

and collection of user fees. Please see 

our preamble discussion on user fees 

earlier in this preamble related to 

proposed § 423.464(c). 

We could propose (with or without 

mandatory reporting by insurers) 

placing requirements on Part D plans 

and enrollees that would facilitate 

private market arrangements to report 

the data. We are considering mandating 

that beneficiaries enrolling in Part D 

plans provide third-party payment 

information and consent for release of 

data held by third parties as part of their 

enrollment application and which could 

be validated through a HIPAAcompliant beneficiary ‘‘release’’ or 

authorization. For instance, if we were 

to clearly require that all Part D plans 

coordinate benefits and that all Part D 

enrollees provide consent for release of 

third-party data on their Part D 

enrollment forms, the Part D plans 

would have the authority to implement 

inter-plan reporting mechanisms in 

order to coordinate benefits. However, 

back-up procedures would still be 

necessary to capture expense 

reimbursements made outside 

prescription drug claim processing 

systems as, for instance, by HRA 

administrators. Thus, although the 

statute is unclear as to which entity 

should have primary responsibility for 

tracking TrOOP costs (CMS or the Part 

D plans), to facilitate the accurate 

calculation of TrOOP we could do this 

either through reliance on data 

collection provisions in section 1860D–

15(c)(1)(C) of the Act, or in reliance on 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46707 

our authority to collect information 

related to contracting in section 1860D–

12(b)(3)(D) of the Act that incorporates 

into Part D section 1857(e) of the Act, 

allowing the contract to require the 

contracting organization to provide to us 

the information as we decide necessary 

and appropriate. However, section 

911(c)(2) of the MMA strictly forbids 

matches of data between Medicare 

contractors and us to identify MSP 

situations. The fact that the MMA is 

silent with regard to matches or data 

exchanges for the purposes of Part D 

TrOOP cost administration could be 

taken in different ways. One way to read 

the statute would be that the omission 

was intentional and the Congress 

specifically intended for the type of 

exception not to be applicable for 

TrOOP. However, an equally good case 

could be made that TrOOP 

administration procedures were to be 

defined by us and therefore the spirit of 

the provision contained in 911(c)(2) 

should be considered as it applies to 

TrOOP. 

We ask for comment on these options 

and are seeking input on the best means 

to ensure an efficient and effective 

coordination of benefits related to the 

Part D Medicare program. We are also 

interested in discussion of other 

temporary or phased-in approaches that 

may be necessary or advisable given the 

short timeframe between publication of 

the final rule and program 

implementation. Under any of the 

scenarios presented it is clear that the 

ultimate responsibility for calculating 

TrOOP belongs to the Part D plan. The 

only issues are what role in facilitating 

TrOOP tracking CMS should have, if at 

all. 

It is important to note that the 

sequencing of primary and secondary 

insurance claims will be a critical issue 

for tracking TrOOP costs. If, for 

example, a secondary plan does not 

provide feedback to the system in real 

time, it is possible that the TrOOP cost 

information the Part D plan has access 

to may not be entirely up to date at any 

given time. Also, if a paper claim is 

submitted after the fact to the Part D 

plan or supplemental insurer (due to an 

appeal reversal, for instance), the 

TrOOP calculation would not be up to 

date in real time at the point of service. 

Another complicating factor in the 

sequencing of claims is cancelled 

prescriptions. Generally, a claim is 

adjudicated when a prescription is 

filled. If the prescription is not picked 

up, and is eventually cancelled, the 

claim needs to be cancelled. If, in the 

meantime, other claims have been 

adjudicated, the sequencing is thrown 

off by the cancelled prescription, 

potentially disrupting the calculation of 

the initial deductible and TrOOP, and 

making coordinating benefits and 

tracking TrOOP costs more difficult. 

Ideally, we would prefer that the 

system actually coordinate the 

adjudication of claims and provide realtime claims processing across multiple 

insurers, but we do not believe that such 

a complex and unique system could be 

operational by January 1, 2006. And, as 

previously mentioned, we do not have 

statutory authority to enforce a 

mandatory reporting requirement that 

employers, group health plans, other 

insurance or third-party arrangements 

participate in such a system. We 

believe, however, that the type of 

voluntary system we envision would 

provide information sufficient to permit 

the coordination of benefits that the 

statute requires and that beneficiaries 

and pharmacies desire. In any case, the 

goal would be to minimize the 

prevalence of paper claims submitted 

post point of service. In addition, we 

request public comment on methods for 

Part D plans to receive information from 

beneficiaries or others regarding 

payment made by entities that do not 

participate in this coordination of 

benefits system, since there is no 

requirement that third-party payers 

participate in this voluntary system. 

We anticipate that the majority of 

employers, group health plans and other 

third-party payment arrangements 

would participate in a voluntary system 

since they would receive a clean claim 

from the pharmacy that has already 

been adjudicated by the Part D plan. In 

return for the clean claim, we would 

request that third-party payers provide 

information back to the coordination of 

benefits system regarding how much 

they paid on the claim for purposes of 

calculating the TrOOP under Part D. We 

anticipate that there will be times that 

the information in the system is not 

consistent with what the beneficiary 

informs the pharmacy is the most 

current state of insurance. We request 

comment and relevant information (if 

any exists from current market 

practices) on how these situations 

should be resolved under Part D at the 

point of sale. 

K. Proposed Application Procedures 

and Contracts With PDP Sponsors 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart K—Proposed 

Application Procedures and Contracts 

with PDP Sponsors’’ at the beginning of 

your comments.) 

1. Overview 

Subpart K of proposed part 423, 

would implement provisions 

established by sections 1860D–12(b)(1), 

1860D–12(b)(3)(A), 1860D–12(b)(3)(B), 

1860D–12(b)(3)(C), 1860D–12(b)(3)(D) 

and 1860D–12(b)(3)(F) of the Act that 

relate to contract requirements for PDP 

sponsors. The proposed provisions in 

this rule would address conditions 

necessary to contract with Medicare as 

a PDP sponsor, as well as contract 

requirements and termination 

procedures that would apply to 

Medicare-contracting PDP sponsors. 

2. Background 

Section 1860D–12(b)(1) of the Act 

provides that an entity seeking to 

participate in the Medicare program as 

a PDP sponsor must enter into a contract 

with us for that offering. The contract 

may cover more than one prescription 

drug plan in a region or across multiple 

regions and would require the PDP 

sponsor to adhere to all applicable 

requirements and standards included in 

Part D of Title XVIII of the Act and our 

provisions at proposed part 423, as well 

as the terms and conditions for 

payments described in regulation and 

the statute. While the provisions 

discussed in proposed subpart K would, 

in general, also apply to ‘‘fallback 

plans’’, eligibility limitations and 

contract requirements for applicants 

that have offered or are offering 

‘‘fallback plans’’ are discussed in 

proposed subpart Q of this preamble. 

Section 1860D–12(b)(3) of the Act 

states that certain MA contracting 

provisions in the Act should be applied 

to contracts with PDP sponsors in the 

same manner that they apply to 

contracts with MA organizations. 

Therefore, it is our intent to apply, 

where applicable, the contracting 

provisions used for MA organizations to 

contracts with PDP sponsors. The 

contracting provisions in this proposed 

rule are, for the most part, the current 

MA contract requirements with some 

changes made to accommodate the 

differences between MA and PDP 

sponsors and to implement specific 

changes mandated in the Act. However, 

we realize that the programmatic 

differences between this proposed rule 

and the existing MA contracting 

provisions will require changes. We are 

studying this issue, requesting 

comments and planning to implement 

the appropriate changes in the final 

rule. 

We discuss the following five 

requirements in this subpart: 

• Protection against fraud and abuse 

(proposed § 423.504(d)); 

46708 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

• Contract provisions (proposed 

§ 423.505); 

• Effective date and term of contract 

(proposed § 423.506); 

• Procedures for non-renewal 

(proposed § 423.507) and termination 

(proposed § 423.508 through § 423.510); 

and 

• Minimum enrollment (proposed 

§ 423.512). 

The sixth requirement (intermediate 

sanctions) identified in section 1860D–

12(b)(3) of the Act is discussed in more 

detail in proposed subpart O of this 

preamble. 

In addition, section 1860D–12(b)(3)(D) 

of the Act incorporates section 1857(e) 

of the Act, which provides the Secretary 

the authority to include in the contract 

‘‘such other terms and conditions not 

inconsistent with this part * * * as the 

Secretary may find necessary and 

appropriate.’’ Since the contracting 

aspects of the proposed MA and PDP 

programs are quite similar, as are the 

procedures and requirements, we need 

to support their contracts. We propose 

to apply the provisions of part 422 to 

PDP sponsor contractors and applicant 

organizations, with few exceptions, in 

proposed subpart K. In some cases it 

was necessary to make changes to 

accommodate differences between MA 

and PDP sponsors, for example, 

application timeframes, payment, 

provider contract requirements, and 

certifications. We have noted these 

changes where they occur throughout 

the preamble. 

We are interested in receiving 

comments on the contracting provisions 

of this rule. We are interested in 

receiving comments on provisions that 

should not be applied, and whether for 

PDPs there are other contracting 

considerations that are not addressed in 

these MA contract provisions. Specific 

issues on which we seek comment 

include: the type of business 

transactions which should be reported 

to CMS, the proposed required 

administrative and management 

arrangements, how these provisions 

should be applied to large companies 

with multiple business units, and the 

record maintenance requirements. 

Maintenance of a single application 

and evaluation procedure, and a single 

set of contract requirements for both the 

MA and PDP programs would bring 

simplicity, consistency, and reduced 

administrative burden for those entities 

that are managing both programs. The 

requirements at proposed § 423.501 

through § 423.516 would be similar to 

the requirements in § 422.500 through 

§ 422.524. A summary of our proposed 

provisions are discussed below. 

3. Definitions 

In proposed § 423.501, we would 

define contract-related terms that would 

be limited to use in this proposed 

subpart. These definitions would be 

almost the same as those in § 422.500 

for application to the MA program 

except in cases where the MA definition 

is inapplicable—such as in definitions 

that reference hospitals or hospital 

services. Of particular note are the 

proposed terms ‘‘first tier’’ and 

‘‘downstream’’ entity because a PDP 

sponsor may often accomplish its 

responsibilities under its Medicare 

contract by contracting with these 

entities. For purposes of this proposed 

subpart the following definitions would 

apply: 

Business transaction would mean any 

of the following kinds of transactions: 

(a) Sale, exchange, or lease of 

property. 

(b) Loan of money or extension of 

credit. 

(c) Goods, services, or facilities 

furnished for a monetary consideration, 

including management services, but not 

including—

(1) Salaries paid to employees for 

services performed in the normal course 

of their employment; or 

(2) Health services furnished to the 

PDP sponsor’s enrollees by pharmacies 

and other providers, and by PDP 

sponsor staff, medical groups, or 

independent practice associations, or by 

any combination of those entities. 

Significant business transaction 

would mean any business transaction or 

series of transactions of the kind 

specified above in the definition of 

‘‘business transaction’’ that, during any 

fiscal year of the PDP sponsor, have a 

total value that exceeds $25,000 or 5 

percent of the PDP sponsor’s total 

operating expenses, whichever is less. 

Downstream entity would mean a 

party that enters into a written 

arrangement below the level of the PDP 

sponsor’s contract with the ‘‘first tier’’

entity. These written arrangements 

would continue down to the level of the 

ultimate provider of both health and 

administrative services. Usually in the 

context of the drug benefit the ultimate 

provider would be the pharmacist but it 

might also include other entities, such 

as an organization providing medication 

therapy management. 

First tier entity would mean any party 

that enters into a written arrangement 

with a PDP sponsor or contract 

applicant to provide administrative 

services or health services for a 

Medicare eligible individual under Part 

D. 

Party in interest would mean the 

following: 

(a) Any director, officer, partner, or 

employee responsible for management 

or administration of a PDP sponsor. 

(b) Any person who is directly or 

indirectly the beneficial owner of more 

than 5 percent of the organization’s 

equity; or the beneficial owner of a 

mortgage, deed of trust, note, or other 

interest secured by and valuing more 

than 5 percent of the organization. 

(c) In the case of a PDP sponsor 

organized as a nonprofit corporation, an 

incorporator or member of such 

corporation under applicable State 

corporation law. 

(d) Any entity in which a person 

described in paragraphs (a), (b), or (c) of 

this definition—

(1) Is an officer, director, or partner; 

or 

(2) Has the kind of interest described 

in paragraphs (a), (b), or (c) of this 

definition. 

(e) Any person that directly or 

indirectly controls, is controlled by, or 

is under common control with the PDP 

sponsor. 

(f) Any spouse, child, or parent of an 

individual described in paragraphs (a), 

(b), or (c) of this definition. 

Related entity would mean any entity 

that is related to the PDP sponsor by 

common ownership or control and—

(a) Performs some of the PDP 

sponsor’s management functions under 

contract or delegation; 

(b) Furnishes services to Medicare 

enrollees under an oral or written 

agreement; or 

(c) Leases real property or sells 

materials to the PDP sponsor at a cost 

of more than $2,500 during a contract 

period. 

4. Proposed Application Requirements 

Under proposed § 423.502, in order to 

obtain a determination on whether it 

meets the requirements to become a PDP 

sponsor, an entity, or an individual 

authorized to act for the entity (the 

applicant), would be required to 

complete and submit a certified 

application in the form and manner 

required by us. In addition to the 

application, the entity or individual 

authorized to act for the entity would be 

required to submit documentation of 

appropriate State licensure or State 

certification that the entity is able to 

offer health insurance or health benefits 

coverage that meets State-specified 

standards as described in proposed 

subpart I of this proposed part; or 

submit a Federal waiver as described in 

proposed subpart I of this proposed 

part. The authorized individual would 

be required to describe thoroughly how 

the entity would meet the proposed 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46709 

requirements described in this proposed 

part. 

We would be responsible for 

determining whether an entity is 

qualified to be a PDP sponsor and if that 

entity meets the proposed requirements 

of part 423. Also, in this proposed 

section, we would specify that an 

applicant that submits material that he 

or she believes would be protected from 

disclosure under 5 U.S.C. 552, the 

Freedom of Information Act, or because 

of exceptions provided in 45 CFR part 

5 (the Department’s regulations 

providing exceptions to disclosure), 

would have to label the material 

‘‘privileged’’ and include an explanation 

of the applicability of an exception 

described in 45 CFR part 5. 

Current fallback plans, entities that 

bid to be fallback plans, and, in some 

circumstances, entities that served as 

fallback plans the prior year would not 

be eligible to apply as a PDP sponsor. 

(See proposed subparts F and Q of this 

preamble for details on proposed 

‘‘fallback plans’’.) 

5. Proposed Evaluation and 

Determination Procedures For 

Applications To Be A Sponsor 

Proposed § 423.503 would establish 

procedures for us to evaluate and 

determine an entity’s application for a 

contract as a PDP sponsor. These 

provisions mostly mirror the provisions 

applicable to MA specified at 42 CFR 

422.502. This evaluation and 

determination of the application would 

be done on the basis of information 

contained in the application itself and 

any additional information that we 

would obtain through on-site visits, 

publicly available information, and any 

other appropriate procedures. 

If the application is incomplete, we 

would notify the contract applicant, and 

we propose to allow 10 days from the 

date of the notice for the contract 

applicant to furnish the missing 

information. After evaluating all 

relevant information, we would 

determine if the contract applicant’s 

application meets the applicable 

requirements of proposed § 423.504. We 

note that the MA provision in 

§ 422.502(a)(2) currently provides a 30- 

day window for the MA program to 

furnish missing information. We believe 

a 10-day period is necessary for the Part 

D program because of the June bidding 

deadline specified at § 423.265(b). An 

organization would need to apply as 

close to the first of the year as possible 

in order to have its contract approved 

before submitting bids. Once a contract 

is approved, an organization is not 

required to reapply each year. See 

§ 423.506(c) for renewal of contract 

information. 

If a PDP sponsor, MA organization, or 

Medicare cost plan fails to comply with 

the terms of a previous year’s contract 

with us under Title XVIII of the Act, or 

fails to complete a corrective action plan 

during the term of the contract, we may 

deny an application from a contract 

applicant based on the contract 

applicant’s failure to comply with that 

prior contract with us even if the 

contract applicant meets all of the 

current proposed requirements. 

We would notify each applicant that 

applies for a contract as a PDP sponsor 

under this part, of its determination on 

the application and the basis for the 

determination. The determination may 

be one of the following: 

• Approval of application. If we 

approve the application, we would give 

written notice to the contract applicant, 

indicating that it meets the requirements 

for a contract as a PDP sponsor. 

• Intent to deny. If we find that the 

contract applicant does not appear to 

meet the requirements for a PDP 

sponsor contract, we would give the 

contract applicant ‘‘notice of intent to 

deny’’ the application for a PDP contract 

and a summary of the basis for this 

preliminary finding. Within 10 days 

from the date of the notice, the contract 

applicant would have to respond in 

writing to the issues or other matters 

that would be the basis for our 

preliminary finding and would have to 

revise its application to remedy any 

defects we identify. We note that the 

MA provision in § 422.502(e)(2) 

currently provides a 60-day window for 

the MA program to remedy any defects 

we identify. We believe a 10-day period 

is necessary for the Part D program 

because of the June bidding deadline 

specified at § 423.265(b). An 

organization needs to apply as close to 

the first of the year as possible in order 

to have its contract approved prior to 

submitting a bid. 

If we deny an application, written 

notice would be given to the contract 

applicant that would indicate the 

following: 

• That the contract applicant does not 

meet the contract requirements under 

Part D of Title XVIII of the Act. 

• The reasons why the contract 

applicant does not meet the contract 

requirements. 

• The contract applicant’s right to 

request reconsideration in accordance 

with the proposed procedures specified 

in proposed § 423.645. 

This proposed section would also 

establish oversight of a PDP sponsor’s 

continued compliance with the 

proposed requirements for a PDP 

sponsor. If a PDP sponsor fails to meet 

those proposed requirements, we would 

terminate the contract in accordance 

with proposed § 423.509 of this 

proposed rule. 

6. General Provisions 

Proposed § 423.504 would specify the 

general provisions that would apply to 

PDP sponsor contracts. Again, for the 

most part, we would adopt the 

provisions that already apply to MA 

organizations through the regulations at 

42 CFR 422.501. We have recently 

proposed changes to the compliance 

program requirements for MA 

organizations at 42 CFR 

422.501(b)(3)(vi)(G) to include 

provisions that would require MA 

organizations to report misconduct it 

believes may violate various criminal, 

civil or administrative authorities. 

These self-reporting requirements are 

identified below in the discussion of the 

elements of a PDP compliance program. 

We have based the compliance program 

requirements for PDP sponsors on these 

new and recently proposed MA 

requirements. We believe that 

mandatory reporting of potential fraud 

by government contractors is critical, 

especially in light of the corporate fraud 

scandals that occurred over the past 

several years. It is also in keeping with 

the Sarbanes-Oxley Act of 2002, under 

which the Securities and Exchange 

Commission adopted new regulations 

designed to make corporate compliance 

and disclosure requirements stronger 

and more effective. In short, we believe 

that the self-reporting requirements 

included in this rule are keeping with 

the change in the legal, regulatory, and 

business climates since the compliance 

program requirements were first 

implemented. Subject to the provisions 

at proposed § 423.265(a)(1), in subpart 

F—Submission of bid, we are proposing 

that in order to enroll beneficiaries in 

any prescription drug plan it offers and 

be paid on behalf of Medicare 

beneficiaries enrolled in those plans, a 

PDP sponsor would have to enter into 

a contract with us. The contract could 

cover more than one prescription drug 

plan. 

In accordance with those regulations, 

we also propose that any entity seeking 

to contract as a PDP sponsor would be 

required to meet the following 

conditions: 

• Complete an application as 

described in proposed § 423.502. 

• Be organized and licensed under 

State law as a risk bearing entity eligible 

to offer health insurance or health 

benefits coverage in each State in which 

it offers a prescription drug plan, or 

have secured a Federal waiver, as 

46710 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

described in proposed subpart I of this 

preamble. 

• Meet the proposed minimum 

enrollment requirements of proposed 

§ 423.512(a) unless waived under 

proposed § 423.512(b). 

• Have administrative and 

management arrangements satisfactory 

to us that could be demonstrated by at 

least the following: 

+ A policy making body that would 

exercise oversight and control over the 

PDP sponsor’s policies and personnel 

that would ensure that management 

actions would be in the best interest of 

the organization and its enrollees. 

+ Personnel and systems that would 

be sufficient for the PDP sponsor to 

organize, implement, control, and 

evaluate financial and marketing 

activities, the furnishing of prescription 

drug services, the quality assurance, 

medication therapy management, and 

drug-utilization management programs, 

and the administrative and management 

aspects of the organization. 

+ At a minimum, an executive 

manager whose appointment and 

removal would be under the control of 

the policy making body. 

+ A fidelity bond or bonds, procured 

and maintained by the PDP sponsor, in 

an amount fixed by its policymaking 

body, but not less than $100,000 per 

individual, that would cover each 

officer and employee entrusted with the 

handling of its funds. The bond may 

have reasonable deductibles, based 

upon the financial strength of the PDP 

sponsor. 

+ Insurance policies or other 

arrangements, secured and maintained 

by the PDP sponsor and approved by us, 

that would insure the PDP sponsor 

against losses arising from professional 

liability claims, fire, theft, fraud, 

embezzlement, and other casualty risks. 

+ A compliance plan that would 

consist of the following: 

¥ Written policies, procedures, and 

standards of conduct articulating the 

organization’s commitment to comply 

with all applicable Federal and State 

standards. 

¥ The designation of a compliance 

officer and compliance committee 

accountable to senior management. 

¥ Effective training and education 

between the compliance officer and 

organization employees. 

¥ Effective lines of communication 

between the compliance officer and the 

organization’s employees. 

¥ Enforcement of standards through 

well-publicized disciplinary guidelines. 

¥ Procedures for internal monitoring 

and auditing. 

¥ Procedures for ensuring prompt 

response to detected offenses and 

development of corrective action 

initiatives relating to the organization’s 

contract as a PDP sponsor. 

¥ If the PDP sponsor discovers from 

any source evidence of misconduct 

related to payment or delivery of 

prescription drug items or services 

under the contract, it must conduct a 

timely, reasonable inquiry into that 

misconduct; 

¥ If, after reasonable inquiry, the 

PDP sponsor has determined that the 

misconduct may violate criminal, civil 

or administrative law, the sponsor must 

report the existence of the misconduct 

to the appropriate Government authority 

within a reasonable period, but not 

more than 60 days after the 

determination that a violation may have 

occurred. If the potential violation 

relates to federal criminal law, the civil 

False Claims Act, federal Anti-Kickback 

provisions, the civil monetary penalties 

authorities (primarily under sections 

1128A and 1857 (as incorporated 

through section 1860D–12) of the Act), 

or related statutes enforced by the HHS 

Office of Inspector General, the report 

must be made to that Office. 

¥ The PDP sponsor must conduct 

appropriate corrective actions (for 

example, repayment of overpayments, 

disciplinary actions against responsible 

employees, etc.) in response to the 

potential violation referenced above. 

The PDP sponsor’s contract must not 

have been non-renewed under proposed 

§ 422.507 within the past 2 years, 

unless—

+ During the 6-month period 

beginning on the date the organization 

notified us of the intention to nonrenew the most recent previous 

contract, there was a change in the 

statute or regulations that had the effect 

of increasing PDP sponsor payments in 

the payment area or areas at issue; or 

+ We have otherwise determined that 

circumstances warrant special 

consideration. 

Section 1860D–4(b)(1)(A) of the Act 

assures pharmacy access by requiring a 

PDP sponsor to permit the participation 

of any pharmacy that meets the terms 

and conditions under the plan. Based on 

this requirement, we are considering 

adding the following language to the 

contract provisions: The PDP sponsor 

would agree to have a standard contract 

with reasonable and relevant terms and 

conditions of participation whereby any 

willing pharmacy may access the 

standard contract and participate as a 

network pharmacy. We are interested in 

public comment on the inclusion of 

such a provision. 

Section 1857(c)(5) of the Act, which is 

incorporated by section 1860D–

12(b)(3)(B) of the Act, authorizes us to 

exercise the authority granted to the 

Secretary under Part D of Title XVIII 

without regard to provisions of the 

statute or regulations that we determine 

to be inconsistent with the furtherance 

of the purpose of Title XVIII of the Act. 

Based on this authority, we propose to 

provide, in proposed § 423.504(c) 

(Contracting authority), that we may 

enter into contracts under this proposed 

subpart without regard to Federal and 

Departmental acquisition regulations set 

forth in title 48 of the CFR. We note that 

some of the Federal Acquisition 

Regulation (FAR) provisions may apply 

to ‘‘fallback plans’’. (See proposed 

subparts F and Q for any contracting 

provisions unique to fallback plans.) 

In proposed § 423.504(d) (Protection 

against fraud and beneficiary 

protections), we set forth the proposed 

requirements that we would have in 

place to protect against fraud and abuse 

in our PDP sponsor contracts. As 

directed by the statute, these are the 

same requirements as those in sections 

1857(d)(1) and (d)(2) of the Act. The 

proposed requirements are as follows: 

• We would annually audit the 

financial records (including, but not 

limited to, data relating to Medicare 

utilization, costs, reinsurance cost, lowincome subsidy payments, and risk 

corridor cost) of at least one-third of the 

PDP sponsors, including fallback plans, 

offering prescription drug plans. We 

welcome comments on whether fallback 

plans, because of the payment 

arrangements, require a different audit 

approach, possibly more frequent. The 

Comptroller General would monitor 

these auditing activities. 

• Each contract under this proposed 

section would be required to provide 

that we, or any person or organization 

designated by us, would have the right 

to—

+ Inspect or otherwise evaluate the 

quality, appropriateness, and timeliness 

of services performed under the PDP 

sponsor’s contract; 

+ Inspect or otherwise evaluate the 

facilities of the organization when there 

is reasonable evidence of some need for 

such inspection; and 

+ Audit and inspect any books, 

contracts, and records of the PDP 

sponsor that pertain to the ability of the 

organization or its first tier or 

downstream providers to bear the risk of 

potential financial losses; or services 

performed or determinations of amounts 

payable under the contract. 

Section 1860D–12(b) of the Act allows 

contracts with PDP sponsors to cover 

more than one prescription drug plan. 

At proposed § 423.504(e) (Severability 

of contracts), we are proposing that the 

contract would provide, upon our 

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request, that the contract could be 

amended to exclude any State-licensed 

entity, or a PDP plan specified by us; 

and a separate contract for any excluded 

plan or entity would be deemed to be 

in place when such a request is made. 

7. Contract Provisions 

Section 1860D–12(b)(3)(D) of the Act 

requires that provisions of section 

1857(e) of the Act relating to additional 

contract terms of MA contracts would 

apply in the same manner to PDP 

sponsors. Section 1857(e) of the Act 

allows that the contract would contain 

other terms and conditions not 

inconsistent with Part D of the Act, 

including requiring the organization to 

provide us with the information that we 

may find necessary and appropriate. 

The additional contract provisions for 

the MA program are adopted for use in 

this proposed rule with modifications as 

necessary to accommodate differences 

between the MA program and the 

prescription drug program. Elsewhere in 

this preamble, we have also identified 

additional contract terms that would 

apply uniformly to both MA 

organizations offering MA–PDs and PDP 

sponsors (see, for example, subpart D 

discussing e-prescribing). In proposed 

§ 423.505 (Contract provisions), we 

would require the contract between the 

PDP sponsor and us to contain the 

provisions specified in proposed 

§ 423.505(b). The following is a 

summary of the proposed additional 

contract provisions that reflect any 

changes from the MA contract 

provisions: 

• Specific Provisions. 

In proposed § 423.505(b), we would 

list the specific provisions that would 

be contained in the contract between the 

PDP sponsor and us. Changes were 

made from the MA provisions to 

accommodate the different bidding and 

payment system for PDP sponsors. The 

PDP sponsor would be required to agree 

to comply with the following proposed 

provisions: 

+ All the applicable proposed 

requirements and proposed conditions 

set forth in this proposed part and in 

general proposed instructions. 

+ To accept new enrollments, make 

enrollments effective, process voluntary 

disenrollments, and limit involuntary 

disenrollments, as provided in proposed 

subpart B of this proposed part. 

+ To comply with the proposed 

prohibition in proposed § 423.34(a) on 

discrimination in beneficiary 

enrollment. 

+ To provide the basic benefits as 

proposed under proposed § 423.108 

and, to the extent applicable, 

supplemental benefits proposed under 

proposed § 423.112. 

+ To disclose information to 

beneficiaries in the manner and the 

form prescribed by us under proposed 

§ 423.128. 

+ To operate quality assurance, cost 

and utilization management, medication 

therapy management, and fraud, abuse 

and waste programs as proposed under 

proposed subpart D of this proposed 

part. 

+ To comply with all proposed 

requirements in proposed subpart M of 

this proposed part governing coverage 

determinations, grievances, and appeals. 

+ To comply with the proposed 

reporting requirements in proposed 

§ 423.514 and the proposed 

requirements in proposed 

§ 423.329(b)(3) of proposed subpart G 

for submitting drug claims and related 

information to us for its use in risk 

adjustment calculations; 

+ Each contract under this proposed 

part would provide that—

¥ The PDP sponsor offering a 

prescription drug plan would be 

required to provide us with the 

information as we determine is 

necessary to carry out proposed 

payment provisions in proposed subpart 

G of this proposed part; and 

¥ We would have the right, as 

applied under section 1860D–

12(b)(3)(C) of the Act and in accordance 

with section 1857(d)(2)(B) of the Act, to 

inspect and audit any books, contracts, 

and records of a PDP sponsor or MA 

organization that pertain to the 

information regarding costs provided to 

us under proposed § 423.504(d)(2)(iii) of 

this proposed section. 

+ To be paid under the contract in 

accordance with the proposed payment 

rules in proposed subpart G of this 

proposed part. 

+ To submit its bid, including all 

required information on premiums, 

benefits, and cost-sharing, by the 

proposed due date, as provided in 

proposed subpart F of this proposed 

part. 

+ That its contract could possibly not 

be renewed or could be terminated in 

accordance with this proposed subpart 

and proposed subpart N of this 

proposed part. 

+ To comply with the proposed 

confidentiality and proposed enrollee 

record accuracy requirements described 

in proposed § 423.136. 

+ To comply with State Law and 

preemption by Federal Law 

requirements described in proposed 

subpart I of this proposed part. 

+ To comply with the proposed 

coordination requirements with plans 

and programs that provide prescription 

drug coverage as described in proposed 

subpart J of this proposed part. 

+ To provide benefits by means of 

point of service systems to adjudicate 

drug claims, except where necessary to 

provide access in underserved areas, I/ 

T/U pharmacies (as defined in proposed 

§ 423.100), and long-term care 

pharmacies. 

• Communication with CMS. 

In proposed § 423.505(c), we would 

require the PDP sponsor to have the 

capacity to communicate with us 

electronically in the manner we specify. 

• Maintenance of records. 

In proposed § 423.505(d), we are 

proposing to detail the proposed 

requirements for record maintenance 

and retention, which would be 

unchanged from the MA regulations. We 

would require PDP sponsors to maintain 

books, records, documents, and other 

evidence of accounting procedures and 

practices for a period of 6 years so as not 

to prematurely foreclose our ability to 

pursue fraudulent or other abusive 

activities. The other evidence of 

accounting procedures and practices 

would have to be sufficient to do the 

following: 

+ Accommodate periodic auditing of 

the financial records (including data 

related to Medicare utilization, costs, 

and computation of the bid of PDP 

sponsors). 

+ Enable us to inspect or otherwise 

evaluate the quality, appropriateness 

and timeliness of services performed 

under the contract, and the facilities of 

the organization. 

+ Enable us to audit and inspect any 

books and records of the PDP sponsor 

that pertain to the ability of the 

organization to bear the risk of potential 

financial losses, or to services 

performed or determinations of amounts 

payable under the contract. 

+ Properly reflect all direct and 

indirect costs claimed to have been 

incurred and used in the preparation of 

the PDP sponsor’s bid and necessary for 

the calculation of gross covered 

prescription drug costs, allowable 

reinsurance costs and allowable risk 

corridor costs (as defined in proposed 

§ 423.308). 

+ Establish the basis for the 

components, assumptions and analysis 

used by the PDP in determining the 

actuarial valuation of standard, basic 

alternative, or enhanced alternative 

coverage offered in accordance with our 

guidelines described in proposed 

§ 423.265(b)(3). 

We would also require the PDP 

sponsor to include at least records of the 

following: 

46712 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

+ Ownership and operation of the 

PDP sponsor’s financial, medical, and 

other record keeping systems. 

+ Financial statements for the current 

contract period and 6 prior periods. 

+ Federal income tax or 

informational returns for the current 

contract period and six prior periods. 

+ Asset acquisition, lease, sale, or 

other action. 

+ Agreements, contracts, and 

subcontracts. 

+ Franchise, marketing, and 

management agreements. 

+ Matters pertaining to costs of 

operations. 

+ Amounts of income received by 

source and payment. 

+ Cash flow statements. 

+ Any financial reports filed with 

other Federal programs or State 

authorities. 

+ All prescription drug claims for the 

current contract period and 6 prior 

periods. 

+ All price concessions for the 

current contract period and 6 prior 

periods accounted for separately from 

other administrative fees. This includes 

concessions offered by manufacturers to 

PDP sponsors. 

• Access to Facilities and Records. 

In proposed § 423.505(e), the PDP 

sponsor would be required to agree to 

the same access to facilities and records 

as under the MA program. The PDP 

sponsor would be required to agree to 

the following: 

+ HHS, the Comptroller General, or 

their designee could evaluate, through 

inspection or other means—

¥ The quality, appropriateness, and 

timeliness of services furnished to 

Medicare enrollees under the contract; 

¥ The facilities of the PDP sponsor; 

and 

¥ The enrollment and disenrollment 

records for the current contract period 

and six prior periods. 

+ HHS, the Comptroller General, or 

their designees could audit, evaluate, or 

inspect any books, contracts, medical 

records, patient care documentation, 

and other records of the PDP sponsor, 

related entity(s), contractor(s), 

subcontractor(s), or its transferee that 

pertain to any aspect of services 

performed, reconciliation of benefit 

liabilities, and determination of 

amounts payable under the contract, or 

as the Secretary may deem necessary to 

enforce the contract. 

+ The PDP sponsor would have to 

agree to make available, for the purposes 

specified in this section, its premises, 

physical facilities and equipment, 

records relating to its Medicare 

enrollees, and any additional relevant 

information that we could require. 

+ HHS, the Comptroller General, or 

their designee’s right to inspect, 

evaluate, and audit extends through 6 

years from the end of the final contract 

period or completion of audit, 

whichever is later unless—

¥ We determine there is a special 

need to retain a particular record or 

group of records for a longer period and 

notify the PDP sponsor at least 30 days 

before the normal disposition date; 

¥ There is a termination, dispute, or 

allegation of fraud or similar fault by the 

PDP sponsor, in which case the 

retention may be extended to 6 years 

from the date of any resulting final 

resolution of the termination, dispute, 

or fraud or similar fault; or 

¥ We determine that there is a 

reasonable possibility of fraud, in which 

case we may inspect, evaluate, and 

audit the PDP sponsor at any time. 

• Disclosure of Information. 

Under proposed § 423.505(f), the PDP 

sponsor would be required to agree to 

submit to us certified financial 

information that would have to include 

the information, as we could require, 

that would demonstrate that the 

organization has a fiscally sound 

operation. The certified financial 

information would include the 

information, as we could require, 

pertaining to the disclosure of 

ownership and control of the PDP 

sponsor. Also, the certification would 

include all information that would be 

necessary for us to administer and 

evaluate the program and to 

simultaneously establish and facilitate a 

process for current and prospective 

beneficiaries to exercise choice in 

obtaining prescription drug coverage. 

This information would include, but 

would not be limited to—

+ The benefits that would be covered 

under a prescription drug plan; 

+ The PDP monthly basic beneficiary 

premium and PDP monthly 

supplemental beneficiary premium, if 

any, for the plan; 

+ The service area of each plan; 

+ Plan quality and performance 

indicators for the benefits under the 

plan including—

¥ Disenrollment rates for Medicare 

enrollees electing to receive benefits 

through the plan for the previous 2 

years; 

¥ Information on Medicare enrollee 

satisfaction; 

¥ The recent records regarding 

compliance of the plan with 

requirements of this part, as determined 

by us; and 

¥ Other information determined by 

us to be necessary to assist beneficiaries 

in making an informed choice regarding 

PDP plans; 

+ Information about beneficiary 

appeals and their disposition; 

+ Information regarding all formal 

actions, reviews, findings, or other 

similar actions by States, other 

regulatory bodies, or any other 

certifying or accrediting organization; 

and 

+ Any other information deemed 

necessary to CMS for the administration 

or evaluation of the Medicare program. 

The PDP sponsor would also be 

required to disclose all informational 

requirements to its enrollees, under 

proposed § 423.128(b) and, upon an 

enrollee’s request, the financial 

disclosure information required under 

proposed § 423.128(c)(4). (See proposed 

subpart C of this proposed part.) 

• Proposed Beneficiary Financial 

Protections. 

Under proposed § 423.505(g), the PDP 

sponsor would be required to adopt and 

maintain arrangements satisfactory to us 

to protect its enrollees from incurring 

liability (that is, as a result of an 

organization’s insolvency or other 

financial difficulties) for payment of any 

fees that would be the legal obligation 

of the PDP sponsor. The beneficiary 

financial protection provisions would 

remain unchanged from the MA 

program. To meet this proposed 

requirement, the PDP sponsor would 

have to ensure that all contractual or 

other written arrangements prohibit the 

organization’s contracting agents from 

holding any beneficiary enrollee liable 

for payment of any such fees; and the 

PDP sponsor would have to indemnify 

the beneficiary enrollee for payment of 

any fees that would be the legal 

obligation of the PDP sponsor for 

covered prescription drugs furnished by 

non-contracting pharmacists, or that 

would not have otherwise entered into 

an agreement with the PDP sponsor, to 

provide services to the organization’s 

beneficiary enrollees. 

To meet these proposed requirements 

of this proposed section, other than the 

proposed provider contract 

requirements discussed above, the PDP 

sponsor would use contractual 

arrangements; insurance acceptable to 

us; financial reserves acceptable to us; 

or any other arrangement acceptable to 

us. 

• Proposed Requirements of Other 

Laws and Regulations. 

One of the requirements we have 

incorporated from the existing MA rules 

is the requirement that plans comply 

with all Federal, State and local laws 

and regulations (see proposed 

§ 422.505(h)). We have updated the list 

to include HIPAA Administrative and 

Simplification rules. Proposed 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46713 

§ 423.505(h) would require the PDP 

sponsor to comply with—

+ Title VI of the Civil Rights Act of 

1964 as implemented by regulations at 

45 CFR part 84. 

+ The Age Discrimination Act of 

1975 as implemented by regulations at 

45 CFR part 91. 

+ The Rehabilitation Act of 1973. 

+ The Americans with Disabilities 

Act. 

+ HIPAA Administrative 

Simplification rules at 45 CFR Parts 160, 

162, and 164 

+ Other laws applicable to recipients 

of Federal funds. 

+ All other applicable laws and rules. 

PDP sponsors receiving Federal 

payments under PDP sponsor contracts, 

and related entities, contractors, and 

subcontractors paid by a PDP sponsor to 

fulfill its obligations under its contract 

with us, would be subject to certain 

laws that are applicable to individuals 

and entities receiving Federal funds. 

PDP sponsors would be required to 

inform all related entities, contractors 

and subcontractors that payments they 

receive would be, in whole or in part, 

from Federal funds. These proposed 

provisions would remain unchanged 

from the MA program. 

• Proposed Requirements for PDP 

Sponsor Relationship with Related 

Entities, Contractors, and 

Subcontractors. 

In proposed § 423.505(i), 

notwithstanding any relationship(s) that 

the PDP sponsor may have with related 

entities, contractors, or subcontractors, 

the PDP sponsor would maintain 

ultimate responsibility for adhering to 

and otherwise fully complying with all 

terms and conditions of its contract with 

us. The PDP sponsor would have to 

agree to require all related entities, 

contractors, or subcontractors that 

provide Part D items or services 

(including administrative services) to 

agree that—

+ The Department of Health and 

Human Services (HHS), the Comptroller 

General, or their designees would have 

the right to inspect, evaluate, and audit 

any pertinent contracts, books, 

documents, papers, and records of the 

related entity(s), contractor(s), or 

subcontractor(s) involving transactions 

related to our contract with the PDP 

sponsor; and 

+ HHS’, the Comptroller General’s, or 

their designee’s right to inspect, 

evaluate, and audit any pertinent 

information for any particular contract 

period should exist through 6 years 

from the final date of the contract period 

or from the date of completion of any 

audit, whichever is later. 

This proposed section would also 

require all contracts or written 

arrangements between PDP sponsors 

and providers, related entities, 

contractors, subcontractors, ‘‘first tier’’, 

and ‘‘downstream’’ entities that provide 

Part D items or services (including 

administrative services) to contain the 

specified proposed provisions. These 

proposed provisions would remain 

unchanged from the MA program. 

• Proposed Additional Contract 

Terms. 

In proposed § 423.505(j), the PDP 

sponsor would agree to include, in the 

contract, other terms and conditions as 

we may find necessary and appropriate 

in order to implement proposed 

requirements in this proposed part. 

• Severability of Contracts. 

In proposed § 423.505(k), the PDP 

sponsor would have to agree to include 

in the contract a severability provision 

that would establish that, upon our 

request, the contract would be amended 

to exclude any State-licensed entity, or 

PDP sponsor specified by us; and a 

separate contract for any excluded plan 

or entity would be deemed to be in 

place when the request is made. 

• Certification of Data that 

Determines Payment. 

In proposed § 423.505(l), we would 

require, as a condition of receiving a 

monthly payment under proposed 

subpart G of this proposed part, the PDP 

sponsor to agree that its chief executive 

officer (CEO), chief financial officer 

(CFO), or an individual delegated the 

authority to sign on behalf of one of 

these officers, and who reports directly 

to the officer, would request payment 

under the contract on a document that 

certifies (based on best knowledge, 

information, and belief) the accuracy, 

completeness, and truthfulness of all 

data related to payment. The data could 

include specified enrollment 

information, claims data, bid 

submission data, and other data that we 

specify. We recommend that PDP 

sponsors collect such certifications from 

their downstream partners to support 

their best knowledge, information and 

belief in signing their own certifications. 

In addition, we propose a certification 

for when PDP sponsors submit updated 

drug pricing data to CMS for beneficiary 

enrollment purposes. 

The CEO, CFO, or an individual 

delegated the authority to sign on behalf 

of one of these officers, and who reports 

directly to the officer, would be required 

to certify (based on best knowledge, 

information, and belief) that each 

enrollee for whom the organization 

would request payment is validly 

enrolled in a program offered by the 

organization and the information relied 

upon by us in determining payment) is 

accurate, complete, and truthful. 

The CEO, CFO, or an individual 

delegated with the authority to sign on 

behalf of one of these officers, and who 

reports directly to the officer, would be 

required to certify (based on best 

knowledge, information, and belief) that 

the claims data it would submit under 

proposed § 423.329(b)(3) are accurate, 

complete, and truthful. If the claims 

data are generated by a related entity, 

contractor, or subcontractor of a PDP 

sponsor, the entity, contractor, or 

subcontractor would be required to 

similarly certify (based on best 

knowledge, information, and belief) the 

accuracy, completeness, and 

truthfulness of the data. The PDP 

sponsor or related entity, contractor, or 

subcontractor would acknowledge that 

the claims data would be used for the 

purpose of obtaining Federal 

reimbursement. 

The CEO, CFO, or an individual 

delegated the authority to sign on behalf 

of one of these officers, and who reports 

directly to the officer, would be required 

to certify (based on best knowledge, 

information, and belief) that the 

information in its bid submission and 

assumptions related to projected 

reinsurance and low income cost 

sharing subsidies is accurate, complete, 

truthful, and fully conforms to the 

requirements specified in proposed 

§ 423.265. The CEO, CFO, or an 

individual delegated the authority to 

sign on behalf of one of these officers, 

and who reports directly to the officer, 

must certify (based on best knowledge, 

information, and belief) that the 

information provided for purposes of 

supporting allowable costs, as defined 

in § 423.308, is accurate, complete, 

truthful, and fully conforms to the 

requirements in § 423.336(c) and 

§ 423.343(c). 

The CEO, CFO, or an individual 

delegated the authority to sign on behalf 

of one of these officers, and who reports 

directly to the officer, must certify 

(based on best knowledge, information, 

and belief) that the information 

provided for purposes of price 

comparison is accurate, complete, and 

truthful. 

8. Effective Date and Term of Contract 

Section 1860D–12(b)(3)(B) of the Act 

provides that we include the contract 

period and effectiveness requirements 

that are included in section 1857(c) of 

the Act. Proposed § 423.506 would 

provide that contracts be effective on 

the date specified in the contract, and 

that the contracts would be for a term 

of 12 months. The contract period for a 

fallback plan is specified in 

46714 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

§ 423.871(b). In addition, contracts 

could be renewed from year to year, but 

only in the event that we inform the 

PDP sponsor that a renewal is 

authorized and only if the PDP sponsor 

does not provide us with a notice of 

intention not to renew. We do not 

require an application process for 

contract renewals. Because of the need 

for us to establish a national average 

monthly bid amount from approved 

bids in order to calculate the base 

beneficiary premiums, we propose to 

not allow a PDP contract to be effective 

at any time other than the first of the 

year. These proposed provisions would 

be similar to the MA provisions in 

§ 422.505. 

9. Non-Renewal of Contract 

Section 1860D–12(b)(3)(F) of the Act 

requires that the provisions of section 

1857(h) of the Act relating to procedures 

for termination (or non-renewal) of MA 

contracts would apply to PDP sponsors 

with respect to determinations and 

appeals. A non-renewal would be 

different from a termination in that 

either the PDP or us chooses to end the 

contract by following the proposed 

provisions described below. 

In proposed § 423.507, we are 

proposing that a PDP sponsor could 

elect not to renew its contract with us 

as of the end of the term of the contract 

for any reason, provided it would notify 

us in writing by the first Monday of June 

in the year in which the contract would 

end. The PDP sponsor would also have 

to notify each Medicare enrollee, at least 

90 days before the date on which the 

nonrenewal is effective. This notice 

would have to include a written 

description of alternatives available for 

obtaining Medicare prescription drug 

services within the PDP region, 

including MA–PDs, and other PDPs, and 

would have to receive our approval. The 

general public would also have to be 

notified at least 90 days before the end 

of the current calendar year, by 

publishing a notice in one or more 

newspapers of general circulation in 

each community or county located in 

the PDP sponsor’s service area. 

If a PDP sponsor chooses to nonrenew a contract as described in 

proposed § 423.507(a)(3), we would not 

enter into a contract with the 

organization for 2 years unless there are 

special circumstances that warrant 

special consideration, as determined by 

CMS. 

For purposes of this section, we could 

elect not to authorize renewal of a 

contract for any of the reasons listed in 

proposed § 423.509(a), which would 

also permit us to terminate the contract, 

or if the PDP sponsor commits any of 

the acts in proposed § 423.752 that 

supports the imposition of intermediate 

sanctions or civil money penalties 

under proposed § 423.750 of proposed 

Subpart O. 

We would provide notice of our 

decision whether to authorize renewal 

of the contract to the PDP sponsor by 

May 1 of the contract year. If we decide 

not to authorize a renewal of the 

contract, we would provide notice to the 

PDP sponsor’s Medicare enrollees by 

mail at least 90 days before the end of 

the current calendar year. We would 

also notify the general public at least 90 

days before the end of the current 

calendar year, by publishing a notice in 

one or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

service area. We would give the PDP 

sponsor written notice of its right to 

appeal the decision not to renew in 

accordance with proposed § 423.642(b). 

10. Modification or Termination of 

Contract by Mutual Consent 

In proposed § 423.508, we are 

proposing that a contract could be 

modified or terminated at any time by 

written mutual consent. If the contract 

is terminated by mutual consent, the 

PDP sponsor would have to provide 

notice to its Medicare enrollees and the 

general public as provided in proposed 

§ 423.507. If the contract is modified by 

mutual consent, the PDP sponsor would 

be required to notify its Medicare 

enrollees of any changes that we 

determine are appropriate for 

notification within timeframes specified 

by us. This proposed section would 

remain unchanged from the MA 

program. 

11. Termination of Contract by CMS 

In proposed § 423.509, we may 

terminate a contract with the PDP 

sponsor for any of the following reasons: 

• The PDP sponsor fails substantially 

to carry out the terms of its contract 

with us (proposed § 423.509(a)(1)). 

• The PDP sponsor carries out its 

contract with us in a manner that would 

be inconsistent with the effective and 

efficient implementation of this 

proposed part (proposed 

§ 423.509(a)(2)). 

• We determine that the PDP sponsor 

no longer meets the proposed 

requirements of this proposed part for 

being a contracting organization 

(proposed § 423.509(a)(3)). 

• There is credible evidence that the 

PDP sponsor committed or participated 

in false, fraudulent, or abusive activities 

affecting the Medicare program, 

including submission of false or 

fraudulent data (proposed 

§ 423.509(a)(4)). 

• The PDP sponsor experiences 

financial difficulties so severe that its 

ability to provide necessary prescription 

drug coverage is impaired to the point 

of posing an imminent and serious risk 

to the health of its enrollees, or 

otherwise fails to make services 

available to the extent that a risk to 

health exists (proposed § 423.509(a)(5)). 

• The PDP sponsor substantially fails 

to comply with the requirements in 

proposed subpart M of this proposed 

part relating to grievances and appeals 

(proposed § 423.509(a)(6)). 

• The PDP sponsor fails to provide us 

with valid risk adjustment, reinsurance 

and risk corridor related data as 

required under proposed § 423.329 

(proposed § 423.509(a)(7)). 

• The PDP sponsor substantially fails 

to comply with the proposed service 

access requirements in proposed 

§ 423.120 (proposed § 423.509(a)(8)) 

• The PDP sponsor substantially fails 

to comply with the proposed marketing 

requirements in proposed § 423.128 

(proposed § 423.509(a)(9)). 

• The PDP sponsor substantially fails 

to comply with the coordination with 

plans and programs that provide 

prescription drug coverage as described 

in proposed subpart J of this proposed 

part (proposed § 423.509(a)(10)). 

• The PDP sponsor substantially fails 

to comply with the proposed cost and 

utilization management, proposed 

quality improvement, proposed 

medication therapy management, and 

fraud, abuse and waste program 

requirements as described in proposed 

subpart D of this proposed part 

(proposed § 423.509(a)(11)). 

If we decide to terminate a contract 

for reasons other than the grounds 

described above in proposed 

§ 423.509(a)(4) or (a)(5), we would 

notify the PDP sponsor in writing 90 

days before the intended date of the 

termination. The PDP sponsor would 

then notify its Medicare enrollees of the 

termination by mail at least 30 days 

before the effective date of the 

termination. The PDP sponsor would 

also notify the general public of the 

termination at least 30 days before the 

effective date of the termination by 

publishing a notice in one or more 

newspapers of general circulation in 

each community or county located in 

the PDP sponsor’s service area. 

We propose adding § 423.509(a)(4) as 

a reason for immediate termination 

without corrective action. If we have 

credible evidence that a PDP sponsor 

committed or participated in false, 

fraudulent, or abusive activities 

affecting the Medicare program, we may 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46715 

determine that providing the sponsor 

with additional time to submit a 

corrective action plan would only 

expose beneficiaries to a plan we have 

already determined engaged in 

fraudulent or abusive behavior. 

Therefore, we propose to terminate the 

contract as soon as possible in order to 

protect the beneficiaries enrolled with 

the affected sponsor as well as the 

Medicare trust fund. 

For terminations based on violations 

described in proposed § 423.509(a)(4) or 

§ 423.509(a)(5), we would notify the 

PDP sponsor in writing that its contract 

has been terminated effective the date of 

the termination decision by us. If 

termination is effective in the middle of 

a month, we would have the right to 

recover the prorated share of the 

prospective monthly payments made to 

the PDP sponsor covering the period of 

the month following the contract 

termination. 

We would also notify the PDP 

sponsor’s Medicare enrollees in writing 

of our decision to terminate the PDP 

sponsor’s contract. This notice would 

occur no later than 30 days after we 

notify the plan of our decision to 

terminate the contract. We would also 

simultaneously inform the Medicare 

enrollees of alternative options for 

obtaining prescription drug coverage, 

including alternative PDP and MA–PDs 

in a similar geographic area. We would 

notify the general public of the 

termination no later than 30 days after 

notifying the plan of our decision to 

terminate the contract. This notice 

would be published in one or more 

newspapers of general circulation in 

each community or county located in 

the PDP sponsor’s service area. 

Before terminating a contract for 

reasons other than the grounds specified 

in proposed § 423.509(a)(4) or 

§ 423.509(a)(5), we would provide the 

PDP sponsor with reasonable 

opportunity to develop and receive our 

approval of a corrective action plan to 

correct the deficiencies that are the basis 

of the proposed termination. If a 

contract is terminated based on 

§ 423.509(a)(4) or § 423.509(a)(5), the 

PDP sponsor would not be given the 

opportunity to submit a corrective 

action plan. If we decide to terminate a 

contract, we would send written notice 

to the PDP sponsor informing it of its 

termination appeal rights in accordance 

with proposed § 423.642 of this 

proposed part. 

12. Termination of Contract by the PDP 

Sponsor 

In proposed § 423.510, we are 

proposing that the PDP sponsor may 

terminate its contract if we fail to 

substantially carry out the terms of the 

contract. The PDP sponsor would be 

required to give advance notice as 

follows: 

• To us, at least 90 days before the 

intended date of termination. This 

notice would have to specify the reasons 

why the PDP sponsor is requesting 

contract termination. 

• To its Medicare enrollees, at least 

60 days before the termination effective 

date. This notice would have to include 

a written description of alternatives 

available for obtaining Medicare drug 

services within the services area, 

including alternative PDPs, MA–PDs, 

and original Medicare and would have 

to receive our approval. 

• To the general public at least 60 

days before the termination effective 

date by publishing a notice approved by 

us in one or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

geographic area. 

The effective date of the termination 

would be determined by us and is at 

least 90 days after the date we receive 

the PDP sponsor’s notice of intent to 

terminate. Our liability for payment to 

the PDP sponsor would end as of the 

first day of the month after the last 

month for which the contract is in 

effect. We would not enter into an 

agreement with an organization that has 

terminated its contract within the 

preceding 2 years unless there are 

circumstances that warrant special 

consideration, as determined by us. This 

proposed section would remain 

unchanged from the MA program. 

13. Proposed Minimum Enrollment 

Requirements 

Section 1860D–12(b)(3)(A) of the Act 

applies the minimum enrollment 

requirements of section 1857(b)(1) and 

section 1857(b)(3) of the Act to Part D 

of the Act. However, the statute also 

gives the Secretary the authority to 

increase the minimum number of 

enrollees as the Secretary deems 

appropriate. In proposed § 423.512, we 

are proposing to retain the minimum 

enrollment requirements used for the 

MA program and that appear in section 

1857(b)(1) of the Act. Our rationale for 

retaining the MA minimum enrollment 

level is to avoid conflicts that could 

occur if we adopted a higher minimum 

for Part D, which could imply that MA 

plans that could not meet the higher 

Part D standard would be unable to offer 

a drug benefit as required by law. In 

reality, we expect that stand-alone PDPs 

would have enrollments that far exceed 

these minimum levels. We are 

interested in receiving comments on 

whether these numbers should be 

increased for PDP sponsors. We are also 

interested in receiving comments on 

whether the 1,500 standard, which was 

directed at local MA organizations, has 

applicability in the context of PDPs. 

Thus, our regulations would provide 

that, in general, the Secretary would not 

enter into a contract with a prospective 

PDP sponsor, unless the organization 

has at least 5,000 individuals who are 

enrolled for the purpose of receiving 

prescription drug benefits from the 

organization. Another option would be 

for the prospective PDP sponsor to have 

a minimum enrollment number of 1,500 

individuals if the organization primarily 

serves individuals residing outside of 

urbanized areas. Urban area is defined 

in § 412.62(f) as essentially including 

MSAs and NECMAs as defined by OMB. 

The PDP sponsor would be required to 

maintain a minimum enrollment as 

discussed in this proposed section, 

however, as directed by section 1860D–

12(b)(3)(A)(ii) of the Act, the proposed 

minimum enrollment requirements 

would be waived for any PDP sponsor 

in its first contract year in a region. 

14. Proposed Reporting Requirements 

In proposed § 423.514, we would 

require each PDP sponsor to have an 

effective procedure to develop, compile, 

evaluate, and report to us, to its 

enrollees, and to the general public, at 

the times and in the manner that we 

require statistics indicating the 

following: 

• The cost of its operations; 

• The patterns of utilization of its 

services; 

• The availability, accessibility, 

acceptability of its services; 

• Information demonstrating that the 

PDP sponsor has a fiscally sound 

operation; and 

• Other information that we may 

require; 

This proposed section would also 

contain proposed provisions for each 

PDP sponsor to report significant 

business transactions to us annually, 

within 120 days of the end of its fiscal 

year (unless for good cause shown, we 

authorize an extension of time). The 

information provided to us, would have 

to contain a description of significant 

business transactions as defined in 

proposed § 423.501 between the PDP 

sponsor and a party in interest. For 

those transactions, the PDP sponsor 

would be required to show that the costs 

of the transactions do not exceed the 

costs that would be incurred if these 

transactions were with someone who is 

not a party in interest; or if they do 

exceed, a justification that the higher 

costs are consistent with prudent 

46716 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

management and fiscal soundness 

requirements. 

For purposes of this proposed section, 

the PDP sponsor would be required to 

produce a combined financial statement 

for itself and a party of interest if 35 

percent or more of the costs of operation 

of the PDP sponsor go to a party in 

interest or 35 percent or more of the 

revenue of a party in interest is from the 

PDP sponsor. We would require the 

combined financial statements to 

include the following information: 

• The display, in separate columns, of 

the financial information for the PDP 

sponsor and each of the parties in 

interest. 

• The elimination of inter-entity 

transactions in the consolidated 

column. 

• The examination of statements by 

an independent auditor in accordance 

with generally accepted accounting 

principles and include appropriate 

opinions and notes. 

Upon written request from a PDP 

sponsor showing good cause, we could 

waive the proposed requirement that the 

organization’s combined financial 

statement include the financial 

information discussed above for a 

particular entity. 

In this proposed section, for any 

employees’ health benefits plan that 

includes a PDP sponsor in its offerings, 

the PDP sponsor would be required to 

furnish, upon request, the information 

the plan needs to fulfill its reporting and 

disclosure obligations (for the particular 

PDP sponsor) under the Employee 

Retirement Income Security Act of 1974 

(ERISA). The PDP sponsor would also 

be required to furnish the information to 

the employer or the employer’s 

designee, or to the plan administrator, 

as the term ‘‘administrator’’ is defined in 

ERISA. This proposed section would 

also require each PDP sponsor 

organization to notify us of any loans or 

other special financial arrangements it 

makes with contractors, subcontractors 

and related entities and each PDP 

sponsor would be required to make the 

information reported to us under this 

proposed section available to its 

enrollees upon reasonable request. 

These provisions would remain 

unchanged from the MA regulations. 

15. Proposed Prohibition of Midyear 

Implementation of Significant New 

Regulatory Requirements 

In proposed § 423.516, we propose 

that we may not implement, other than 

at the beginning of a calendar year, 

provisions under this proposed section 

that would impose new, significant 

regulatory requirements on a PDP 

sponsor or a prescription drug plan. 

L. Effect of Change of Ownership or 

Leasing of Facilities During the Term of 

Contract 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart L—Effect of Change of 

Ownership or Leasing of Facilities 

During the Term of Contract’’ at the 

beginning of your comments.) 

1. Overview 

Proposed Subpart L of proposed part 

423 would describe the impact that a 

PDP sponsor organization’s ‘‘change of 

ownership’’ (CHOW) or leasing of 

facilities during the term of its contract 

would have on the status of the 

organization’s contractual relationship 

with us, as well as required procedures 

to be followed by a contracting PDP 

sponsor to effect a CHOW. 

2. Provisions 

In developing the proposed 

provisions for this proposed subpart as 

it relates to PDP sponsor organizations, 

we reviewed the experience that MA 

contractors and we have had under the 

provisions of subpart L of Part 422. A 

single set of CHOW requirements for 

both MA and PDP contractors would 

simplify management, assure 

consistency, and reduce administrative 

burden for those entities that are 

managing both programs. To that end, as 

a starting point we are proposing that 

the requirements in proposed 

§§ 423.551, 423.552, and 423.553, of this 

proposed rule, for the PDP sponsor, 

would be essentially the same as the 

requirements found in §§ 422.550, 

422.552 and 422.553 for the MA 

program. Those proposed requirements 

and procedures are summarized in 

section 3, below. 

Since the impact of a change of 

ownership on a PDP sponsor’s contract 

with us would be similar to its effect on 

an MA organization’s contract, we 

believe that the two sets of requirements 

should be similar. However, we are 

considering the modification of existing 

change of ownership provisions in both 

rules in order to reduce the 

administrative burden of these 

requirements and to increase the 

effectiveness of these provisions. We 

request comments regarding how these 

provisions could be modified to 

accomplish these objectives. In 

particular, we seek comments regarding: 

the situations which constitute a change 

of ownership, how these provisions 

should be applied to large companies 

with multiple business units, the 

notification requirements related to a 

change of ownership, the novation 

agreement provisions, and the provision 

related to the leasing of a PDP’s 

facilities. 

3. Proposed General Provisions 

In proposed § 423.551(a), we would 

present the three situations that 

constitute CHOW in the context of 

proposed subpart L. We would state 

that—

• The removal, addition, or 

substitution of a partner, unless the 

partners expressly agree otherwise as 

permitted by applicable State law, 

constitutes a CHOW; 

• Transfer of substantially all the 

assets of the sponsor to another party 

constitutes a change of ownership; and 

• The merger of the PDP sponsor’s 

corporation into another corporation, or 

the consolidation of the PDP sponsor’s 

organization with one or more other 

corporations, resulting in a new 

corporate body, constitutes a CHOW. 

We note that § 422.551(a)(2) if carried 

over from the MA rule would provide 

that a change of ownership occurs 

whenever there is a ‘‘[t]ransfer of title 

and property to another party * * *’’

This provision would seem to apply to 

any transfer no matter how small and, 

read literally, would include a partial 

transfer of the employer’s assets such as 

a spin off or the sale of a single facility 

or operating division of the employer. 

Combined with the absolute assignment 

rule of (d), this has the potential to lead 

to absurd results. Therefore, in our 

proposed rule, we would change 

§ 423.551(a)(2) to include only asset 

sales that are essentially transfers of the 

entire business enterprise. We request 

comments on situations where a 

sponsor transfers to another party 

substantial assets, but less than 

substantially all of its assets. In such 

comments, please describe the different 

scenarios that might develop under such 

circumstances, especially the extent to 

which benefits covered by the 

agreement might reasonably be expected 

to be provided by the old or new owner 

and the best approach for either 

transferring, issuing, or reissuing 

sponsor agreements.’’

The proposed exception to the three 

provisions discussed above would be 

that a transfer of corporate stock or the 

merger of another corporation into the 

PDP sponsor’s organization, with the 

PDP sponsor organization surviving, 

would not usually constitute a CHOW. 

Proposed § 423.551(c) of this 

proposed section, would require a PDP 

sponsor that has a Medicare contract in 

effect under proposed § 423.502 of 

proposed Subpart K and is considering 

or negotiating a CHOW, to notify us at 

least 60 days before the anticipated 

effective date of the change. The PDP 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46717 

sponsor would also be required to 

provide updated financial information 

and a discussion of the financial and 

solvency impact of the CHOW on the 

surviving organization. 

In this proposed section we would 

also state that if the PDP sponsor fails 

to give us the required notice in a timely 

manner, it would continue to be liable 

for payments that we make to it on 

behalf of Medicare enrollees after the 

date of the CHOW. 

Proposed § 423.551(d) would define a 

novation agreement, the legal vehicle 

that we would use to recognize the new 

owner of a PDP sponsor organization’s 

corporation, as the successor in interest 

to the Medicare contract. For this 

proposed rule, a novation agreement 

would be an agreement among the 

current owner of the PDP sponsor, the 

prospective new owner, and us. This 

agreement would have to be signed by 

all three parties and, to be effective, 

contain the proposed provisions at 

proposed § 423.552. The agreement 

would also have to allow us to recognize 

the new owner as the successor in 

interest to the current owner’s Medicare 

contract. The new owner has to be sure 

to get adequate data to substantiate 

claims for reimbursement from the 

previous owner, because the new owner 

would be responsible at the time of the 

reconciliation process. 

Proposed § 423.551(e) would detail 

the consequences of a CHOW that 

occurs without a novation agreement. 

Under this proposed section, if there is 

not a novation agreement, the existing 

Medicare contract would become 

invalid and, if the new owner wanted to 

participate in the Medicare program as 

a PDP sponsor, it would have to apply 

for, and enter into a contract in 

accordance with proposed subpart K of 

this proposed part. 

4. Proposed Novation Agreement 

Requirements 

Proposed § 423.552(a) would provide 

the three conditions that should be met 

for our approval of a novation 

agreement. Consistent with our 

approach in the MA program, we are 

proposing that the first condition would 

be for the PDP sponsor to give us notice, 

at least 60 days before the effective date 

of the CHOW. That notice would also 

include updated financial information 

and a discussion of the financial and 

solvency impact of the CHOW on the 

surviving organization. If notice were 

not timely, the contractor would 

continue to be liable for payments that 

we make to it on behalf of Medicare 

enrollees after the date of ‘‘CHOW’’ as 

described in proposed § 423.551(c)(2). 

The second proposed condition would 

be that the PDP sponsor would submit 

three signed copies of the novation 

agreement that contains the proposed 

provisions specified in proposed 

§ 423.552(b) to us at least 30 days before 

the proposed CHOW date, and one copy 

of other relevant documents required by 

us. The final condition would be our 

determination after reviewing a 

novation agreement concerning the 

following: 

• The proposed new owner is in fact 

a successor in interest to the contract. 

• Recognition of the new owner as a 

successor in interest of the Medicare 

program. 

• The successor organization meets 

the requirements to qualify as a PDP 

sponsor under proposed subpart K. 

Proposed § 423.552(b) would identify 

the four required provisions of a 

properly constituted novation 

agreement. In this proposed section, we 

would require the agreement to state 

that the new owner would assume all 

obligations under the Medicare contract 

and the previous owner would be 

required to waive its right to 

reimbursement for covered services 

furnished during the rest of the current 

contract period. The previous owner 

would also be required to guarantee 

performance of the contract by the new 

owner during the contract period, or 

post a performance bond that is 

satisfactory to us. The last condition 

would require the previous owner to 

agree to make its books, records, and 

other necessary information available to 

the new owner and to us to permit an 

accurate determination of costs for the 

final settlement of the contract period. 

We would have to be able to recognize 

the new owner as the successor in 

interest to the current owner’s Medicare 

contract and the novation agreement 

would be effective, once signed by all 

three relevant parties. 

5. Effect of Leasing of a PDP Sponsor’s 

Facilities 

Proposed § 423.553 would address 

provisions related to when a PDP 

sponsor leases its facilities to another 

party and its PDP sponsor contract with 

us. Specifically, we are proposing that if 

a PDP sponsor leases all or part of its 

facilities to another entity, the other 

entity would not acquire PDP sponsor 

status under section 1860D–12(b) of the 

Act. If a PDP sponsor leases all of its 

facilities to another entity, its Medicare 

contract would terminate. If the other 

entity wants to participate in the 

Medicare program as a PDP sponsor, it 

would be required to apply for and enter 

into a contract in accordance with 

proposed § 423.502. If the PDP sponsor 

leases part of its facilities to another 

entity, its contract with us would 

remain in effect while we survey the 

PDP sponsor to determine whether it 

continues to be in compliance with the 

applicable proposed requirements and 

qualifying conditions specified in 

proposed Subpart K of this part. 

M. Grievances, Coverage, 

Reconsiderations, and Appeals 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart M—Grievances, Coverage 

Determinations, Reconsiderations, and 

Appeals’’ at the beginning of your 

comments.) 

1. Introduction 

Proposed subpart M of part 423 would 

implement sections 1860D–4(f), 1860D–

4(g), and 1860D–4(h) of the Act, which 

set forth the procedures PDP sponsors 

must follow with regard to grievances, 

coverage determinations, and appeals. 

Under section 1860D–4(f) of the Act, 

a PDP sponsor must provide meaningful 

procedures for hearing and resolving 

grievances between the sponsor 

(including any entity or individual 

through which the sponsor provides 

covered benefits) and enrollees. 

Section 1860D–4(g) of the MMA 

addresses the procedures for coverage 

determinations and redeterminations of 

PDP sponsors. In general, the MMA 

requires that a PDP sponsor’s 

procedures meet the same requirements 

as those that apply to MA organizations 

(under paragraphs (1) through (3) of 

section 1852(g)) of the Act for 

organization determinations and 

redeterminations. This includes the 

same timeframes for making these 

determinations and redeterminations, 

including the requirements for 

expedited procedures when the 

standard timeframes could seriously 

jeopardize an enrollee’s life, health, or 

ability to regain maximum function. In 

addition, section 1860D–4(g)(2) of the 

Act specifies that if a PDP sponsor has 

tiered cost sharing for formulary drugs, 

it must establish an exceptions process. 

Under the exceptions process, 

consistent with guidelines established 

by the Secretary, a nonpreferred drug 

could be covered under the terms 

applicable for preferred drugs if the 

prescribing physician determines that 

the preferred drug for treatment of the 

same condition either would not be as 

effective for the individual or would 

have adverse effects for the individual, 

or both. 

Section 1860D–4(h) of the Act 

addresses appeals of a PDP sponsor’s 

coverage determinations and 

redeterminations. Here, the MMA 

requires that the PDP sponsors follow 

46718 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

appeals requirements that are similar to 

those applicable to MA organizations 

under paragraphs (4) and (5) of section 

1852(g) of the Act (regarding 

independent review entity (IRE) review 

and ALJ hearings, respectively). As a 

result, in our regulations at § 423.612(b), 

we propose to require a 60-day 

timeframe for requesting an appeal, 

which has been a long-standing 

requirement throughout the entire 

Medicare managed care appeals process. 

To the extent the proposed requirements 

differ from the MA rules, we discuss 

these differences below. In addition, 

section 1860D–4(h)(2) of the Act 

specifies that appeals, involving 

coverage of a covered part D drug that 

is not on a PDP’s formulary, are 

permissible only if the prescribing 

physician determines that all covered 

Part D drugs, on any tier of the 

formulary for treatment of the same 

condition, would not be as effective for 

the individual as the nonformulary 

drug, would have adverse effects on the 

individual, or both. The proposed 

regulations needed to implement the 

above provisions are discussed below. 

2. General Provisions (§ 423.560 

Through § 423.562) 

Subpart M begins with proposed 

§ 423.560, which sets forth several 

definitions for terms used in the 

subpart. These definitions are generally 

self-explanatory and mirror those used 

in subpart M of part 422 for MA, but 

have been modified to reflect 

applicability to Part D drug benefits. 

Section 423.562, General Provisions, 

provides an overview of the 

responsibilities of PDP sponsors and the 

rights of PDP enrollees with respect to 

grievances, coverage determinations, 

and appeals. The responsibilities of PDP 

sponsors under § 423.562(a) include 

establishing and maintaining 

procedures for grievances, coverage 

determinations, exceptions to tiered 

cost-sharing formulary structures, 

requests for formulary exceptions, and 

appeals. This section would also specify 

that enrollees receive written 

information about the grievance and 

appeal procedures available to them 

through the PDP sponsor, and about the 

QIO complaint process available to 

enrollees. Like under the MA program, 

the proposed regulations indicate that if 

a PDP sponsor delegates any of its 

responsibilities under subpart M to 

another entity or individual through 

which the sponsor provides covered 

drug benefits, the PDP sponsor is 

ultimately responsible for ensuring that 

the applicable grievance, coverage 

determination, and appeal requirements 

are met. 

Section 423.562(b) of our proposed 

rule explains the basic rights of PDP 

enrollees in relation to PDP sponsors 

under subpart M and references the 

regulations that explain the rights. 

These include, for example, the right to 

a timely coverage determination and 

appeal rights pursuant to that coverage 

determination. 

Section 423.562(c) of our proposed 

rule specifies that an enrollee has no 

appeal right when there is no payment 

liability, or when benefits have been 

provided by a non-network provider 

(that is, a non-network pharmacy), 

except in those situations in which, 

under subpart C, the PDP is obligated to 

cover such drugs. Finally, § 423.562(d) 

explains that, unless otherwise noted, 

the general Medicare appeals rule under 

part 422, subpart M, is applicable for 

appeals to an Administrative Law Judge 

(ALJ) or the Medicare Appeals Council 

(MAC). 

3. Grievance Procedures (§ 423.564) 

As defined in § 423.560 of our 

proposed rule, a grievance means any 

complaint or dispute, other than one 

that constitutes a coverage 

determination, expressing 

dissatisfaction with any aspect of a PDP 

sponsor’s operations, activities, or 

behavior, regardless of whether 

remedial action is requested. An 

enrollee might file a grievance, for 

example, if he or she has a complaint 

about the timeliness of filling a 

prescription, or the accuracy of the 

prescription. As required by section 

1860D–4(f) of the MMA, the grievance 

procedures in this subpart generally 

mirror those found in part 422, Subpart 

M, for MA. Thus, our regulations would 

require that each PDP sponsor have 

procedures to ensure that grievances are 

heard and resolved in a timely manner, 

but they would not include prescriptive 

details on the procedures. The only 

exceptions to this approach, under 

§ 423.564(d), involve certain limited 

situations where a PDP sponsor must 

respond to a grievance within 24 hours, 

such as a grievance over a PDP 

sponsor’s decision to invoke an 

extension relating to a coverage 

determination or redetermination, or a 

PDP sponsor’s refusal to grant an 

enrollee’s request for an expedited 

coverage determination or 

redetermination where the enrollee has 

not yet purchased or received the drug 

that is in dispute. 

Section 423.564(c) of our proposed 

rule explains the distinction between 

the grievance procedures of the PDP 

sponsor and the quality improvement 

organization (QIO) complaint process. 

This section further establishes that 

when an enrollee submits a quality of 

care complaint to a QIO, the PDP 

sponsor must cooperate with the QIO in 

resolving the complaint. 

Section 423.564(e) of our proposed 

rule concludes the grievance procedures 

by proposing minimum record keeping 

requirements for a PDP sponsor, which 

include recording the receipt date of a 

grievance, its final disposition, and the 

date the enrollee is notified of the 

disposition. 

4. Coverage Determinations (§ 423.566 

Through § 423.576) 

These proposed provisions implement 

the MMA requirement that PDP 

sponsors establish procedures for 

making coverage determinations and 

redeterminations regarding covered 

drug benefits that are essentially the 

same as those in effect for MA 

organizations under part 422, subpart M 

for MA. Therefore, for the drug benefits 

under Part D, we have continued 

standard and expedited requirements 

for coverage determinations and 

redeterminations. 

Section 423.566(a) of our proposed 

rule specifies that each PDP sponsor 

must have a procedure for making 

timely coverage determinations 

regarding the drug benefits an enrollee 

is entitled to receive and the amount, if 

any, that an enrollee is required to pay 

for a benefit. The PDP sponsor is 

required to establish both a standard 

procedure for making coverage 

determinations and an expedited 

procedure for situations in which 

applying the standard procedure could 

seriously jeopardize the enrollee’s life, 

health, or ability to regain maximum 

function. 

As proposed in § 423.566(b), actions 

that would constitute coverage 

determinations include: a PDP sponsor’s 

failure to provide or pay for a covered 

Part D drug (including failure to pay 

because the drug is not on the plan’s 

formulary, because the drug is 

determined not to be medically 

necessary, because the drug is furnished 

by an out-of-network pharmacy, or 

because the sponsor determines that the 

drug otherwise would be excluded 

under section 1862(a) of the Act); failure 

to provide a coverage determination in 

a timely manner that would adversely 

affect the health of the enrollee; 

decisions on the amount of cost sharing; 

or decisions on whether the preferred 

drug is appropriate for an enrollee. 

Section 423.566(c) lists those 

individuals who can request a standard 

coverage determination as the enrollee 

(including his or her authorized 

representative) and the prescribing 

physician on behalf of the enrollee. We 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46719 

note that we have not included the legal 

representative of a deceased enrollee’s 

estate (as is specified in 

§ 422.566(c)(1)(iii)) since that individual 

would be considered an authorized 

representative. Those individuals who 

can request an expedited determination 

or an expedited redetermination are 

similarly an enrollee (including his or 

her authorized representative), or the 

prescribing physician on behalf of the 

enrollee. In these situations we propose 

that a prescribing physician need not be 

an appointed representative of the 

enrollee in order to assist in obtaining 

either a standard or an expedited 

coverage determination. We welcome 

comments on any additional individuals 

or entities that should be able to request 

a coverage determination. 

The standard timeframes and notice 

requirements for coverage 

determinations are proposed in 

§ 423.568. These requirements include a 

determination as expeditiously as the 

enrollee’s health condition requires, but 

no later than 14 calendar days after 

receipt of the request if the request is for 

prescription drug benefits. An extension 

of the timeframe by up to 14 calendar 

days is allowable if the enrollee requests 

the extension, or if the PDP sponsor can 

justify how a delay is in the interest of 

the enrollee. For example, the receipt of 

additional medical evidence may 

change the outcome of the decision. An 

enrollee must be notified of the reasons 

for the delay, and informed of the right 

to file an expedited grievance if the 

enrollee disagrees with the sponsor’s 

decision to invoke an extension. If the 

request is for payment, the 

determination must be made no later 

than 30 calendar days after receipt of 

the request. Consistent with § 1860D–

4(g)(1) of the MMA, the timeframe and 

notice requirements for requests 

involving payment are the same as those 

that apply for clean claims under the 

Medicare Advantage program. This 

section also establishes the requirement 

for written notice for PDP sponsor 

denials and the form and content of the 

denial notice, including that the notice 

must explain the reason for the denial 

and the availability of appeal rights. 

Sections 423.570 and 423.572 propose 

the requirements regarding expedited 

coverage determinations, including how 

an enrollee or an enrollee’s prescribing 

physician can make an oral or written 

request (§ 423.570(b)), and how the PDP 

sponsor must process requests 

(§ 423.570(c)). We clarify in § 423.570(a) 

that requests for payment of 

prescription drugs already furnished for 

an enrollee cannot be expedited. 

Section 423.570(b)(2) specifies that a 

prescribing physician may provide 

written or oral support for a request for 

expedition, and under 

§ 423.570(c)(3)(ii), we clarify that when 

requests for expedition are made or 

supported by an enrollee’s prescribing 

physician, the PDP sponsor must grant 

the request if the physician indicates 

that applying the standard timeframe 

could seriously jeopardize the enrollee’s 

life or health, or the ability to regain 

maximum function. Section 423.570(d) 

proposes actions following a denial of a 

request and explains that when a 

sponsor denies a request for an 

expedited determination that the 

request automatically be transferred to 

and processed under the standard 

determination procedures, which 

require the determination within 14 

calendar days. For accepted requests for 

expedited determination, § 423.572 

proposes that the PDP sponsor must 

make its expedited determination and 

notify the enrollee and the prescribing 

physician, as appropriate, as 

expeditiously as the enrollee’s health 

condition requires, but no later than 72 

hours after receiving the request. 

Section 423.572(b) proposes the 

requirements for extensions, and 

includes the enrollee’s right to file an 

expedited grievance if the enrollee 

disagrees with the PDP sponsor’s 

decision to invoke an extension. 

Proposed § 423.572(c) explains that if 

the PDP sponsor first notifies an 

enrollee of an adverse expedited 

determination orally, then it must mail 

written confirmation to the enrollee 

within 3 calendar days. Finally, 

§ 423.572(d) explains the requirements 

for the content of the expedited 

determination notice, and § 423.572(e) 

explains that a failure to provide a 

timely notice would constitute an 

adverse coverage determination, which 

may be appealed. Similar to the 

expedited requirements for MA under 

Part C, these sections would require that 

drug coverage determinations be made 

as expeditiously as the enrollee’s health 

condition requires. Note that given the 

requirement that timing of 

determinations (and redeterminations) 

be based on an enrollee’s health 

condition, the PDP sponsor has a 

responsibility to ensure that an 

enrollee’s health situation and needs are 

fully considered in reviewing any 

requests (for example, if an enrollee has 

a chronic condition that has 

necessitated ongoing use of the drug in 

question). Again, however, if the 

enrollee already received the drug and 

the determination involves who should 

pay for the drug (or how much), there 

is generally no need for an expedited 

determination since the enrollee’s 

health needs have been met. 

5. Formulary Exceptions Procedures 

(§ 423.578) 

a. Exceptions to a Plan’s Tiered CostSharing Structure 

As noted above, section 1860D–4(g)(2) 

of the Act specifies that an enrollee may 

request an exception to a plan’s tiered 

cost-sharing structure. Under such an 

exception, a ‘‘nonpreferred drug could 

(emphasis added) be covered under the 

terms applicable for a preferred drug’’

under certain conditions. At a 

minimum, the prescribing physician 

would have to determine that the 

preferred drug either would not be as 

effective for the individual or would 

have adverse effects for the individual, 

or both. The statute then requires that 

each PDP sponsor establish exceptions 

procedures consistent with guidelines 

issued by the Secretary for making 

determinations on such requests. 

Unfavorable determinations constitute 

coverage denials that would be subject 

to all the appeals rights discussed in 

subpart M of part 423. 

How this section of the statute is 

implemented will have significant 

consequences for PDP sponsors and 

Medicare beneficiaries. Although the 

only specific criterion established by 

law for assessing exceptions requests is 

the prescribing physician’s 

determination explained above, we 

believe that the statute’s direction that 

exceptions be made in accordance with 

‘‘guidelines established by the 

Secretary’’ indicates that PDP sponsors 

be able to establish additional criteria, 

subject to the Secretary’s guidance. This 

flexibility raises two key, intertwined 

questions. First, to what extent should 

the Secretary limit a plan’s discretion in 

establishing exceptions criteria? And 

second, how detailed must the criteria 

be? The absence of detailed criteria, 

although perhaps desirable for a PDP 

sponsor, may not afford Part D enrollees 

the type of drug access intended under 

the law. However, making tiering 

exceptions too easy to obtain could 

eliminate a sponsor’s ability to obtain 

volume pricing discounts, and thus, 

offer optimal value to beneficiaries. 

Based on existing models in the state 

and private sectors and on Federal 

managed care models, we believe that 

PDPs’ formularies are likely to include 

tiered cost sharing; such tiering allows 

PDP sponsors to obtain better prices on 

preferred drugs, resulting in savings for 

both enrollees and the PDPs. Tiering 

will presumably be particularly critical 

for stand-alone PDPs (that is, non MA–

PD plans), which will not have direct 

46720 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

relationships with doctors and thus will 

have no clear method of cost/utilization 

control other than through their pricing 

structure. 

However, it is very difficult to predict 

exactly how PDP sponsors will design 

their tiering structures. For example, 

although the statute refers to ‘‘preferred’’

and ‘‘nonpreferred’’ drugs, actual tiering 

structures are likely to include three or 

more classes of drugs (such as ‘‘generic,’’

‘‘preferred brand,’’ ‘‘non-preferred 

brand,’’ etc.). We believe that this 

uncertainty strongly suggests that the 

proposed regulations not include overly 

prescriptive requirements with respect 

to a PDP’s exceptions criteria. Instead, 

we would provide general guidance on 

the scope of issues that must be 

addressed under a PDP’s exceptions 

criteria on the procedural elements of 

that process, but still allow for 

flexibility and innovation in this regard 

as we gain experience with the new 

program. 

Thus, we would propose under 

§ 423.578 that a PDP sponsor must 

establish an exceptions process that 

addresses each of the following sets of 

circumstances: (1) The enrollee is using 

a drug and the applicable tiered costsharing structure changes during the 

year; (2) the enrollee is using a drug and 

the applicable tiered cost-sharing 

structure changes at the beginning of a 

new plan year; and (3) there is no preexisting use of the drug by the enrollee. 

For purposes of this subpart, ‘‘using a 

drug’’ means the enrollee is receiving 

the drug in the course of treatment, 

including time off if it is part of the 

treatment. A PDP’s exceptions criteria 

would not necessarily need to be 

different under each scenario. 

While we thought it necessary to 

require PDP sponsors to include certain 

criteria in the exceptions process, we 

also recognize the need to avoid a 

situation where a PDP sponsor’s costsharing rules are effectively driven by 

the exceptions criteria, rather than the 

other way around. Thus, in 

§ 423.578(a)(2) we have proposed a 

limited number of elements that must be 

included in any sponsor’s exception 

criteria: (1) A description of the process 

used by the PDP to evaluate the 

physician’s certification; (2) 

consideration of the cost of the 

requested drug compared to that of the 

preferred drug; (3) consideration of 

whether the formulary includes a drug 

that is the therapeutic equivalent of the 

requested drug; and (4) consideration of 

the number of drugs on the plan’s 

formulary that are in the same class and 

category as the requested drug. 

We also considered including a 

number of other exceptions criteria such 

as—(1) requiring PDP sponsors to 

establish a blanket rule permitting 

continued access to a drug at a given 

price when there is a mid-year change 

in the tiering structure; (2) requiring an 

enrollee who is using a drug that is 

subsequently removed from the 

sponsor’s formulary or is no longer 

designated as the ‘‘preferred drug’’ to try 

a preferred drug(s), and experience 

adverse effects, before being permitted 

to resume using the original drug; (3) 

requiring a sponsor to establish 

exceptions criteria that are specific to 

particular classes of covered Part D 

drugs, such as cholesterol-lowering 

drugs; and (4) requiring sponsors to give 

enrollees an opportunity to request 

exceptions to a plan’s tiered costsharing structure other than on a caseby-case basis. Additionally, we 

contemplated the possibility of 

establishing criteria for the review 

process used to evaluate plan 

formularies and tiering structures, and 

developing exceptions criteria that are 

specific to particular classes of covered 

Part D drugs. Based on public comment 

and any additional information that is 

available at the time on the formulary 

structure, we may add further detail to 

these criteria or include additional 

criteria in the final rule. 

Consistent with existing MA rules, we 

are proposing that an enrollee, the 

enrollee’s authorized representative or 

the prescribing physician may request 

an exception. The statutory requirement 

that the prescribing physician determine 

that the preferred drug either would not 

be as effective for the individual 

generally, or would have adverse effects 

for the individual, would constitute a 

minimum threshold for approving an 

exception request. Thus, we are 

proposing that a PDP sponsor may 

require a written certification to that 

effect from the prescribing physician, as 

well as certain limitations on the 

content requirements sponsors could 

impose for these certifications. 

However, we would permit PDP 

sponsors flexibility in how this standard 

is applied. For example, a PDP sponsor 

could require that a physician certify 

that the preferred drug would be less 

effective than the nonpreferred drug, or 

the PDP sponsor could choose to apply 

a more stringent standard (such as 

requiring that the prescribing 

physician’s certification also include the 

enrollee’s patient history or require the 

enrollee first try the preferred drug, 

absent medical contraindications). 

A PDP’s exceptions procedures would 

also be required to describe how a 

determination on an exception request 

would affect the enrollee’s cost sharing 

obligations under the PDP’s tiering 

structure. For example, would a request 

for a nonpreferred drug result in 

payment at the preferred brand drug 

level, or at the generic drug level, if 

available? 

b. Exceptions and Appeals Rules for 

Non-Formulary Determinations 

Section 1860D–4(h)(2) of the Act 

establishes a limitation on requests for 

exceptions when a particular drug is not 

on a plan’s formulary at all. The statute 

specifies that an enrollee may appeal a 

determination not to provide coverage 

of a non-formulary drug ‘‘only if the 

prescribing physician determines that 

all covered Part D drugs on any tier of 

the formulary for treatment of the same 

condition would not be as effective for 

the individual as the nonformulary 

drug, would have adverse effects for the 

individual, or both.’’ Notably, this 

limitation is set forth under the 

‘‘appeals’’ provisions of the statute, as 

opposed to under the preceding 

coverage determination and 

redetermination provisions that are 

discussed above for exceptions to tiered 

cost-sharing rules. Thus, we believe the 

intent of this provision is to limit 

appeals to cases where the prescribing 

physician has made the determination 

described by the law. 

Unlike for the tiering exceptions, the 

statute does not specifically require that 

PDP sponsors develop an exceptions 

process to review requests for 

exceptions for non-formulary drugs. 

However, we do not believe that the 

statute intends to preclude an enrollee 

from obtaining a coverage determination 

from a PDP sponsor absent a 

determination by the prescribing 

physician, or to require that the 

physician’s determination alone should 

result in a favorable coverage 

determination by the PDP. Thus, we 

propose to require that PDP sponsors 

also establish exceptions criteria for 

addressing these situations. Requiring 

sponsors to use an exceptions process to 

review requests for coverage of nonformulary drugs will create a more 

efficient and transparent process and 

will ensure that enrollees know what 

standards are to be applied. 

Additionally, requiring a similar 

exceptions process for conducting these 

types of reviews will help ensure that a 

PDP sponsor’s formulary is based on 

scientific evidence rather than tailored 

to fit exceptions and appeals rules for 

formulary drugs. 

Under this exceptions process, which 

we propose at § 423.578(b), a PDP must 

allow enrollees to request (1) Coverage 

of covered Part D drugs that are not on 

a sponsor’s formulary; (2) continued 

coverage of a drug the sponsor has 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46721 

removed from its formulary; (3) an 

exception to a sponsor’s policy 

regarding coverage for a step therapy; 

and (4) an exception to a sponsor’s 

dosing limitation. A PDP’s criteria 

would need to include a description of 

the criteria it will use to evaluate the 

prescribing physician’s determination, 

clarify how the plan evaluates the 

relative safety and efficacy of the 

requested drug, and describe the costsharing scheme that will be applied if 

coverage is provided. Again, an 

enrollee, the authorized representative, 

or prescribing physician could request 

an exception, and the PDP sponsor may 

require a written certification from the 

prescribing physician that the noncovered drug is medically necessary to 

treat the enrollee’s disease or medical 

condition. An enrollee would have a 

right to a redetermination by the PDP of 

any unfavorable coverage 

determination. 

Like for tiering exceptions, we are 

proposing that enrollees be required to 

request reconsideration by an 

independent review entity (IRE), as 

opposed to having these cases 

automatically forwarded to the IRE. We 

welcome comments on both these 

issues. 

c. Treatment of Determinations 

Regarding Exceptions Requests 

From a procedural standpoint, we 

propose at § 423.578(c)(1) that 

determinations on exception requests 

constitute plan coverage determinations 

under § 423.566 and should be 

completed in the same timeframes. 

Enrollees would then have an 

opportunity to request a plan 

redetermination. Unfavorable 

redetermination decisions could then be 

appealed to the independent review 

entity. The IRE’s review would focus on 

whether the PDP had properly applied 

its formulary exceptions criteria for the 

individual in question. If it determined 

that the PDP sponsor correctly applied 

its exceptions criteria, the sponsor’s 

determination would be upheld. Thus, 

the IRE would not have any discretion 

with respect to the validity of the plan’s 

exceptions criteria or formulary. (CMS 

would be responsible for evaluating and 

approving a PDP’s exceptions criteria 

and formulary as part of the annual plan 

approval process.) In many instances, 

however, evaluating whether the criteria 

for a formulary exception had been 

satisfied would necessarily involve an 

element of medical judgment (e.g., 

would a patient suffer significant 

adverse effects by using the planpreferred drug?). In those situations, the 

IRE’s medical staff would be responsible 

for reviewing the sponsoring plan’s 

determination as to whether the 

formulary exceptions criteria had been 

applied properly. Note that part D 

enrollees could subsequently access 

higher levels of the appeals process like 

for any other unfavorable coverage 

determination, consistent with the 

statutory reference to section 1852(g)(4) 

and (5) of the MA provisions. 

Although not required by statute, we 

thought it important to put in place 

certain safeguards regarding the issuing 

and effect of a coverage determination 

made as part of the exceptions process. 

We believe that these safeguards will 

help to ensure that the exceptions 

process is both fair and efficient for 

enrollees. First, to ensure that enrollees 

who file exceptions requests for drugs 

that are being removed from a sponsor’s 

formulary are not disadvantaged by a 

sponsor’s failure to issue a timely 

decision, we establish in § 423.578(c)(1) 

and § 423.578(c)(2) that if a sponsor fails 

to issue a timely decision, the sponsor 

must continue to provide coverage until 

a decision is made on the request. 

Section 423.578(c)(2)(i) allows enrollees 

to receive up to a one-month supply of 

the requested drug, but a sponsor could 

adjust the supply to account for a 

shorter time frame. 

Once a sponsor approves an 

exceptions request, we believe an 

enrollee should not have to continue 

filing exceptions requests for future 

refills of the drug. Therefore, we provide 

in § 423.578(C)(3) that once a sponsor 

approves a drug pursuant to the 

exceptions process, an enrollee is 

entitled to continue receiving refills of 

the drug for as long as the physician 

continues prescribing the drug and for 

as long as the drug continues to be 

considered safe and effective for 

treatment of the enrollee’s disease or 

medical condition. 

The final safeguard implemented 

under § 423.578 prohibits PDP sponsors 

from assigning drugs approved under 

either exceptions process to a special 

formulary tier, co-payment, or other 

cost-sharing requirement. In other 

words, sponsors must employ 

reasonable criteria (for example, the cost 

of the requested drug compared to the 

cost of other similar drugs on the plan’s 

formulary) in determining the copayments or other cost-sharing 

requirements of drugs approved for 

coverage under the exceptions process. 

We recognize that these provisions 

represent a critical component of the 

new prescription drug benefit, and we 

particularly welcome suggestions from 

commenters on these proposals. Our 

goal is to foster the establishment of 

exceptions processes that employ 

criteria designed to maximize available 

drug benefits for all Medicare 

beneficiaries, while ensuring that plan 

sponsors have the flexibility they need 

to negotiate the best process on behalf 

of enrollees. 

6. Appeals 

a. Redeterminations (§ 423.580 Through 

§ 423.590) 

Sections 423.580 through § 423.590 

explain the right to a redetermination 

and the requirements that apply to PDP 

sponsors for both standard and 

expedited redeterminations. If a 

decision regarding a coverage 

determination is unfavorable (in whole 

or in part) to the enrollee, the enrollee 

may file an oral or written request with 

the PDP or MA–PD plan for a 

redetermination on the decision. Note 

that, unlike the existing MA regulations, 

the proposed regulations would not 

identify Social Security Administration 

(SSA) field offices as a possible location 

for filing redetermination requests. 

Using any filing location other than the 

plan itself can significantly affect the 

speed with which the appeal is 

resolved. Moreover, given that section 

931 of the MMA mandates the transfer 

of responsibility for Medicare appeals 

from SSA to DHHS by no later than 

October 1, 2005, we believe that an 

explicit regulatory reference to SSA 

field offices would not be appropriate. 

For an expedited redetermination, an 

enrollee or the prescribing physician 

(acting on behalf of an enrollee) may 

submit an oral or written request for 

redetermination. However, requests for 

payment of drugs already received 

cannot be expedited. The proposed 

requirements for making standard 

redetermination determinations of 

covered benefits in § 423.590(a) specify 

that the PDP sponsor must issue its 

determination as expeditiously as the 

enrollee’s health condition requires, but 

no later than 30 calendar days from the 

date of receipt of the request. Under 

§ 423.590(b), for standard 

redeterminations involving requests for 

payment, the PDP sponsor must issue its 

redetermination no later than 60 

calendar days from the date of receipt of 

the request. In the case of expedited 

redeterminations, § 423.590(d) specifies 

that a PDP sponsor must complete its 

redetermination and give the enrollee 

and the prescribing physician involved, 

as appropriate, notice of its decision as 

expeditiously as the enrollee’s health 

condition requires, but no later than 72 

hours after receiving the request. For 

both the standard and expedited 

redetermination for covered benefits, 

the PDP sponsor may extend the 

timeframe for making its determination 

46722 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

by up to 14 calendar days if the enrollee 

requests the extension, or if the sponsor 

justifies a need for additional 

information and how the delay is in the 

interest of the enrollee. An extension 

would not be provided for 

redeterminations involving requests for 

payment. 

If the PDP sponsor’s redetermination 

results in an affirmation, in whole or in 

part, of its original adverse coverage 

determination, the sponsor must give 

written notification to the enrollee and 

advise the enrollee of the right to file an 

appeal with the IRE that contracts with 

CMS. 

b. Independent Review Entity (IRE) 

Reconsideration (§ 423.600 Through 

§ 423.604) 

The MMA gives the Secretary the 

flexibility to establish an appeals 

process similar to that used for the MA 

appeals process. Thus, the proposed IRE 

reconsideration process set forth at 

§ 423.600 through § 423.604 is much 

like that applicable to MA organizations 

under Part C. Note that when the PDP 

sponsor’s redetermination affirms, in 

whole or in part, its adverse coverage 

determination, any issue remaining in 

dispute may be appealed by the enrollee 

to the IRE that contracts with CMS. 

However, unlike under the MA 

program, PDP sponsor redeterminations 

involving tiering issues or coverage of a 

non-formulary drug would not be 

automatically forwarded to the IRE. 

Instead, an enrollee would need to 

request an IRE review. This proposed 

requirement modifies the MA procedure 

that affords automatic referral to the IRE 

whenever the MA organization’s 

original denial is upheld by the 

organization’s redetermination. We 

believe that this change is appropriate 

given the statutory limitation that an 

appeal request be made only if the 

prescribing physician determines that 

all covered Part D drugs on the 

formulary would not be as effective or 

would have adverse effects. Moreover, 

many of the drug appeals may involve 

relatively small monetary amounts, 

raising doubts about the efficacy of 

forwarding all such cases to an IRE. 

Thus, § 423.600 proposes that an 

enrollee who is dissatisfied with the 

PDP sponsor’s redetermination may file 

a written request for reconsideration by 

the IRE. We also propose that when an 

enrollee files for an appeal, the IRE is 

required to solicit the views of the 

prescribing physician. Also, in order for 

an enrollee to request a reconsideration 

of a PDP sponsor’s determination not to 

provide for a covered drug that is not on 

the PDP formulary, the prescribing 

physician must determine that all 

covered part D drugs on any tier of the 

formulary for treatment of the same 

condition would not be as effective for 

the individual as the nonformulary 

drug, would have adverse effects for the 

individual, or both. 

Section 423.602 proposes the 

requirements for the IRE reconsideration 

determination notice, including the 

requirement that if the determination is 

adverse (that is, does not completely 

reverse the PDP sponsor’s adverse 

coverage determination), the enrollee 

must be informed of the right to request 

an ALJ hearing and the procedures that 

must be followed to obtain the hearing. 

Section 423.604 of our proposed rule 

explains that a reconsideration by the 

IRE is final and binding on the enrollee 

and the PDP sponsor, unless the 

enrollee requests an ALJ hearing. 

c. Administrative Law Judge (ALJ) 

Hearings, Medicare Appeals Council 

(MAC) Appeals, and Judicial Review 

(§ 423.610 Through § 423.630) 

As stated above, Section 1860D–

4(h)(1) of the Act merely requires the 

Secretary to establish a reconsideration 

and appeals process that is ‘‘similar’’ (as 

determined by the Secretary) to the 

process used for MA organizations 

under the authority of 1852(g)(4) and (5) 

of the Act. Although we believe the 

Congress gave us a good deal of 

discretion in designing these procedural 

rules under Part D, we have determined 

as a policy matter to adopt most of the 

ALJ, MAC, and judicial review 

procedures currently used in the MA 

program. 

Section 1852(g)(5) of the Act provides 

the right to a hearing and to judicial 

review for an enrollee dissatisfied by 

reason of the enrollee’s failure to receive 

a covered Part D drug to which he or she 

believes he or she is entitled, and at no 

greater charge than he or she believes he 

or she is required to pay. Section 

1852(g)(5) of the Act also specifies the 

amount in controversy needed to pursue 

a hearing and judicial review and 

authorizes representatives to act on 

behalf of individuals that seek appeals. 

In general, we would be implementing 

section 1869 changes that apply to Part 

D through cross-reference to the 

appropriate Part 405 regulations. 

If the IRE’s reconsideration 

determination is not fully favorable, the 

enrollee may request a hearing before an 

ALJ if the amount remaining in 

controversy meets the threshold 

requirement established annually by the 

Secretary. The threshold requirement 

will be published annually in the 

Federal Register. Although a PDP 

sponsor generally is not a party to the 

IRE appeal and may not request a 

hearing before an ALJ, the sponsor is 

considered a party to the ALJ hearing for 

the limited purpose of participation in 

the hearing. If the ALJ hearing does not 

result in a fully favorable determination, 

the enrollee may request MAC review of 

the ALJ decision. 

Following the administrative review 

process, the enrollee is entitled to 

judicial review of the final 

determination if the amount remaining 

in controversy meets the threshold 

requirement established annually by the 

Secretary and published in the Federal 

Register. 

7. Effectuation of Reconsideration 

Determinations (§ 423.636 Through 

§ 423.638) 

Sections 423.636 and 423.638 propose 

the requirements for effectuation of 

coverage determinations reversed by the 

PDP sponsor, redeterminations reversed 

by the independent review entity, or 

reversals by an ALJ or higher level of 

appeal. For example, § 423.636(a)(1) 

requires that for redeterminations of 

requests for benefits, if the PDP sponsor 

reverses its determination, it must 

authorize or provide the benefit under 

dispute as expeditiously as the 

enrollee’s health condition requires, but 

no later than 30 calendar days after the 

date it receives the request for 

redetermination. When the PDP sponsor 

is reversed by the independent review 

entity, § 423.636(b)(1) requires that it 

must authorize the benefit under 

dispute within 72 hours from the date 

it receives notice reversing the 

redetermination, or provide the benefit 

as expeditiously as the enrollee’s health 

requires, but no later than 14 calendar 

days from the date of the reversal notice. 

For redeterminations of requests for 

payment, § 423.636(a)(2) requires that if 

the PDP sponsor reverses its coverage 

determination, it must pay for the 

benefit no later than 60 calendar days 

after the date it receives the request for 

reconsideration. Under § 423.636(b)(2) if 

a sponsor’s redetermination is reversed 

by the independent review entity, it 

must pay for the benefit no later than 30 

calendar days from the date it receives 

notice reversing the redetermination. 

Section 423.638 proposes that for 

expedited redeterminations reversed by 

the PDP sponsor or the independent 

review entity, the PDP sponsor must 

authorize or provide the benefit under 

dispute as expeditiously as the 

enrollee’s health condition requires but 

no later than 72 hours after the date it 

receives the request for redetermination, 

or in the case of reversal by the 

independent review entity, from the 

date it receives the reversal notice. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46723 

Finally, for reversals by an ALJ or 

higher level of appeal, under 

§ 423.636(c) and § 423.638(c) the PDP 

sponsor must pay for, authorize, or 

provide the benefit under dispute as 

expeditiously as the enrollee’s health 

condition requires, but no later than 60 

calendar days from the date it receives 

notice reversing its determination. 

8. Federal Preemption of Grievances and 

Appeals 

We believe that the grievance 

procedures for the Part D Drug Program 

under Title I should be the same as 

those that apply to the MA program 

under Title II. 

Section 232(a) of the MMA amended 

1856(b)(3) of the Act so that it now 

reads: ‘‘The standards under this part 

shall supersede any State law or 

regulation (other than State licensing 

laws or State law relating to plan 

solvency) with respect to MA plans 

which are offered by MA organizations 

under this part.’’ Section 1860D–12(g) of 

the Act then incorporates this 

preemption rule for PDP sponsors and 

prescription drug plans. As we 

discussed earlier in Part I of this 

preamble, we believe that these 

preemption provisions would not cause 

all State laws to be superseded—

particularly in areas where we have no 

authority to regulate. In the context of 

our grievance and appeals rules, 

because our regulations provide for 

doing so, we would continue to defer to 

state law on the issue of authorized 

representatives of enrollees in the 

appeals process. We do not believe that 

the Congress intended for the Secretary 

to regulate matters for which the 

Secretary is not authorized to 

promulgate standards (for example, 

spousal rights, powers of attorney, or 

legal guardianship). Often, authorized 

representative matters are non-Federal 

issues. However, because we do have 

the authority to regulate in the field of 

grievances, we are concerned that state 

grievance requirements will now be 

preempted, and we may need to 

reexamine our Federal grievance 

requirements. We request comments on 

this preemption issue and the specific 

state grievance requirements that should 

be incorporated into Federal regulatory 

requirements at § 423.564. 

We also note that tort law, and often 

contract law, are generally developed 

based on case law precedents 

established by courts, rather than by 

legislators through statutes or by state 

officials through regulations. In 

addition, we do not believe we would 

have the authority under Part D to set 

specific tort remedies or to govern 

resolution of private contracting 

disputes between PDPs and MA–PDs 

and their subcontractors. We believe 

that the Congress did not intend for our 

regulations to supersede each and every 

State requirement applying to MA–PDs 

and PDPs—even those for which the 

Secretary lacks expertise and authority 

to regulate. Thus, we do not believe, for 

example, that wrongful death or similar 

law suits based upon tort law would be 

superseded by the appeals process 

established in these regulations. 

Similarly, State contract law would 

continue to govern private contract 

disputes between PDPs or MA–PDs and 

their subcontractors. 

Under principles of Federalism, and 

Executive Order 13132 on Federalism, 

which generally require us to construe 

preemption narrowly, we believe that an 

enrollee should still have state remedies 

available in cases in which the legal 

issue before the court is independent of 

an issue related to the organization’s 

status as a stand alone PDP or an MA–

PD plan. 

9. Employer Sponsored Prescription 

Drug Programs and Appeals 

The waiver provisions of section 

1857(i) of the Act were incorporated 

into Part D through section 1860D–22(b) 

of the Act. When an employer, whether 

by contracting with MA–PDs or PDPs or 

otherwise, provides prescription drug 

benefits in addition to those covered 

under Part C and Part D of Title XVIII 

of the Social Security Act to their 

retirees, such employer may have 

established a group health plan 

governed by both Title I of the 

Employee Retirement Income Security 

Act of 1974, as amended (ERISA), and 

State law (to the extent such State law 

is not preempted by ERISA). In 

addition, when MA–PDs, PDPs, and 

programs described in 42 U.S.C. 1395w–

132 offer benefits covered under Part D, 

they also would fall under the 

requirements of Part 423 of our 

proposed regulations, with respect to 

Part D benefits. 

In drafting our Part C, MA rules, we 

consulted the Department of Labor 

(DOL), employer groups, and the health 

plan industry in trying to eliminate 

unnecessary Federal regulation of 

claims and appeals issues that impact 

matters within the jurisdiction of both 

DOL and DHHS. Based on our 

experience under Part C, we have reason 

to believe that some Medicare eligible 

individuals may receive integrated 

prescription drug benefits, i.e., Part D 

benefits through an MA–PD, PDP, or 

program described in 42 U.S.C. 1395w–

132 and supplemental benefits through 

an ERISA-covered plan. For example, an 

employer-sponsored plan may pay the 

cost-sharing amount for a prescription 

drug that is offered by an MA–PD or 

PDP. Clearly, if the enrollee had a 

dispute about Part D coverage, he or she 

could file an appeal with the PDP 

sponsor. If the enrollee’s dispute 

involved only the amount of cost 

sharing paid by the employer-sponsored 

plan, he or she would file an appeal in 

accordance with the procedures of the 

ERISA covered plan. In some cases, 

however, the dispute might involve 

independent coverage decisions under 

both Part D and the ERISA plan; 

possibly necessitating parallel appeal 

procedures on the same case. In this 

regard, we are soliciting comments on 

whether, and to what extent, the 

application of parallel procedures in 

this context might be a problem for 

plans, employers, and/or eligible 

individuals. We also are soliciting 

suggestions for addressing problems, if 

any, resulting from the application of 

parallel procedures. 

N. Medicare Contract Determinations 

and Appeals 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart N—Medicare Contract 

Determinations and Appeals’’ at the 

beginning of your comments.) 

1. Overview 

Section 1860D–12(b)(3)(F) of the Act 

directs that the ‘‘procedures for 

termination’’ in section 1857(h) of the 

Act be incorporated into contract 

requirements for PDP sponsors. To 

enhance the flow of this proposed rule, 

we have separated the provisions of 

section 1857(h) of the Act into two 

portions and addressed the two portions 

in different subparts of this part. 

2. Proposed Provisions of the Subpart 

As discussed above, § 423.509 of 

subpart K of this part implements the 

provisions of sections 1857(h)(1)(A) and 

1857(h)(2) of the Act that address 

reasons for our termination of contracts, 

opportunity for PDP sponsors to 

develop a corrective action plan before 

termination, and procedures for 

immediate termination if we identify an 

imminent and serious health risk to 

enrollees. 

Sections 423.641(b) through 423.669 

specifies the procedures outlined in 

section 1857(h)(1)(B) of the Act. These 

sections specify that we would provide 

the organization with reasonable notice 

and opportunity for hearings (including 

the right to appeal an initial decision) 

before termination of its contract. 

Additionally, the requirements at 

§ 423.641(a) specifies the procedures for 

making and reviewing our 

46724 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

determination that an entity is not 

qualified to enter into a contract as a 

PDP sponsor under this part. Finally, 

§ 423.641(c) identifies procedures for 

reviewing our decision as specified at 

§ 423.507(b) not to renew a contract 

with a PDP sponsor. 

Section 1860D–12(b)(3) of the Act 

states that we must apply certain 

specified provisions of section 1857 of 

the Act including the procedures for 

termination in section 1857(h) of the 

Act in the same manner as they apply 

to contracts under section 1857(a) of the 

Act. Therefore, we are proposing that a 

single set of procedures relating to 

contract determinations and appeals 

apply to both MA and PDP sponsor 

contractors. The requirements at 

§ 423.641 through § 423.669 would 

mirror the requirements at § 422.641 

through § 422.698 for the MA program. 

A summary of the specific process 

and content of the proposed appeals and 

determination system for PDP sponsors 

found in this subpart are below. 

Sections 423.641 through 423.669 of 

our regulations detail the specific 

process and content of the appeals and 

determinations system, as it relate to 

PDP sponsors. The topics covered in 

these sections fall into the following five 

categories: 

(1) Contract determinations. Sections 

423.641 through 423.643 would 

describe the types of contract 

determinations, the notice requirements, 

and the effect of contract determinations 

on the PDP sponsor contract. 

(2) Reconsideration. Sections 423.644 

through 423.649 would describe when a 

PDP sponsor organization may request a 

reconsideration of our contract 

determination, the procedures for 

requesting a reconsideration, the 

internal operation of the 

reconsideration, the notice requirements 

for relating the reconsideration 

determination to all parties, and the 

impact of this determination on the PDP 

sponsor’s contract. 

(3) Hearing. Sections 423.650 through 

423.667 would discuss in detail the 

process surrounding a hearing, 

including when a hearing may be 

requested by a PDP sponsor and how to 

make the request, the internal operation 

of the hearing (for example, designation 

of participants in the hearing, witnesses 

and evidence that can be presented, and 

record of the hearing), and the notice 

and effect of the hearing decision on the 

PDP sponsor’s contract. If the contractor 

has submitted a request for a hearing 

timely, the effective date of the contract 

determination may have been 

postponed pending the reconsideration 

determination. Finally, this section 

discusses the right for review of the 

hearing decision by the Administrator 

and the effect of that review decision. 

(4) Reopening. Section 423.668 would 

present the opportunity for reopening of 

the contract or reconsidered 

determination of a hearing officer or the 

Administrator. 

O. Intermediate Sanctions 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart O’Intermediate Sanctions’’ at 

the beginning of your comments.) 

1. Overview 

Supbart O would implement most of 

the provisions of section 1860D–

12(b)(3)(E) of the Act. This section of the 

statute provides that the contract 

requirements at section 1857(g) of the 

Act that govern ‘‘intermediate 

sanctions’’ for Medicare Advantage 

(MA) organizations, with a few 

exceptions, will apply to contracts for 

PDP sponsors. Therefore, with two 

exceptions, the requirements in 

§ 423.750 through § 423.760 would 

mirror the requirements at § 422.750 

through § 422.760. The two changes we 

are proposing to make to comply with 

the MA provisions are found below in 

the section called, ‘‘Basis for Imposing 

Sanctions.’’

Freezing marketing or enrollments has 

generally been our first and most 

frequently used sanction authority. The 

MMA requires at least two qualified 

plans, that is a PDP per region. If we 

were to freeze the enrollment or 

marketing of a PDP sponsor, that is one 

of only two plans in a region, 

beneficiaries would no longer have the 

level of choice the MMA intended. If we 

are contemplating sanctioning a plan 

that is one of only two PDP sponsors in 

a region, we may have to consider using 

other remedies including civil monetary 

penalties to maintain an adequate level 

of choice for beneficiaries. However, we 

do not want to discriminate in our 

treatment of PDPs when imposing 

sanctions. Our goal would be to have 

consistent policies and procedures 

across all regions in regard to sanctions. 

Therefore, we request comment on 

whether closing enrollment should be 

used in any situation or should we 

generally rely on civil monetary 

penalties as a sanction for PDPs. 

2. Kinds of Sanctions (§ 423.750) 

Section 423.750 of our regulations 

would describe four types of sanctions 

that we may impose on PDP sponsors, 

if warranted under § 423.752. These 

sanctions are identical to those we have 

imposed on M+C contractors. The range 

of potential sanctions, and the fact that 

one or more of them may be imposed at 

any one time, would permit us to tailor 

our action to a specific situation. 

Three of these sanctions would 

disrupt the operation of the PDP 

sponsor in relation to Medicare 

beneficiaries (that is, suspension of new 

enrollment (§ 423.750(a)(2), suspension 

of our payments to the PDP sponsor for 

enrolled beneficiaries (§ 423.750(a)(3), 

and suspension of all marketing 

activities (§ 423.750(a)(4)). We may keep 

the sanction in force until we are 

satisfied that the organization has 

corrected and will not repeat, the 

deficiency on which the sanction was 

based. 

The fourth sanction that we could 

impose on an organization is civil 

monetary penalties ranging from 

$10,000 to $100,000, depending on the 

violation. Both the Office of the 

Inspector General (OIG) (§ 423.756(f)(2)) 

and CMS (§ 423.756(f)(3)) may impose 

civil monetary penalties. 

3. Basis for Imposing Sanctions 

(§ 423.752) 

Sections 423.752(a) and 423.752(b) of 

our regulations would list the seven 

violations for which sanctions may be 

imposed on a PDP sponsor organization. 

These violations are the same as those 

that warrant the imposition of sanctions 

for MA contractors, with the exception 

of two deletions we are proposing 

below. Specifically, sanctions would be 

imposed if the PDP sponsor engages in 

any of the following: 

(1) Fails to provide required 

medically necessary services with 

adverse effect on the enrollee. 

(2) Imposes premiums on 

beneficiaries that are in excess of those 

permitted in subpart F of part 423 of 

these proposed regulations. 

(3) Expels or will not re-enroll a 

beneficiary in violation of this part. 

(4) Engages in the practice of health 

screening or ‘‘cherry picking.’’

(5) Misrepresents or falsifies 

information furnished to CMS, any 

other entity or individual under the Part 

D drug benefit program. 

(6) Employs or contracts with an 

individual or entity excluded from 

participation in the Medicare program 

as specified under section 1128 or 

1128A of the Act (or with an entity that 

employs or contracts with the 

individual or entity) for the provision of 

certain services. 

Additionally, as an alternative to the 

sanctions listed above, we would be 

able to decline to authorize renewal of 

the organization’s contract (or may elect 

to terminate the contract entirely in 

accordance with § 423.509). In addition, 

§ 423.509(a) would provide that a PDP 

sponsor organization be sanctioned if it 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46725 

fails to carry out the terms of its contract 

as specified under this section. 

Section 1860D–12(b)(3)(E) of the Act 

would specifically exclude two of the 

bases for sanctions at section 1857(g)(1) 

of the Act for MA contractors from 

application to PDP sponsor 

organizations as specified in part 423. 

Specifically, we would not impose 

sanctions on a PDP sponsor in the event 

it fails to enforce the limit on balance 

billing under a private-fee-for-service 

plan as required at § 422.216(a)(4), or 

fails to prohibit interference with 

practitioners’ advice to enrollees, as 

required at § 422.206, since we do not 

believe these provisions are applicable 

in the context of the Part D drug benefit. 

4. Procedures for Imposing Sanctions 

(§ 423.756) 

Section 423.756 of our proposed 

regulations would specify our 

procedures for conducting the sanction 

process for PDP sponsor organizations. 

This process would mirror that used for 

the MA program. A brief summary of 

the process is as follows—

• We must send a timely notification 

of sanction to the PDP sponsor, 

outlining the nature and basis of the 

proposed sanction, and copy OIG. 

• We must provide the PDP sponsor 

with an 15 or 30 day extension, to 

respond. If requested, an uninvolved 

CMS official will conduct an informal 

reconsideration of the determination 

with a written decision. 

• Non-monetary sanctions would be 

effective 15 days from the organization’s 

receipt of a final notice of sanction and 

remain in effect until we determine that 

the violation is corrected. CMS or the 

OIG, depending on the basis for the 

sanction, may impose civil monetary 

penalties. 

5. Maximum Amount of Civil Money 

Penalties Imposed by CMS (§ 423.758) 

Section 423.758 of our proposed 

regulations would provide that we be 

given discretion, as we have been in the 

M+C program, to determine the amount 

of monetary penalty to impose on a PDP 

sponsor within the limits specified at 

§ 423.758. Three situations where 

monetary penalty limits are listed are as 

follows—

(1) If the deficiency in which the 

determination was based has adversely 

affected the health of an enrollee (or has 

substantial probability of doing so), the 

penalty may be $25,000 per 

determination. 

(2) We may apply a monetary penalty 

for each week that a deficiency remains 

uncorrected after the organization 

receives our notice of sanction or notice 

of reconsideration determination, up to 

$10,000 per week. 

(3) If we determine that a PDP sponsor 

has terminated its contract without 

following the process required in 

subpart K at § 423.510, the penalty 

imposed may be either $250 per 

Medicare beneficiary enrolled in the 

organization at the time the PDP 

sponsor terminated its contract, or 

$100,000, whichever is greater. 

6. Other Applicable Provisions 

(§ 423.760) 

Section 423.760 of our proposed 

regulation provides that the provisions 

of section 1128A of the Act (except 

subsections (a) and (b)) apply to civil 

money penalties under this subpart to 

the same extent that they apply to a civil 

money penalty or procedure under 

section 1128A of the Act. 

P. Premiums and Cost-Sharing 

Subsidies for Low-Income Individuals 

Section 1860D–14 of the Act 

establishes a program to provide 

subsidies for assistance with premium 

and cost-sharing amounts for Part D 

eligible individuals with lower income 

and resources. The proposed regulations 

in this subpart and in regulations 

published by the Social Security 

Administration (SSA) adding a subpart 

D to a new part 418 of title 20 of the 

Code of Federal Regulations implement 

section 1860D–14 of the Act. 

The statute divides subsidy eligible 

individuals into two different groups 

based on income and resources: (1) Full 

subsidy eligible individuals; and (2) 

other low-income subsidy eligible 

individuals. The different groups are 

entitled to different amounts of subsidy 

assistance. In this proposed regulation, 

we are defining the eligibility criteria 

and the amounts of subsidy assistance 

provided. 

1. Eligibility for the Low-Income 

Subsidy (§ 423.773) 

In order to qualify for a full subsidy, 

an individual must live in one of the 

fifty States or the District of Columbia 

and have countable income below 135 

percent of the Federal poverty level for 

the individual’s family size. For 

purposes of this section, ‘‘federal 

poverty line’’ (FPL) has the meaning 

given that term in section 673(2) of the 

Community Services Block Grant Act 

(42 U.S.C. 9902(2)), including any 

revision required by that section. 

In addition, an individual must have 

resources that do not exceed three times 

the resource limit under section 1613 

for applicants for Supplemental 

Security Income (SSI) under title XVI, 

which in 2006 is $6,000 if single, or 

$9,000 if married. Thereafter, this 

resource limit will be increased 

annually by the percentage increase in 

the Consumer Price Index (all items, 

U.S. city average) as of September for 

the year before, rounded to the nearest 

multiple of $10. 

Individuals not eligible for the full 

subsidy may be eligible for the partial 

subsidy if they live in one of the fifty 

States or the District of Columbia and 

have income below 150 percent of the 

FPL for their family size, and have 

resources in 2006 that do not exceed 

$10,000 if single, or $20,000 if married. 

Beginning in 2007 and for each 

subsequent year, the resource limit will 

be increased annually by the percentage 

increase in the Consumer Price Index 

(all items, U.S. city average) as of 

September for the year before, rounded 

to the nearest multiple of $10. 

Low-income Part D eligible 

individuals who reside in the territories 

are not eligible to receive premium and 

cost-sharing subsidies under this 

subpart. Subpart S of this proposed rule 

addresses the provision of covered Part 

D drugs to low-income individuals 

residing in the territories. 

In making income and resource 

determinations for the low-income 

subsidy for Part D, the statute refers to 

certain sections of the SSI program 

rules. For example, the MMA refers to 

income being determined in the same 

manner as for Qualified Medicare 

Beneficiaries (QMBs) under the 

Medicaid program, without use of the 

more liberal methodologies that States 

are permitted to use. The QMB 

provisions reference the SSI rules 

(specifically, section 1612 of the Act, 

which are the rules of the SSI program 

for determining income). Our proposed 

definition of income is consistent with 

the MMA in that it references SSI rules. 

The MMA provides that we will 

compare the individual’s income to the 

appropriate FPL applicable to ‘‘the 

family of the size involved.’’ As there is 

no reference in the MMA statute to 

using previous definitions of family 

size, we propose to define family size to 

include the applicant, his or her spouse 

who lives in the same residence, and the 

number of individuals related to the 

applicant who live in the same 

residence and who depend on the 

applicant or the applicant’s spouse for 

at least one-half of their financial 

support. 

We considered limiting family size to 

1 or 2 individuals to more closely 

resemble the SSI rules where family size 

is not actually defined but where 

benefits are paid on the basis of an 

eligible individual or eligible couple. 

This is the definition we propose to use 

46726 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

in determining eligibility for 

Transitional Assistance under the drug 

card. The decision to limit family size 

under the drug card was based on the 

short duration of that program (18 

months), the limited benefit ($600 a 

year), and the fact that we would have 

to rely entirely on a computer and 

systems-based process for determining 

Transitional Assistance eligibility and 

verifying income and other information 

from applicants. However, we do not 

believe it was the intent of the Congress 

to similarly limit the definition for 

purposes of determining eligibility for 

subsidies under the Part D program. 

Unlike the provisions authorizing the 

Medicare-approved drug discount card 

program, there are no provisions with 

respect to the low-income subsidy 

program that give the Secretary specific 

authority to define family size. Instead, 

we are interpreting the term ‘‘family of 

the size involved.’’ We believe that this 

term implies a definition that is greater 

than an individual or couple and that 

includes other dependent relatives 

residing in the applicant’s household. In 

addition, in order for the term ‘‘family 

size’’ to have meaning in the context of 

subsidy determinations, the notion of 

dependency needs to take into account 

the impact of a dependent on the 

relative need of the applicant or the 

applicant’s spouse in attaining the 

subsidy. Accordingly, we have specified 

that dependents included in the 

calculation of family size are only those 

relatives residing in the residence who 

are financially dependent on the 

applicant or the applicant’s spouse for 

one-half of their support. 

In determining the income to be 

compared to the FPL for the size of the 

family involved, we would include 

income of the Medicare beneficiary and 

spouse, if any. Thus, if a married 

individual applies, both the income of 

the applicant and his or her spouse who 

lives in the same residence, regardless 

of whether the spouse is also an 

applicant, is counted and measured 

against the appropriate standard for the 

low-income subsidy. In our view, this 

best comports with the statutory 

reference to determining income in the 

manner described in section 

1905(p)(1)(B) of the Act (for QMBs). In 

making a standard QMB income 

determination, States will consider the 

income of one spouse as available to the 

other spouse. Moreover, since both 

spouses will be considered in the family 

size determination, it would be 

counterintuitive to count a spouse’s 

presence while not including that 

spouse’s income. Other members who 

meet the one-half support test will be 

counted in the family size calculation, 

but income of these dependents will be 

ignored in the eligibility determination. 

The one-half support test ensures that a 

family member with sizable income is 

not erroneously counted as a dependent 

while that person’s income is ignored. 

The MMA (at section 1860D–

14(a)(3)(D)) provides that resources will 

be determined according to section 1613 

of the Act. The resource standard 

depends upon whether the applicant is 

a single individual or a member of a 

married couple and whether the 

resources will be measured against the 

basic or alternative resources standards. 

See section 1860D–14(a)(3)(D) and (E) 

and H.R. Conference Report No. 108–

391 at 470. However, that section does 

not define resources, it defines what are 

not resources. The MMA also provides 

for the development of a simplified 

application in which applicants attest to 

their level of resources and submit only 

minimal documentation. The 

implication of this provision is that the 

Congress envisioned a simple process. 

In order to keep the process simple and 

minimize administrative cost, we intend 

to only consider liquid resources (that 

is, those that could be converted to cash 

within twenty days) and real estate that 

is not an applicant’s primary residence 

as resources that are available to the 

applicant to pay for the Part D 

premiums, deductibles and copayments. 

Thus, we will not consider other nonliquid resources (for example, a second 

car) to be available to the applicant for 

this purpose. 

We do not believe this policy will 

have a significant impact on program 

costs. We believe any such program 

costs associated with not counting nonliquid resources other than countable 

real estate would be offset by the 

administrative savings resulting from a 

more simplified program. As we 

indicate further in this section, we are 

working with SSA on a quality 

assurance strategy that will strike an 

appropriate balance between 

administrative costs and program goals 

and objectives. 

Section 1860D–14(a)(3)(B)(v)(I) of the 

Act requires that full-benefit dual 

eligibles (as defined under section 

1935(c)(6) of the Act) and individual 

receiving benefits under the SSI 

program be treated as full subsidy 

eligible individuals with respect to 

premium assistance, elimination of the 

deductible, continuation of coverage 

above the initial coverage limit, and 

elimination of cost-sharing above the 

annual out-of-pocket threshold. 

However, copayment subsidies for these 

individuals will vary depending on 

whether the individual is in an 

institution or has income below or 

above 100 percent of the FPL. Full 

benefit dual eligible individuals with 

income above 100 percent of the FPL 

will have copayments not to exceed $2 

for a generic or a preferred multiple 

source drug or $5 for an other drug. 

Under Medicaid, the term ‘‘dual 

eligibles’’ generally refers to low-income 

Medicare beneficiaries who qualify for 

some level of medical assistance. Those 

entitled to full benefits under Medicaid 

generally have most of their health care 

expenses, including prescription drugs, 

paid for by a combination of Medicare 

and Medicaid. However, Federal law 

also specifies several groups of dual 

eligibles who, while not entitled to full 

Medicaid benefits, are entitled to more 

limited medical assistance, specifically 

payment of Medicare Part A or Part B 

premiums and/or cost sharing, such as 

payment of Medicare deductibles and 

coinsurance. These groups are certain 

QMBs, specified low-income Medicare 

beneficiaries (SLMBs), qualified 

disabled and working individuals 

(QDWIs), and certain qualifying 

individuals (QIs). 

For purposes of the low-income 

subsidy under Part D, we propose to 

define the term ‘‘full benefit dual 

eligible individual’’ as an individual 

who for any month has coverage under 

a PDP or MA–PD and is determined 

eligible by the State for medical 

assistance for full benefits under title 

XIX for the month under any eligibility 

category covered under the State plan or 

comprehensive benefits under a 

demonstration under section 1115 of the 

Act. Comprehensive benefits referred to 

in this section do not include those 

benefits received under section 1115 

Pharmacy Plus demonstrations. For 

individuals who become medically 

needy by spending down excess 

medical expenses, the individual is not 

eligible as medically needy until he or 

she satisfies their spenddown 

obligation. This requirement is reflected 

in the proposed regulations at § 423.772. 

Section 1860D–14(a)(3)(B)(v)(II) of the 

Act authorizes the Secretary to treat 

QMBs, SLMBs, and QIs who are not full 

benefit dual eligible individuals as full 

subsidy eligible individuals. This 

authority does not apply to QDWIs. As 

indicated in the proposed regulations at 

§ 423.773(c), the Secretary proposes to 

elect to exercise this authority and treat 

these individuals as being eligible for 

full subsidy assistance. This decision is 

based on the fact that nearly all QMBs, 

SLMBs, and QIs, by definition, will 

likely meet the requirements to be 

considered a full subsidy individual. 

Generally, QMB, SLMB, and QI 

individuals have income below 135 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46727 

percent of the FPL and resources that do 

not exceed twice the SSI limit. The 

exception will be in the few States that 

have more liberalized income and asset 

rules for these groups under section 

1902(r)(2) of the Act. We do not believe 

that treating these groups as subsidy 

eligible will have a large cost impact. 

Further, we believe that it will ease the 

administrative burden of having to 

educate these individuals on the need to 

apply for the subsidy. 

Section 1860D–14(a)(1) distinguishes 

between noninstitutionalized full 

benefit dual eligible individuals with 

incomes at or below 100 percent of the 

FPL and other non-institutionalized 

individuals covered as full subsidy 

eligibles. This distinction is made solely 

for purposes of the reduction in costsharing below the out of pocket 

threshold. Therefore, full benefit dual 

eligibles (and, as proposed above, at the 

Secretary’s election QMBs, SLMBs, and 

QIs) receive a full premium subsidy, 

have no annual deductible, and have 

coverage above the initial coverage 

limit. However, with respect to costsharing below the out-of-pocket 

threshold, these individuals have a twotiered system depending upon whether 

their incomes are at or below 100 

percent of the FPL or above 100 percent 

of the FPL. For those 

noninstitutionalized full benefit dual 

eligible individuals below 100 percent 

of the FPL, a copayment is imposed that 

does not exceed the lesser of $1 for a 

generic or a preferred multiple source 

drug or $3 for any other drug, or the 

amount charged to other individuals 

with income below 135 percent of the 

FPL who meet the resource standard 

based on three times the SSI standard. 

For individuals in this group above 100 

percent of the FPL, a copayment not 

exceeding $2 for a generic or a preferred 

multiple source drug is imposed, or $5 

for an other drug. 

Finally, the statute gives the Secretary 

the option to permit a State to make 

subsidy eligibility determinations by 

using the methodology it uses under 

section 1905(p) of the Act if the 

Secretary determines that this would 

not result in any significant difference 

in the number of individuals who are 

made eligible for the subsidy. This 

would permit a State to use the same 

resource methodologies that it uses to 

determine Medicaid eligibility for 

QMBs, SLMBs, and QIs if the Secretary 

determines that the use of those 

methodologies would not result in any 

significant differences in the number of 

individuals who are made eligible for a 

subsidy. This includes the less 

restrictive methodologies the State uses 

under section 1902(r)(2) of the Act to 

determine eligibility for QMBs, SLMBs, 

and QIs. At this time, the Secretary 

proposes not to exercise this option. 

This means that when making 

eligibility determinations for other lowincome subsidy eligibles, all States will 

use the same resource methodologies 

across the country. The rationale for not 

electing this authority is twofold. First, 

uniformity in the application process is 

a desired goal and having alternative 

resource methodologies that would vary 

among States would detract from that 

goal. Second, based on the 

administrative burden and complexity 

that would be involved in administering 

this alternative process, we see very 

little benefit in terms of the number of 

individuals who would be determined 

subsidy eligible. 

2. Eligibility Determinations, 

Redeterminations and Applications 

(§ 423.774) 

In accordance with section 1860D–

14(a)(3)(B)(i) of the Act, an application 

for subsidy assistance may be filed with 

either a State’s Medicaid program office 

or SSA. Inquiries made by individuals 

to PDPs or MA–PDs concerning 

application or eligibility for the lowincome subsidy should be referred to 

State agencies or SSA. Eligibility 

determinations would then be made by 

the State for applications filed with the 

State Medicaid agency or by the 

Commissioner of Social Security for 

those filed with SSA. The Congress 

believes that more beneficiaries would 

enroll in the new Part D benefit if given 

the option to apply at the Social 

Security office as well as State Medicaid 

offices. While our goal is to provide a 

single application and determination 

process for the low-income subsidy, we 

recognize that the statute provides that 

redeterminations and appeals of 

eligibility determinations are to be made 

in the same manner as for medical 

assistance for those individuals who are 

determined eligible by the State 

Medicaid agency. Similarly, the 

Commissioner will decide how to 

conduct redeterminations and appeals 

for those subsidy determinations made 

by Social Security. We invite comments 

on State Medicaid agency procedures 

how to best implement the 

redetermination and appeal process that 

we believe would best be accomplished 

if the two separate processes produce 

the same outcome. 

We note that eligibility 

determinations for low-income 

subsidies would be effective beginning 

with the first day of the month in which 

the individual applies for a subsidy, but 

no earlier than January 1, 2006, 

provided the applicant meets the 

requirements for eligibility when he or 

she applies and has enrolled with a 

prescription drug coverage provider or 

MA plan with prescription drug 

coverage. Initial eligibility 

determinations would remain in effect 

for a period not to exceed 1 year. 

Because States and Social Security 

offices would be performing subsidy 

determinations, States and SSA would 

need to share data with CMS. We will 

then use the data to notify the PDP 

sponsor or MA organization of the 

individual’s eligibility. We will also use 

the data to provide information on 

income so that PDP sponsors and MA 

organizations may determine the 

amount of Part D premiums and 

copayments that may be charged to an 

individual eligible for the low-income 

subsidy as discussed later in this 

preamble. 

Section 1860D–14(a)(3)(E)(ii) of the 

Act directs the Secretary and the 

Commissioner of SSA to develop a 

model simplified application form for 

the determination and verification of 

Part D eligible individual’s assets or 

resources for the other low-income 

subsidy provision. We believe it is 

important to develop a simplified 

application for income as well as 

resources and to develop an application 

that will address both the full and the 

other low-income subsidy provisions. 

Therefore, we are working with SSA to 

develop a model application form to be 

used to determine eligibility for all 

subsidies. The application will reflect 

the definitions of income and resources 

discussed earlier in this subpart. 

With regard to the method and degree 

to which income and resources will be 

verified, our general policy is to not 

spend more on verification than the 

expected return in terms of benefit 

savings. Therefore, we intend to use the 

most efficient and cost-effective process 

that will balance the need for program 

integrity with the goal of reducing 

paperwork burden and cost. 

We envision a process based on an 

operations research strategy whereby 

States and SSA will build on existing 

verification processes used for other 

programs. We plan on maximizing the 

use of automated data matches for 

verification of income and certain liquid 

resources (which minimize both 

paperwork burden and cost), and 

relying on specific targeting or profiling 

criteria derived from a database that 

would identify a subset of applications 

for purposes of in-depth verification. 

This in-depth verification process will 

enable SSA and States to focus on 

elements attested to by the applicant 

that do not lend themselves to 

verification by electronic means (that is, 

46728 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

countable real estate). By developing a 

targeted approach, we believe we can 

strike an appropriate balance between 

administrative costs and program goals 

and objectives. We request comments on 

this approach. 

In developing a simplified 

application, we also considered a 

number of other issues in order to 

streamline the application process. For 

example, the proposed rules permit a 

personal representative to assist in the 

application process. We are proposing 

to define personal representative as an 

individual who is authorized to act on 

behalf of the applicant, an individual 

acting responsibly on behalf of an 

applicant who is incapacitated or 

incompetent, or an individual of the 

applicant’s choice who is requested by 

the applicant to act as his or her 

representative in the application 

process. 

In addition, we would permit the use 

of a proxy signature process to allow 

applications to be taken over the phone 

or by an Internet process. Under a proxy 

signature process, an individual attests 

to the accuracy of the information 

provided under penalty of perjury prior 

to submitting the information for 

processing. Our proposed requirements 

specify that the individual applying for 

the low-income subsidy, or a personal 

representative on his or her behalf 

complete the application for the lowincome subsidy, and certify as to the 

accuracy of the information provided. 

Section 1860D–14(a)(3)(E)(iii)(II) of 

the Act provides that statements from 

financial institutions shall accompany 

applications in support of the 

information provided therein. As 

previously discussed, we believe States 

and SSA will be able to verify 

information through data matches. As a 

result, we would reduce an applicant’s 

burden in producing financial 

statements by not requiring paper copies 

except when specifically requested. For 

example, SSA and States may verify 

some resources for the low-income 

subsidy through data matches with 1099 

files from the IRS, which show the 

annual amount of interest earned on 

interest bearing accounts. If the data 

from the 1099 files indicates the 

applicant’s interest is below a threshold 

amount relating to the resource limit 

and the applicant has no countable real 

estate, the State or SSA could decide 

that no further information is needed 

from the applicant relating to certain 

types of resources. When the threshold 

is exceeded, additional information may 

be requested of the individual to 

support the application. Use of this 

process would ease the burden on 

individuals preparing to file an 

application and will reduce the 

administrative burden on States and 

SSA in handling paper verification. 

Accordingly, § 423.774(d) requires the 

submission of statements from financial 

institutions only if requested by the 

State or SSA. 

3. Premium Subsidy (§ 423.780) and 

Cost-Sharing Subsidy (§ 423.782) 

In accordance with section 1860D–14 

of the Act, the proposed regulations 

specify the Part D premium subsidy and 

the Part D cost-sharing subsidy amounts 

available to subsidy eligible individuals, 

with the specific subsidy amounts 

varying depending upon the 

individual’s income and resources/ 

assets level. Table P–2 below shows the 

premium and cost-sharing subsidy 

amounts for the different groups of 

eligible individuals. 

a. Full Subsidy Eligible Individuals 

In accordance with section 1860D–

14(a)(1)(A) of the Act, full subsidy 

eligible individuals are entitled to a full 

premium subsidy equal to 100 percent 

of the ‘‘premium subsidy amount,’’ not 

to exceed the basic premium for 

coverage under the prescription drug 

plan selected by the beneficiary. 

Under section 1860D–14(b)(2) of the 

Act, the premium subsidy amount is 

equal to the greater of the low-income 

benchmark premium or the lowest 

monthly beneficiary premium for a 

prescription drug plan that offers basic 

prescription drug coverage in the region. 

The premium subsidy determined 

would apply regardless of whether the 

individual enrolls in a PDP or MA–PD. 

However, in the event the low-income 

benchmark premium is less than the 

lowest monthly beneficiary premium for 

basic prescription drug coverage offered 

by a PDP sponsor in a PDP region, in 

accordance with section 1860D–14(b)(3) 

of the Act, the premium subsidy will be 

equal to the monthly beneficiary 

premium for basic prescription drug 

coverage offered by a PDP sponsor in 

the PDP region. 

Under section 1860D–14(b)(2) of the 

Act, the low-income benchmark 

premium amount for a PDP region 

equals either the weighted average of 

the monthly beneficiary premiums for 

all basic prescription drug plans (if all 

prescription drug plans in the PDP 

region are offered by the same PDP 

sponsor), or the weighted average of 

monthly beneficiary premiums for basic 

prescription drug coverage and the 

monthly beneficiary premiums 

attributable to basic prescription drug 

coverage for alternative prescription 

drug coverage for both PDP and MA-PD 

plans. Because section 1860D–

14(b)(2)(A)(ii) of the Act references 

section 1851(a)(2)(a)(i) of the Act, the 

premiums of cost plans under section 

1876 of the Act, PACE plans, 

specialized MA plans for special needs 

individuals and private fee-for-service 

plans are excluded for purposes of 

determining the weighted average in the 

region. This is because section 

1851(a)(2)(a)(i) of the Act refers only to 

MA coordinated care plans. We 

interpret the calculation of the 

‘‘weighted average’’ as described in the 

regulations at § 423.279(b) of this 

proposed rule. 

Table P–1 below is an illustration of 

the premium subsidy determination. 

TABLE P–1.—DETERMINATION OF THE PREMIUM SUBSIDY

Plan options in region Low-income premium subsidy (full) 

Plans Monthly beneficiary premium 1

Percentage of 

part D enrollees 

in each plan 2

(percent) 

Premium times 

percentage 

(weighted average) 

Maximum premium subsidy for 

eligible individual 

enrolling in plan 

PDP 1 Offered by Sponsor A .......................................................... 40.00 15 6.00 36.00 

MA–PD Plan 1 ................................................................................. 38.00 5 1.90 36.00 

PDP 2 Offered by Sponsor B .......................................................... 36.00 40 14.40 36.00 

MA–PD Plan 2 ................................................................................. 20.00 15 3.00 20.00 

MA–PD Plan 3 ................................................................................. 0.00 25 0.00 0.00 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46729 

TABLE P–1.—DETERMINATION OF THE PREMIUM SUBSIDY—Continued 

Plan options in region Low-income premium subsidy (full) 

Plans Monthly beneficiary premium 1

Percentage of 

part D enrollees 

in each plan 2

(percent) 

Premium times 

percentage 

(weighted average) 

Maximum premium subsidy for 

eligible individual 

enrolling in plan 

Weighted Average Basic Premium in Region = ....................... ............................ ............................ 25.30 ............................

The greater of the Low Income Premium Benchmark Amount (25.30) or the lowest PDP premium in the region (36.00) equals 36.00, so the 

maximum premium subsidy is the lower of 36.00 or the actual plan premium for basic coverage. 1Assumes no supplemental premium or late enrollment penalties. 

2Assumes enrollment weights from the prior year’s reference month (not first year of program). 

Table P–1 illustrates the 

determination of the premium subsidy 

amount in a hypothetical region in 

which there are 2 PDPs, each offered by 

different sponsors, and 3 MA–PD plans. 

Because there are PDPs offered by more 

than one sponsor, the maximum 

premium subsidy amount is the greater 

of 2 amounts: the low-income premium 

benchmark amount or the lowest PDP 

premium in the region. The former is 

calculated by summing the products of 

the plan (basic) premium and the plan 

percentage of Part D enrollment in the 

region, and equals $25.30. The lowest 

PDP premium in the region, however, is 

$36.00. Therefore, in this exhibit, the 

full premium subsidy amount for the 

region is determined to be $36.00. 

Consequently, a Part D eligible 

individual meeting the requirements for 

a full premium subsidy would have a 

choice of 3 zero-premium plans in 

which to enroll (PDP 2, MA–PD 2, and 

MA–PD 3), because the maximum 

premium subsidy amount equals or 

exceeds the premiums for these plans. 

However, if this individual chose to 

enroll in PDP 1 or MA–PD 1 for some 

reason, he or she would be obligated to 

pay the difference between the plan 

premium and the premium subsidy 

amount ($4 or $2, respectively) each 

month. 

We anticipate that fallback plan 

premiums would be treated the same as 

those for risk-bid plans in the 

calculation of the low-income 

benchmark premium amount. 

In accordance with section 1860D–

14(b)(2) of the Act, the low-income 

benchmark premium amounts are 

determined without the addition of any 

amounts attributable to late enrollment 

penalties. 

Individuals eligible for the full 

premium subsidy who are subject to late 

enrollment penalties under proposed 

§ 423.46 would also be entitled to a 

subsidy equal to 80 percent of any late 

enrollment penalty for the first 60 

months in which the penalties are 

imposed, and 100 percent of any 

penalties in any subsequent month, in 

accordance with section 1860D–

14(a)(1)(A)(ii) of the Act and proposed 

§ 423.780(c). 

Section 423.782 of the proposed rule 

incorporates the provisions of section 

1860D–14(a)(1)(B), 1860D–14(a)(1)(C), 

1860D–14(a)(1)(D), and 1860D–

14(a)(1)(E) of the Act relating to the 

elimination of the deductible, 

continuation of coverage above the 

initial coverage limit (that is, no 

coverage gap), and reductions in costsharing. Specifically, full subsidy 

eligible individuals have no deductible. 

In addition, these individuals have 

continuation of coverage from the initial 

coverage limit (under paragraph (3) of 

section 1860D–2(b) of the Act and 

§ 423.104(e)(3)) through the out-ofpocket threshold (under paragraph (5) of 

the same section). In other words, there 

is no coverage gap, or ‘‘donut hole,’’ for 

these individuals. 

In accordance with section 1860D–

14(a)(1)(D)(i) of the Act, 

institutionalized full-benefit dual 

eligible individuals have no cost-sharing 

below the out-of-pocket threshold. We 

are proposing to define 

‘‘institutionalized individual’’ for this 

subpart as a full-benefit dual eligible 

individual who is an institutionalized 

individual as defined in section 

1902(q)(1)(B) of the Act. 

Under section 1860D–14(a)(1)(D)(ii) of 

the Act, full-benefit dual eligibles in 

2006 with incomes that do not exceed 

100 percent of the poverty line for their 

family size will pay no more than $1 for 

generic drugs or preferred multiple 

source drug (as defined in section 

1927(k)(7)(A)(i) of the Act). In addition, 

they would pay $3 for any other drug, 

or, if less, the amount charged to other 

individuals with income below 135 

percent of poverty who meet the three 

times the SSI resource standard test, for 

costs below the out-of-pocket threshold. 

These $1 and $3 copayment amounts 

are increased beginning in 2007 by the 

percentage increase in the CPI (all items, 

U.S. city average), rounded to the 

nearest multiple of 5 cents. The costsharing subsidies would count toward 

the application of the out-of-pocket 

threshold. 

After the out-of-pocket threshold is 

reached, cost-sharing would be 

eliminated for all full subsidy 

individuals and full benefit dual eligible 

individuals. In accordance with section 

1860D–14(a)(1)(D)(iii) of the Act, all 

other full subsidy eligible individuals 

and full benefit dual eligibles with 

income above 100 percent of the FPL in 

2006 will pay copayment amounts of $2 

for a generic drug or preferred multiple 

source (as defined in section 

1927(k)(7)(A)(i) of the Act) and $5 for 

any other drug, for costs up to the outof-pocket threshold. In accordance with 

section 1860D–2(b)(4) and 1860D–

2(b)(6) of the Act, these copayments are 

indexed based on an annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs, 

rounded to the nearest multiple of 5 

cents (see § 423.104(e)(5) of this 

proposed rule). Also, all other full 

subsidy eligible individuals and full 

benefit dual eligible individuals have 

continuation of coverage from the initial 

coverage limit (under paragraph (3) of 

section 1860D–2(b) of the Act and 

§ 423.104(e)(3)) through the out-ofpocket threshold (as specified under 

paragraph (4) of the section), with 

limited cost-sharing. 

After the catastrophic threshold is 

reached, cost-sharing would be 

eliminated for all full benefit dual 

eligible individuals. 

b. Other Low-Income Subsidy Eligible 

Individuals 

In accordance with section 1860D–

14(a)(2)(A) of the Act, for other lowincome subsidy eligible individuals 

who do not qualify for the full subsidy 

or as full benefit dual eligible 

individuals, their premium subsidy 

would be on a sliding linear scale basis. 

The sliding scale premium subsidy 

would range from 100 percent of the 

beneficiary base subsidy (as discussed 

earlier, equal to the greater of the lowincome benchmark premium or the 

lowest monthly beneficiary premium for 

46730 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

a prescription drug plan that offers basic 

prescription drug coverage in the PDP 

region), for individuals at or below 135 

percent of the FPL for their family size, 

to no subsidy for individuals at 150 

percent of the FPL for their family size. 

In contrast to full subsidy eligible 

individuals or full benefit dual eligible 

individuals, other subsidy eligible 

individuals subject to the late 

enrollment penalties under § 423.46 

would be responsible for 100 percent of 

the penalties. We welcome comments 

concerning the manner in which the 

sliding scale premium subsidy is 

calculated for individuals with income 

from 135 percent up to 150 percent of 

the FPL. For ease of administration, we 

could set a scale in a stepped fashion, 

for example, a set decrease in the 

subsidy amount for every 5 percent 

increase in income level. 

Other subsidy eligible individuals 

would have their annual deductible 

reduced from $250 to $50. This $50 is 

indexed in accordance with section 

1860D–2(b)(6) of the Act beginning in 

2007 based on the annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs, 

rounded to the nearest multiple of $1. 

Other subsidy eligible individuals 

would have continuation of coverage 

from the initial coverage limit (under 

paragraph (3) of section 1860D–2(b) of 

the Act) through the out-of-pocket 

threshold (under paragraph (4) of that 

section), meaning no coverage gap or 

‘‘donut hole.’’ For coverage through the 

out-of-pocket threshold, these 

individuals would pay 15 percent 

coinsurance, substituting for the higher 

beneficiary coinsurance described in 

section 1860D–2(b)(2) of the Act (see 

§ 423.104(e)(2) of this proposed rule). 

The cost-sharing subsidies would count 

toward the application of the out-ofpocket threshold. After the out-ofpocket threshold is reached, these 

individuals’ cost-sharing would be 

limited to the copayment or coinsurance 

amount specified under section 1860D–

2(b)(4)(A)(i)(I) of the Act (see 

§ 423.104(e)(5) of these proposed rules), 

which, in 2006, means co-payment 

amounts of $2 for a generic drug or 

preferred multiple source (as defined in 

section 1927(k)(7)(A)(i) of the Act) and 

$5 for any other drug. In accordance 

with section 1860D–2(b)(4) and 1860D–

2(b)(6) of the Act, the $2 and $5 

copayments would be indexed based on 

an annual percentage increase in 

average per capita aggregate 

expenditures for covered Part D drugs, 

rounded to the nearest multiple of 5 

cents. 

A question has been raised 

concerning whether an MA–PD plan 

could choose to reduce or eliminate 

copayments for dual eligible 

individuals. We believe that specialized 

MA plans (under section 231 of the 

MMA, as defined in proposed 

regulations at 42 CFR 422.2) offering 

benefits only to dual eligible individuals 

could choose to reduce or eliminate 

copayments for their members as a 

supplemental benefit. Otherwise, the 

Part D copayments stipulated by the 

MMA for low-income individuals 

cannot be reduced or eliminated. This is 

because any reduction of the 

copayments must apply to all plan 

members under the uniformity of 

benefits provisions, set forth in 

§ 423.265(c). Accordingly, MA–PD plans 

other than special MA–PD plans for 

dual eligibles may not offer their 

members who are dual eligible lower copayments or co-insurance than those 

paid by its other plan members. 

BILLING CODE 4120–01–P 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46731 


EP03au04.000</GPH>
46732 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

BILLING CODE 4120–01–C 

4. Administration of Subsidy Program 

(§ 423.800) 

We would be establishing a process to 

notify the PDP sponsor or MA 

organization that an individual is both 

eligible for the subsidy and the amount 

of the subsidy. Because CMS has not yet 

developed such a process, comments are 

welcome concerning notification to the 

PDP sponsor or MA organization that an 

individual is eligible for a subsidy and 

the amount of the subsidy. Similarly, we 

request comments on the proposed 

requirement that the PDP sponsor or 

MA organization notify CMS that 

premiums or cost-sharing have been 

reduced and the amount of the 

reduction. We are also considering the 

process for reimbursing the sponsor or 

organization for the amount of the 

premium or cost-sharing reductions. 

Any individually identifiable 

information must be kept confidential. 

Finally, we are requesting comments on 

how to best reimburse subsidy eligible 

individuals with respect to out-ofpocket costs relating to excess 

premiums and cost-sharing incurred 

before the date the individual was 

notified of subsidy eligibility but after 

the effective date the individual became 

subsidy eligible. 

Similarly, we are requesting 

comments on how to deal with 

premiums and cost sharing paid by 

charities or other programs, for example, 

the Ryan White program or State 

Pharmacy Assistance programs, on 

behalf of an individual during a period 

when he or she is determined to be 

subsidy eligible. We are specifically 

requesting comments on whether 

Medicare should treat these programs 

for purposes of premium or cost sharing 

reimbursement as we would other 

employer-sponsored insurance 

programs in which Medicare is a 

primary payer for purposes of 

coordination of benefits. In addition, we 

are requesting comments on whether 

beneficiaries should be responsible for 

reimbursing any cost sharing or 

premiums paid on their behalf by 

another program or charity. 

In accordance with section 1860D–

14(c)(2) of the Act, reimbursement to 

PDPs or MA–PDs may be computed on 

a capitated basis, taking into account the 

actuarial value of the subsidies and with 

appropriate adjustments to reflect 

differences in the risks actually 

involved. (Refer to Subpart G of this 

proposed rule for a discussion of 

interim payments and final 

reconciliation payments.) 

Subsidy amounts under section 

1860D–14 of the Act are counted toward 

the counting of the out-of-pocket 

threshold at section 1860D–2(b)(4)(C)(ii) 

of the Act. Prescription drug plans and 

MA–PDs would be responsible for 

tracking the application of the lowincome subsidy amounts as described in 

§ 423.100 of these proposed rules. 

Q. Guaranteeing Access to a Choice of 

Coverage (Qualifying Plans and 

Fallback Plans) 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart Q’’’ Guaranteeing 

Access to A Choice of Coverage 

Qualifying Plans and Fallback Plans’’ at 

the beginning of your comments.) 

1. Overview (§ 423.851) 

Subpart Q would implement the 

provisions of sections 1860D–3, 1860D–

11(g), 1860D–12(b)(2), 1860D–13(c)(3) 

and 1860D–15(g) of the Act. In this 

section, we address a beneficiary’s right 

to have access to a choice of at least two 

plans; the requirements and limitations 

on the bid submission; review and 

approval of fallback prescription drug 

plans; contract requirements specific to 

fallback plans; and the determination of 

enrollee premium and our payments for 

those plans. 

2. Terminology (§ 423.855) 

a. Eligible Fallback Entity 

As provided under section 1860D–

11(g)(2) of the Act, an ‘‘eligible fallback 

entity’’ for a particular contract period 

is defined as an entity that meets all the 

requirements to be a PDP sponsor 

(except that it does not have to be 

capable of withstanding potential 

financial losses as a licensed riskbearing entity) and does not submit a 

bid under the risk bidding process for 

any PDP region for the first year of that 

contract period. An entity would be 

treated as submitting a bid under the 

competitive bidding process, and thus 

not be an eligible fallback entity, if the 

entity was acting as a subcontractor for 

an integral part of the drug benefit 

management activities of a PDP sponsor 

that is submitting a bid for a 

prescription drug plan. An entity would 

not, however, be treated as submitting a 

bid if it is a subcontractor of an MA 

organization, unless that organization is 

acting as a PDP sponsor with respect to 

a prescription drug plan, rather than 

offering an MA–PD plan. We anticipate 

that some eligible fallback entities may 

contract with other entities for the 

performance of some required pharmacy 

benefit management functions. 

As the result of this restriction in 

bidding, eligible fallback entities would 

have decided not to submit either a fullrisk or limited risk bid in any region 

(either as a direct contractor, or as a 

subcontractor for a PDP sponsor) in 

order to be eligible to submit a fallback 

prescription drug bid in any region. 

Section 1860D–11(g)(2)(B) of the Act 

applies this restriction to the first year 

of a contract period. We interpret this to 

mean that an entity that submitted a risk 

bid in any region in the first year of a 

three-year contract cycle would not be 

permitted to be a fallback plan in the 

second and third year of the same 

contract cycle for any region. Taken 

together with the limitations in 

§ 423.265(a)(2) on qualifying as a riskbearing PDP, these requirements will 

force organizations to choose either the 

fallback process or the at-risk process. If 

an organization wins the fallback 

bidding, it is effectively barred under 

§ 423.265(a)(2) from bidding as a risk 

plan in that region for 4 years—for the 

3-year contract term, it is barred 

everywhere, and in the 4th year, it is 

barred from bidding as a risk plan in 

that region. We believe that the intent of 

this restriction was to maximize 

participation in the competitive bidding 

program and to limit the attractiveness 

of participating as a fallback plan for 

those plans that could participate on an 

at-risk basis. One of our objectives is to 

design our bidding process so that 

fallback plans are not required at all, 

that is, to support full-risk plans and to 

provide for limited-risk plans in a 

particular region if full-risk plans are 

not available. To the extent that any 

fallback plans may be required, we are 

required to submit an annual report to 

the Congress on the application of the 

fallback plan provisions and on further 

recommendations for limiting the need 

for such plans and maximizing 

participation by limited risk plans. 

We could consider an alternative 

interpretation of what it means to ‘‘offer 

a fallback plan’’ in a region for purposes 

of section 1860D–12(b)(2)(C) of the Act. 

The alternatives would be—

1. Having a contract with us to be a 

fallback provider; or 

2. Actually offering prescription drug 

benefits to enrollees when and if the 

fallback service area is ‘‘activated.’’

With the second interpretation, a 

fallback entity may not necessarily be 

barred from the at-risk bidding for 4 

years. If the fallback contract was not 

activated and no plan was offered 

during year 3, the entity could be 

eligible to bid at risk for year 4. 

Interpretation 2 seems reasonable and 

consistent with the conference 

negotiations, since the policy goal 

would be to prevent plans from 

converting their enrollment under a 

fallback contract to enrollment under an 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46733 

at-risk plan. If a fallback contract were 

not activated, there would be no 

enrollment and no risk of conversion. 

This interpretation would be 

appropriate in the case of an Indefinite 

Delivery type of contract in which 

bidders are approved as potential 

contractors and orders may or may not 

later be placed against the contracts. 

However, there are a variety of 

contracting vehicles available, and we 

are not prepared to limit the type of 

contract used at this time. We are 

requesting comments on this 

interpretation of ‘‘offer a fallback plan,’’

and on the advantages and 

disadvantages of this type of contracting 

for eligible fallback entities. 

b. Fallback Prescription Drug Plan 

As provided under section 1860D–

11(g)(4) of the Act, a fallback 

prescription drug plan is defined as a 

prescription drug plan offered by an 

eligible fallback entity that—

• Provides only actuarially equivalent 

standard prescription drug coverage 

(without supplemental benefits) as 

defined in § 423.100; 

• Provides access to negotiated 

prices, including discounts from 

manufacturers; 

• Meets the requirements for PDP 

sponsors except as otherwise indicated; 

and 

• Meets other requirements as 

specified by us. 

We would require that fallback plans 

offer actuarially equivalent standard 

coverage as defined in § 423.100 in 

order to ensure the incorporation of 

industry standard cost and utilization 

containment methods, such as tiered 

coinsurance structures. We would 

welcome comments on other 

requirements, or exceptions from 

requirements, that should be considered 

relative to fallback plans. 

c. Qualifying Plan 

Under § 423.855 of our proposed rule, 

a qualifying plan is defined as either a 

full-risk or limited risk prescription 

drug plan (PDP) or an MA–PD plan that 

provides basic coverage, or an MA–PD 

plan that provides supplemental 

coverage for no additional charge to the 

beneficiary. Specifically, if the MA–PD 

plan coverage includes supplemental 

prescription drug coverage, then in 

order to meet the definition of a 

‘‘qualified plan’’ the MA–PD must be 

able to apply a premium rebate under 

Part C of Medicare as a credit against the 

supplemental coverage premium, 

leaving no cost to the beneficiary for the 

supplemental coverage. MA–PD plans 

must also be open for enrollment and 

not operating under a capacity waiver in 

order to be counted as a qualifying plan 

in an area. 

3. Assuring Access to a Choice of 

Coverage (§ 423.859) 

a. Access Standards 

As provided under section 1860D–

3(a) of the Act and codified in our 

proposed regulations at § 423.859(a), we 

are required to ensure that each Part D 

eligible individual has available a 

choice of enrollment in at least two 

qualifying plans offered by different 

entities in the geographic area in which 

he or she resides. Therefore, 

beneficiaries in an area must have a 

choice of two plans that provide basic 

coverage (or an MA–PD plan that 

provides supplemental coverage for no 

additional charge to the beneficiary). 

However, to meet the access test, 

different sponsors must offer the two 

qualifying plans, and at least one of the 

plans must be a PDP. 

b. Fallback Service Area 

As provided in section 1860D–

11(g)(3) of the Act, before the start of a 

contract year, we would determine if 

Part D eligible individuals in a PDP 

region have available a choice of 

enrollment in a minimum of two 

qualified plans offered by different 

entities, at least one of which is a 

prescription drug plan. In the event that 

we determine that beneficiaries within a 

PDP region or some portion of the PDP 

region do not have a choice of two 

qualified plans, we would establish a 

‘‘fallback service area.’’ Thus, a fallback 

service area is any area within a PDP 

region in which we have determined 

that Part D eligible individuals do not 

have available a choice of enrollment in 

two qualified plans, at least one of 

which is a prescription drug plan. Three 

examples of the application of a fallback 

service area follow: 

Example 1—We would establish a 

fallback service area in an area where an 

MA regional PPO plan is offered but no 

PDP is offered in the region. Since 

beneficiaries in the region would only 

have the choice of a MA–PD and not a 

stand-alone PDP, we would define the 

area as a fallback service area. 

Example 2—A fallback service area 

would also be designated if only one 

PDP is offered in a region, but in some 

or all parts of the region neither a 

regional (PPO) MA–PD plan nor a local 

MA–PD plan are available to 

beneficiaries. Since beneficiaries would 

not have a choice of two qualifying 

plans, we would define the areas within 

the region that only have access to the 

PDP, and not an MA–PD plan, as 

fallback service areas. As a result, it 

would be possible for only certain areas 

(counties) within a region to be 

designated as fallback service areas. 

Example 3—A fallback service area 

would also be designated in any area in 

which only one entity offered all 

qualifying plans, even if that sponsor 

offered two PDPs, or one PDP and one 

MA–PD plan with basic coverage, 

covering the entire region. 

In order to meet the requirement that 

two qualifying plans be available to 

beneficiaries in each service area, we 

could, as provided under section 

1860D–11(f) of the Act and § 423.272(c) 

of these regulations, approve limited 

risk plans. If two qualifying plans were 

not approved in any particular service 

area even after our consideration of 

limited risk plan applications from 

entities applying to become PDP 

sponsors, beneficiaries in that service 

area would be provided with the 

opportunity to enroll in a fallback plan. 

c. Waivers for Territories 

Section 423.859(c) of our proposed 

regulations would make Medicare 

beneficiaries residing in the U.S. 

territories—which include American 

Samoa, the Commonwealth of the 

Northern Mariana Islands, Guam, Puerto 

Rico, and the Virgin Islands—eligible to 

enroll in Part D. As provided under 

section 1860D–42(a) of the Act, we 

would have the authority to waive any 

Part D requirements, including the 

requirement that access to two 

qualifying plans be assured in each 

service area, as necessary to assure 

access to qualified prescription drug 

coverage for Part D eligible individuals 

residing in the U.S. territories. For 

instance, if no fallback plans responded 

to our RFP for offering Part D coverage 

in a territory, but one PDP plan did, we 

might consider such a waiver as being 

in the interest of those beneficiaries. In 

addition, entities wishing to become 

prescription drug plans in the territories 

may request waivers or modifications of 

Part D requirements that facilitate their 

operation in those areas. We will 

publish in operational guidance a list of 

acceptable waivers and modifications of 

Part D requirements for entities that 

wish to operate prescription drug plans 

in the territories. 

We will consider waiving the 

following requirements in order to 

assure sufficient access to qualified 

prescription drug coverage for Part D 

eligible individuals residing in the U.S. 

territories—

The proposed requirement set forth in 

section 1860D–3(a)(1) of the Act and 

§ 423.859(a) of our proposed regulations 

that we ensure access to at least 2 

qualifying plans offering standard 

46734 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

prescription drug coverage in each 

service area. 

The proposed pharmacy access 

standard under section 1860D–4(b)(1) of 

the Act and § 423.120 of our proposed 

regulations, and the service area 

requirement set forth in § 423.112. 

The proposed requirement set forth in 

section 1860D–4(k) of the Act and 

§ 423.132 of our proposed regulations 

that PDP sponsors offering a 

prescription drug plan ensure that 

pharmacies inform Part D enrollees of 

any differential between the price of the 

covered drug to the enrollee and the 

price of the lowest priced generic drug 

that is therapeutically equivalent and 

bioequivalent and available at that 

pharmacy. This waiver mirrors language 

in the subpart C preamble regarding 

§ 423.132 (public disclosure of 

pharmaceutical prices for equivalent 

drugs). There, we indicate that we will 

consider waiving this requirement for 

pharmacies under certain 

circumstances—including if the 

pharmacy is located in one of the U.S. 

territories. We propose replicating the 

waiver that is provided in the drug card 

regulation regarding public disclosure of 

prices for equivalent drugs. The 

rationale for this waiver in the drug card 

regulation was that few discount drug 

cards currently have contractual 

relationships with retail pharmacies in 

the territories; waiver of the requirement 

was meant to reduce the administrative 

complexity of endorsed card sponsors’

contracts with participating retail 

pharmacies in the territories and, thus, 

encourage entities to apply to offer a 

discount card in the territories. 

We request comments on the 

appropriateness of these proposed 

waivers of Part D requirements. In 

addition, we request comments 

regarding any additional waivers of Part 

D requirements we may wish to 

consider in order to assure access to 

qualified prescription drug coverage for 

Part D eligible individuals residing in 

the U.S. territories. 

4. Submission and Approval of Bids 

(§ 423.863) 

As provided in section 1860D–

11(g)(1)(A) of the Act, we would 

establish a separate bidding process for 

fallback plans from the process 

addressed in § 423.265 of our 

regulations. We anticipate that we 

would ‘‘pre-qualify’’ bidders from 

eligible fallback entities in the first half 

of 2005 for the offering of fallback 

prescription drug plans in one or more 

regions in 2006. While formal awards 

would be made, the services of a 

fallback plan would only be used if at 

least two full-risk or limited-risk plans 

(one of which could be an MA–PD plan) 

were unavailable. It is quite possible—

and it is our policy objective—that we 

would never use the services of a 

fallback contractor because there would 

be at least two risk-bearing plans offered 

in every region of the country. We 

would re-solicit bids every three years 

thereafter in accordance with the threeyear contracting cycle provided under 

1860D–11(g)(7)(B) of the Act, or 

annually thereafter as needed to replace 

contractors between contracting cycles. 

However, a fallback prescription drug 

plan may be offered for any year within 

the contract period only if that area is 

a fallback service area for that year. We 

will provide additional guidance on the 

form and manner in which such fallback 

bids would be submitted. In general, we 

would enter into contracts with fallback 

plans using federal acquisition rules on 

a timetable ensuring that such contracts 

were in place at the same time as 

prescription drug plans would 

otherwise be offered. In the event that 

fallback contracts are required, we 

expect to award (only) two fallback 

contracts, through a competitive process 

factoring in price (discounts) and 

administrative costs. 

As discussed in earlier sections of this 

preamble, section 1860D–11(i) of the 

Act specifies that we may not interfere 

with negotiations between drug 

manufacturers and pharmacies and PDP 

sponsors, and may not require a 

particular formulary or institute a price 

structure for the reimbursement of 

covered Part D drugs. However, the 

revenue requirements standard in 5 

U.S.C. 8902(i), discussed in subpart F of 

this preamble, requires us to ascertain 

that the bid ‘‘reasonably and accurately 

reflects the revenue requirements for 

benefits provided under that plan.’’

Therefore, while we will not set the 

price of any particular drug, or require 

an average discount in the aggregate on 

any group of drugs (such as singlesource brand-name drugs, multiplesource brand name drugs, or generic 

drugs), we will evaluate whether the bid 

is reasonably justified. As specified in 5 

U.S.C. 8902(i), we will take steps to 

ensure that benefits are ‘‘consistent with 

the group health benefit plans issued to 

large employers,’’ to ensure that the bid 

amounts submitted are comparable to 

those available on the private market. 

For example, if the price reference 

points appear to be particularly high (or 

low), we may request an explanation of 

the bidders’ pricing structure, and the 

nature of their arrangements with 

manufacturers. We would also ensure 

that there is no conflict of interest 

leading to higher bids. In addition to 

evaluating the reasonableness of the bid 

amounts submitted by fallback plans, 

we also propose to negotiate pricerelated performance targets with 

fallback plans, consistent with current 

market practices in which plan sponsors 

negotiate price-related reference points 

with PBMs. Additionally, we would 

also consider potential contractors 

based on what they bid for 

administrative functions like claims 

processing. 

Unlike plans that contract on a risk 

basis, fallback entities are paid on the 

basis of cost, and thus these entities will 

have less of an incentive to negotiate 

low drug prices. Consequently, because 

the statute directs us to pay 

management fees that are tied to 

performance measures, and directs that 

there must be a measure for costs, we 

are contemplating tying the performance 

payments of fallback entities to the 

average discounts they are able to 

negotiate, including discounts from 

manufacturers. To the extent possible, 

we would like the concept of discount 

to reflect a broad measure of lower per 

member spending, this may be 

accomplished by greater reliance on 

generics or use of step therapy. Thus, for 

example, if a performance incentive was 

based on whether the plan was able to 

maintain an average discount of 20 

percent below the Average Wholesale 

Price (AWP) of a drug (referred to as 

‘‘AWP minus (-) 20 percent’’), and if the 

plan averaged less of a discount, it 

might lose some of its performance 

incentive payments. If the plan was able 

to maintain an average discount greater 

than AWP–20 percent, it could qualify 

for additional incentive payments. 

Other potential targets might include 

average cost per prescription, average 

anticipated (or guaranteed) rebate per 

prescription, average dispensing fee per 

(type of) prescription, or average 

administrative fee per prescription. 

We understand that this type of 

incentive contracting is found in the 

pharmacy benefit management market 

today, and believe that pursuing this 

type of approach will incentivize 

fallback plans to secure the best possible 

prices for beneficiaries and the 

Medicare program. However, we are 

aware that using a floating target such 

as AWP as a reference point may be 

counterproductive to our goal of 

minimizing costs, since the AWP can 

easily be raised to keep prices stable. 

Therefore, we are interested in 

identifying other potential reference 

points that would be less subject to 

manipulation, such as a relationship to 

average sales price, or to the prior year’s 

negotiated and delivered prices. We 

considered whether this approach could 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46735 

be viewed as a violation of the 

noninterference provisions of section 

1860D–11(i) of the Act. We believe that 

section 1860D–11(g)(5)(B)(i) of the Act 

makes clear that the Congress 

contemplated taking prices into account 

in calculating incentive payments for 

fallback entities. Moreover, even though 

the performance measures will be 

defined in advance, the determination 

of incentive payments will be made at 

the end of the contract period, and thus 

does not represent interference in the 

bidding process. Therefore, we are 

proposing to place performance clauses 

in the contracts with fallback entities 

that would tie performance payments to 

the fallback plan’s ability to negotiate 

certain levels of discounts on drug 

prices that will be passed on to 

beneficiaries and us as costs. We would 

also like to receive comments on 

alternative reference points or 

alternative methodologies that could 

promote competitive pricing. 

Except as provided below, in section 

6, all of the provisions of § 423.272 of 

our regulations regarding the review and 

approval of prescription drug plans 

apply to the approval or disapproval of 

fallback prescription drug plans. As 

indicated in § 423.265(d)(4), and 

discussed in subpart F of this preamble, 

all risk bids would be submitted as 

either full-risk or limited risk. After we 

evaluate all full-risk and limited risk 

bids, we will determine whether the 

region is, in whole or in part, a fallback 

service area and enter into (or activate) 

fallback plan contracts. In accordance 

with section 1860D–11(g)(1)(B)(ii) and 

section 1860D–11(g)(1)(B)(v) of the Act, 

only one fallback prescription drug plan 

would be approved to serve all fallback 

service areas in any one region, and we 

would not enter into a contract with just 

one fallback entity to offer all of the 

fallback plans throughout the United 

States. 

As with risk bids, we believe we have 

the authority to negotiate with respect to 

fallback plans in four broad areas: 

administrative costs, aggregate costs, 

benefit structure, and plan management. 

We would evaluate administrative costs 

for reasonableness in comparison to 

other bidders. We would examine 

aggregate costs to determine whether the 

revenue requirements for actuarially 

equivalent standard prescription drug 

coverage as defined in § 423.100 are 

reasonable and equitable. We would be 

interested in steps that the plan is taking 

to control costs, such as through 

measures to encourage use of generic 

drugs, therapeutic interchange to 

preferred brand-name drugs, and 

formulary compliance. We would be 

interested in reviewing the formulary to 

ensure that it is appropriate for a region 

in which beneficiaries do not have 

alternative plans from which to choose. 

We would examine and discuss any 

proposed benefit structures or changes 

to benefits, particularly with regard to 

any potentially discriminatory features. 

Finally, we would discuss indicators 

and any identified issues with regard to 

plan management, such as customer 

service. 

5. Rules Regarding Premiums 

(§ 423.867) 

Except as provided with regard to any 

enrollment penalty or low-income 

assistance, or employer group waivers 

under sections 1857(i) and 1860D–22(b) 

of the Act (§ 423.462(a) in subpart J), the 

monthly beneficiary premium charged 

under a fallback prescription drug plan 

offered in all fallback service areas in a 

PDP region must be uniform. It must 

equal 25.5 percent of an amount equal 

to our estimate of the average monthly 

per capita actuarial cost, including 

administrative expenses, under the 

fallback prescription drug plan of 

providing coverage in the region. In 

calculating administrative expenses, we 

would use a factor based on similar 

expenses of prescription drug plans that 

are not fallback prescription drug plans. 

We would like to receive comments 

suggesting the kinds of costs fallback 

plans might have that PDPs would not 

(for example, the cost of gearing up 

systems quickly, less ability to negotiate 

pharmacy network discounts) and what 

costs they would not have (for example, 

marketing). 

Fallback plans would not receive a 

portion of any applicable late 

enrollment penalties since they do not 

bear risk for increased expenses 

attributable to individuals to whom the 

penalty applies. Monthly beneficiary 

premiums for enrollees in fallback 

prescription drug plans would be 

deducted from Social Security benefits 

(as provided in § 422.262(f)(1)) or in any 

other manner provided under section 

1840 of the Act. 

6. Contract Terms and Conditions 

(§ 423.871) 

In general, the terms and conditions 

of contracts with eligible fallback 

entities offering fallback prescription 

drug plans would be the same as the 

terms and conditions of contracts for 

prescription drug plans, with the 

following exceptions: 

• The contract term for a fallback 

prescription drug plan would be for a 

period of 3 years (except as may be 

renewed after a subsequent bidding 

process). However, a fallback 

prescription drug plan may be offered 

for any year within the contract period 

only if that area is a fallback service area 

for that year. 

• An eligible fallback entity with a 

contract under this part may not engage 

in any marketing or branding of a 

fallback prescription drug plan. This 

refers to marketing activities promoting 

the plan and its sponsor to Part D 

eligible beneficiaries as addressed in 

§ 423.50 of this proposed rule, and not 

to required dissemination of 

information on approved plan 

characteristics to enrollees as required 

in § 423.128 of our proposed rule. 

Beneficiary education and outreach to 

employers potentially interested in 

providing supplemental coverage will 

remain solely our responsibility. 

• We would establish performance 

measures for fallback prescription drug 

plans as discussed elsewhere in this 

subpart. 

• Payment terms would include 

payment for actual costs (taking into 

account price concessions) of covered 

Part D drugs provided to Part D eligible 

individuals enrolled in the plan, and 

management fees tied to the 

performance measures that we establish. 

• Each contract for a fallback 

prescription drug plan would require an 

eligible fallback entity offering a 

fallback prescription drug plan to 

provide us with the information that we 

determine is necessary to carry out the 

fallback plan payment provisions, and 

calculate accurate payments, including, 

but not limited to, all documentation 

relating to including 100 percent of drug 

claims, costs, rebates and discounts, and 

disclosure of all direct and indirect 

remuneration as offsets to the claim 

costs. 

• We could amend the contract at any 

time, as needed, to reflect the exact 

regions or counties to be included in the 

fallback service area(s). 

Other contract terms will be specified 

during the bid solicitation process. 

Competitive procedures (as defined in 

section 4(5) of the Office of Federal 

Procurement Policy Act (41 U.S.C. 

403(5)) will be used in fallback plan 

contracting. 

As discussed above, as part of the 

payment process for fallback plans 

authorized by section 1860D–11(g)(5) of 

the Act, we would assess the 

performance of plans with regard to 

specific performance measures and tie 

this performance to an incentive 

payment. These measures would 

include at least measures for cost 

containment, quality programs, 

customer service, and benefit 

administration (including claims 

adjudication). ‘‘Cost containment’’ refers 

to processes in place to ensure that costs 

46736 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

to the Medicare Prescription Drug 

Account and to enrollees are minimized 

through mechanisms such as generic 

substitution and price discounts. The 

term ‘‘quality programs’’ refers to drug 

utilization review processes in place to 

avoid adverse drug reactions and drug 

over utilization and to reduce medical 

errors. The term ‘‘customer service’’

refers to processes in place to ensure 

that the entity provides timely and 

accurate filling of prescriptions and 

delivery of pharmacy and beneficiary 

support services. We would be 

interested in surveying enrollees of 

fallback plans to assess customer 

satisfaction with plan services. The 

terms ‘‘benefit administration and 

claims adjudication’’ refer to processes 

in place to ensure that the entity 

provides efficient and effective benefit 

administration and claims adjudication, 

such as accurately programming and 

updating its benefit administration 

information systems, and providing 

timely and accurate claims adjudication. 

7. Payment to Fallback Plans (§ 423.875) 

The amount payable under approved 

fallback prescription drug contracts 

would be the amount determined under 

the specific contract negotiated for each 

such plan. In general, all such contracts 

would provide for payment for the 

allowable and allocable costs (taking 

into account negotiated price 

concessions) of covered Part D drugs 

provided to Part D eligible individuals 

enrolled in the plan and payment of 

management fees that are tied to the 

performance measures we established 

for the management, administration, 

and delivery of the benefits under the 

contract. 

In contrast to PDP sponsors offering 

prescription drug plans and MA 

organizations offering MA–PD plans, 

eligible fallback entities are not required 

to bear any of the risk associated with 

the provision of the prescription drug 

benefit. They may, however, bear 

administrative cost risk related to the 

achievement of specified performance 

measures. In other words, they would 

receive reimbursement for the full 

contracted cost attributable to delivering 

the drug benefit, including management 

fees and administrative costs, but may 

not receive the full measure of available 

incentive payments tied to performance 

measures unless specified targets have 

been met. 

We are considering alternatives for 

the fallback plan payment process. 

Under one proposal, we would establish 

an account against which the claims 

costs and management fees would be 

debited. This means that the entity 

offering the fallback plan would debit 

the prescription drug claim costs and 

their negotiated administrative fees 

against this account in a manner to 

which we agree and would then be 

subject to certain cost reporting and 

settlement requirements, as, for 

instance, with regard to rebate 

allocation. An alternative approach 

would be to establish an estimated 

monthly payment per enrollee as a 

prospective payment for the fallback 

plan. Initially, that amount could 

change monthly to reflect differences 

between the costs of enrollees in a 

fallback plan versus payments to the 

plan under the prospective system. The 

objectives of this approach would be to 

provide the correct amount of money to 

the fallback plan to reflect their actual 

costs. We request comment on payment 

methodologies, particularly in regard to 

prospective or retrospective rebate 

allocation. 

R. Payments to Sponsors of Retiree 

Prescription Drug Plans 

1. Overview 

Subpart R would implement section 

1860D–22 of the Act, which provides for 

making subsidy payments to sponsors of 

qualified retiree prescription drug plans. 

Section 1201 of the MMA amends the 

Internal Revenue Code of 1986 to 

provide that these subsidy payments 

will be exempt from Federal tax. Further 

guidance on the Federal tax treatment of 

the subsidy will be under the auspices 

of the U.S. Department of the Treasury. 

a. Options for Sponsors of Retiree 

Prescription Drug Programs 

The enactment of Title I of the 

Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) (Pub. L. 108–173) on 

December 8, 2003, has provided 

sponsors of retiree prescription drug 

plans with multiple options for 

providing drug coverage to their 

retirees. We believe the availability of 

these various options will encourage 

employers and unions to continue to 

assist their retirees in having access to 

prescription drug coverage. 

Generally, employers and unions who 

offer drug benefits to their retirees (and 

their spouses and dependents) who are 

also eligible for Medicare Part D could—

(1) Provide prescription drug coverage 

through employment-based retiree 

health coverage. If employment-based 

retiree health coverage were at least 

actuarially equivalent to the standard 

prescription drug coverage under 

Medicare Part D, the sponsor would be 

eligible for a special Federal subsidy for 

each individual enrolled in the 

sponsor’s plan who is also eligible for 

Medicare Part D, but who nevertheless 

elects not to enroll in Medicare Part D; 

(2) Contract with a PDP sponsor or 

Medicare Advantage (MA) organization 

to enroll Medicare beneficiaries covered 

under the retiree plan into a 

prescription drug plan (PDP) or 

Medicare Advantage-prescription drug 

(MA–PD) plan. Alternatively, the 

sponsor itself could apply to be a PDP 

sponsor or MA organization and offer a 

PDP or MA–PD plan to its retirees. That 

plan could consist of ‘‘enhanced 

alternative coverage’’ (as defined under 

§ 423.4 of our proposed rule), that is, 

drug coverage that is more generous 

than that offered under the standard 

prescription drug coverage under 

Medicare Part D (as defined under 

§ 423.4 of our proposed rule). Medicare 

would subsidize the cost of such 

coverage through direct and reinsurance 

subsidies. At its option, the sponsor 

could elect to subsidize the monthly 

beneficiary premium (as calculated 

under § 423.286 of the Drug Benefit); 

(3) Provide prescription drug coverage 

that supplements, or ‘‘wraps-around,’’

the coverage offered under the PDP or 

MA–PD plans in which their retirees 

(and retirees’ spouse and dependents) 

enroll. 

The first option is the subject of this 

subpart of our proposed rule. The latter 

options, all of which involve employers’

or unions’ retirees (and their spouses 

and dependents) enrolling in Part D, are 

discussed in detail in the preamble to 

subpart J. We note that employers also 

have the option of subsidizing the 

monthly beneficiary premium for the 

PDP or MA–PD plan in which the 

employer or union’s retirees (and their 

spouses and dependents) elect to enroll. 

If employers or unions elect to 

sponsor either an enhanced alternative 

plan covered under Medicare Part D or 

supplemental coverage that ‘‘wraps 

around’’ Medicare Part D, either election 

will have an impact as to when their 

retirees (and retirees’ dependents) will 

be eligible for catastrophic drug 

coverage, with important consequences 

for participants, sponsors, the plans, 

and the Medicare program. By delaying 

the provision of government-financed 

catastrophic coverage, these plans 

would lower the cost of Part D to the 

Federal government by lowering our 

reinsurance payments while preventing 

beneficiaries from facing any gaps in 

coverage. As discussed in subpart C of 

this preamble, individuals enrolled in a 

PDP or MA–PD plan would be eligible 

for catastrophic drug coverage after they 

have incurred out-of-pocket drug costs 

in the amount specified under 

§ 423.104(e)(iii)(A) of our proposed rule. 

Under the reinsurance provisions, 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46737 

Medicare would reimburse PDP 

sponsors and MA organizations offering 

MA–PD plans 80 percent of their gross 

costs for providing catastrophic 

coverage (excluding administrative costs 

and net of discounts, rebates, and 

similar price concessions). Only drug 

costs paid by a Part D enrollee, or on 

behalf of a Part D enrollee by another 

person, would count toward the annual 

out-of-pocket threshold. Amounts 

reimbursed by insurance or otherwise, 

by a group health plan, or by another 

third-party payment arrangement would 

not count toward the threshold. We 

refer to those drug expenditures that 

count toward the out-of-pocket 

threshold as ‘‘true out-of-pocket 

expenditures’’ (TrOOP). 

Under these rules, sponsors who 

provide retirees (and retirees’ spouses 

and dependents) enhanced alternative 

coverage would, in effect, delay the total 

drug spending that would trigger 

catastrophic coverage, because plan 

participants would have lower cost 

sharing, and thus, have lower out-ofpocket costs. Similarly, employers or 

unions who would sponsor 

supplemental coverage that would 

‘‘wrap-around’’ Medicare Part D 

coverage would raise the total drug 

spending that would trigger 

government-financed catastrophic 

coverage, since drug costs paid for by 

those plans would reduce beneficiary 

costs and would not count toward the 

true out-of-pocket annual limit. 

When an employer or union elects to 

contract with a PDP sponsor or MA–PD 

organization, the PDP sponsor, under 

§ 423.458(c) of our proposed rule, or the 

MA organization, under § 422.106(c), 

may submit written requests to us for 

permission to waive requirements under 

Part D that hinder the design or offering 

of PDP or MA–PD plans to employers. 

We believe these waivers would 

facilitate efficient administration and 

integration of their enhanced Part D 

coverage with other retiree health 

benefits offered by the sponsor, as 

another subsidized option for employers 

to offer enhanced coverage instead of 

using Medicare’s alternative retiree drug 

subsidy. For example, the PDP sponsor 

or MA organization could request 

permission to restrict enrollment in its 

PDP or MA–PD plan to the sponsor’s 

retirees (and their spouses and 

dependents) and offer a benefit that 

resembles or enhances the sponsor’s 

existing coverage. Similarly, should the 

plan sponsor wish to enroll its retirees 

(and their spouses and dependents) in 

its own plan, with enrollment limited to 

those individuals, the sponsor could 

apply to be a PDP sponsor or MA 

organization offering a MA–PD plan and 

request such waivers as necessary. 

We encourage plan sponsors to 

carefully review each option and 

determine which one is most beneficial 

to the sponsor and its retirees. We 

believe that the variety of options will 

encourage sponsors to retain drug 

coverage for their retirees (and their 

spouses and dependents), and we seek 

comment on how we can use all of these 

subsidized options to maximize 

enhancements in retiree coverage. 

b. The Retiree Drug Subsidy Provision 

During the past 15 years, the 

availability and generosity of 

employment-related retiree health 

coverage has been eroding due to rising 

health care costs, increasing numbers of 

retirees (who may be more costly to 

cover than younger active workers), and 

the impact of changes in accounting 

rules. For example, in 1988 

approximately 66 percent of the nation’s 

private sector firms with 200 or more 

workers that offered health benefits to 

active workers also offered retiree health 

benefits to any of their retirees, 

including both the pre-65 and the ages 

65 and older populations, but by 2003 

only 38 percent of these firms were 

offering retiree health coverage. Most 

employers that offer retiree health 

benefits also provide retiree prescription 

drug coverage. A more detailed 

discussion of the trends in retiree 

coverage, as well as the limitations in 

the data available on these trends is 

provided in the impact analysis section 

of this proposed rule. 

By providing heavily subsidized 

insurance coverage of prescription drug 

expenditures incurred by, or on behalf 

of, Medicare beneficiaries, the MMA 

would significantly reduce the cost of 

existing retiree beneficiary drug 

coverage. For retiree-beneficiaries who 

enroll in Part D, Medicare would 

become the primary insurer. MMA 

would then lower the sponsor’s cost of 

drug coverage by having the sponsor’s 

plan become a secondary payer of 

retiree drug coverage. However, plan 

sponsors may benefit from the greater 

flexibility and fewer prescriptive 

requirements of the alternative retiree 

drug subsidy. 

The retiree drug subsidy is designed 

to accommodate plan sponsors seeking 

greater flexibility and less regulation. In 

addition, while the expenses associated 

with providing retiree drug coverage 

continue to be deductible expenses for 

Federal tax purposes, the payments 

associated with the retiree drug subsidy 

are not counted as taxable income for 

employers. As discussed in the 

Regulatory Impact Analysis of this 

preamble, the after-tax nature of the 

retiree drug subsidy payments 

effectively increases the value of these 

payments for employers that are subject 

to the corporate income tax. For 

example, the tax-free $611 average 

retiree drug subsidy amount would be 

equivalent to about $940 of taxable 

income for employers with a marginal 

tax rate of 35 percent. As discussed 

further in the impact analysis, we 

believe that the tax treatment of the 

retiree drug subsidy payments will 

provide an additional incentive for 

employers to participate in the retiree 

drug subsidy program. 

The intent of the MMA retiree 

prescription drug subsidy provisions is 

to slow the decline in employersponsored retiree insurance. By 

providing a special subsidy payment to 

sponsors of qualifying plans, the MMA 

provides employers with extra 

incentives and flexibility to maintain 

prescription drug coverage for their 

retirees. Our intention is to make these 

subsidy payments as reasonably 

available to plan sponsors as possible. 

We wish to take into account as much 

as possible the needs and concerns of 

plan sponsors, consistent with 

necessary assurances that Federal 

payments are accurate and in 

accordance with statutory requirements, 

that the interests of retiree-beneficiaries 

are protected, and that employers do not 

receive ‘‘windfalls’’ consisting of 

subsidy payments that are not passed on 

to beneficiaries. 

We plan to conduct outreach to plan 

sponsors, retirees and retiree 

associations, and other interested 

parties on all aspects of the MMA. We 

encourage their input on the feasibility 

and advisability of the approaches we 

have identified, as well as any other 

issues presented by the new statute, or 

additional options beyond those we 

have identified. We look forward to 

employer, union, and other public 

comments on all aspects of this 

proposed regulation. We particularly 

seek comments on the sections noted in 

the preamble. 

2. Definitions (§ 423.882) 

The Act contains a number of 

definitions that are critical to 

understanding how the retiree drug 

subsidy functions. To make it easier to 

understand how these definitions work 

together to establish the subsidy 

amount, we first provide an overview of 

the structure of the subsidy program and 

then provide a description of the key 

concepts. As noted above, a significant 

portion of the Medicare population 

receives prescription drug coverage 

through employer and/or union 

46738 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

sponsored retiree health benefits. The 

Act provides for Medicare payment to 

plan sponsors who choose to provide 

prescription drug coverage that is at 

least as generous as the standard 

prescription drug benefit under 

Medicare Part D. The Congress intended 

for the subsidy to encourage as many 

sponsors as possible to retain this 

coverage for their retirees (and their 

spouses and dependents). The subsidy 

payment made to a sponsor of a 

qualified retiree prescription drug plan 

would be based on actual drug spending 

by individuals enrolled in the plan and 

not premium payments. The subsidy is 

28 percent of certain costs that are 

incurred for certain prescription drugs 

for individuals covered under the 

qualified retiree prescription drug plan 

who are eligible for the Medicare Part D 

drug benefit but who are not enrolled in 

Medicare Part D. The statute defines a 

number of terms in order to distinguish 

between costs that are to be considered 

in determining the subsidy payment 

amount, and costs that may not be 

considered in determining the subsidy 

payment amount. 

Only group health plans that provide 

health coverage to Part D eligible 

individuals based on their status as 

retiree participants (or spouses or 

dependents of retiree participants) may 

qualify as a retiree prescription drug 

plan. The term ‘‘group health plan’’ is 

defined later below. Additionally, to be 

considered a qualified retiree 

prescription drug plan, the sponsor’s 

group health plan must be at least 

actuarially equivalent to the standard 

drug coverage under Medicare Part D (in 

accordance with section 1860D–

22(a)(2)(A) of the Act and as discussed 

below in section 3(b) of this subpart). As 

required under section 1860D–

22(a)(2)(A) of the Act, the sponsor must 

submit an actuarial attestation that its 

plan is at least actuarially equivalent to 

the standard Medicare Part D 

prescription drug benefit for the plan to 

be a ‘‘qualified retiree prescription drug 

plan.’’ In addition to meeting tests of 

actuarial equivalence, the plan must be 

a group health plan that provides 

prescription drug benefits to Medicare 

Part D eligible individuals, as defined in 

§ 423.882, based on their status either as 

retirees or as spouses and dependents of 

those retirees. 

The next step is to identify the 

‘‘qualifying covered retirees’’ (that is, 

those Medicare beneficiaries eligible to 

enroll in Medicare Part D who are 

enrolled in the retiree plan, but who are 

not enrolled in the Medicare Part D 

benefit) and determine the ‘‘gross 

covered retiree plan-related prescription 

drug costs’’ (gross costs) under the plan 

for these individuals for the year. Gross 

costs refer to the costs directly 

associated with the dispensing of a 

prescription drug. (In the prescription 

drug industry, gross costs are frequently 

referred to as the ‘‘ingredient costs’’ (the 

cost of the drug itself) and the 

‘‘dispensing fee’’ (the pharmacy charge 

for dispensing the drug to a patient)). 

The statute, however, specifically 

excludes the retiree health plan’s 

administrative costs from gross costs. 

Having established that gross costs are 

the base upon which the subsidy 

payment is to be determined, the statute 

then specifies that the payment may be 

made only for those costs that fall 

between the ‘‘cost threshold’’ and the 

‘‘cost limit’’. For 2006, the cost threshold 

is $250 and the cost limit is $5,000. In 

other words, the first $250 in 

prescription drug costs for an individual 

during a year and any prescription drug 

costs for that year that exceed $5,000 is 

disregarded. The dollar values for the 

cost threshold and cost limit are 

adjusted annually. 

The statute then specifies that the 

amount of gross costs that fall between 

the cost threshold and cost limit must 

be reduced by any discounts, 

chargebacks, rebates, and other price 

concessions. These net costs actually 

paid by the sponsor or by or on behalf 

of the retiree are referred to as the 

‘‘allowable retiree costs.’’ The intent of 

this provision is to ensure that Medicare 

subsidy payments take into account the 

pricing adjustments and discounts that 

actually occur in the market today. 

Some pricing adjustments, such as 

manufacturer rebates, typically occur 

well after payment is made to the 

pharmacy. Since the ingredient costs 

and dispensing fees found in the claims 

data do not include the lower ‘‘prices’’

achieved as a result of manufacturer 

rebates and other price concessions, 

further adjustment is needed to account 

for these other pricing related factors 

when determining the costs under the 

plan that will be ‘‘allowable’’ for 

purposes of the Medicare subsidy 

payment amount. 

To summarize, the statute provides 

that the retiree drug subsidy payment 

amount equals 28 percent of the 

allowable costs attributable to the 

portion of the gross costs that fall 

between the cost threshold and cost 

limit. The definitions below further 

articulate the meaning of the key terms 

involved in determining the subsidy 

payment amount. The definitions are 

organized to first describe the Medicare 

Part D eligible individuals, then 

terminology related to retiree plans, and 

finally, terminology related to the 

subsidy payment amount and the basis 

upon which the payment is determined. 

Part D Eligible Individual 

Section 423.4 of our proposed rule 

defines a Part D eligible individual as an 

individual who is entitled to or enrolled 

in benefits under Medicare Part A or 

who is enrolled under Medicare Part B. 

Qualifying Covered Retiree 

Section 1860D–22(a)(4) of the Act 

defines a qualifying covered retiree as a 

Part D eligible individual who is not 

enrolled in a Part D prescription drug 

plan (PDP) or Medicare AdvantagePrescription Drug (MA–PD) plan but 

who is covered under a qualified retiree 

prescription drug plan. We note that the 

qualifying covered retiree is not 

necessarily the retired employee who is 

the participant under the plan; it also 

includes coverage of a Part D eligible 

individual who is covered under the 

plan as a spouse or dependent of a 

participant. (Under ERISA, an employee 

or former employee who is covered 

under an employment-related plan is 

referred to as the ‘‘participant.’’

Dependents of the participant are 

referred to as ‘‘beneficiaries,’’ but to 

avoid confusion with ‘‘Medicare 

beneficiaries,’’ we will refer to the 

beneficiaries under the health plan as 

‘‘spouses and dependents.’’) 

Employment-Based Retiree Health 

Coverage 

Section 1860D–22 (c)(1) of the Act 

defines employment-based retiree 

health coverage. Employment-based 

retiree health coverage means coverage 

of health care costs under a group health 

plan based on an individual’s status as 

a retired participant in the plan or as the 

spouse or dependent of a retired 

participant. The term includes coverage 

provided by voluntary insurance 

coverage or pursuant to statutory or 

contractual obligation. 

Group Health Plan 

The term ‘‘group health plan’’ has the 

same meaning as defined in section 

607(1) of ERISA, 29 U.S.C. 1167(1). 

Section 1860D–22(c)(3) of the Act 

specifies that the definition of a group 

health plan includes plans maintained 

for their employees by the Federal 

government (including the Federal 

Employee Health Benefits Program 

(FEHBP) and the TRICARE program); 

plans maintained by State or local 

government; and church plans exempt 

from Federal taxes under section 501 of 

the Internal Revenue Code of 1986 

(despite the fact that those types of 

group health plans are not generally 

subject to ERISA requirements). 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46739 

Qualified Retiree Prescription Drug Plan 

A qualified retiree prescription drug 

plan means employment-based retiree 

health coverage that meets the 

requirements set forth in § 423.884(a) 

through § 423.884(d) for a Part D eligible 

individual who is a participant or the 

spouse or dependent of a participant 

under the coverage. 

Sponsor 

Sponsor means plan sponsor as 

defined in section 3(16)(B) of ERISA, 29 

U.S.C. 1002(16)(B). This term means an 

employer, an employee organization 

(generally a trade union) or a 

combination of employers and 

employee organizations. Section 1860D–

22(c)(2) of the Act, however, modifies 

this definition in the case of a plan 

maintained jointly by one employer and 

an employee organization and for which 

the employer is the primary source of 

financing, in which case the term 

‘‘sponsor’’ means the employer. 

Covered Part D Drug 

Covered Part D drug has the meaning 

given in § 423.4 of our proposed rule 

and as discussed in subpart C of this 

preamble. 

Retiree Drug Subsidy Amount 

The retiree drug subsidy amount is 

defined as 28 percent of the allowable 

retiree costs for each qualifying covered 

retiree. Section 1860D–22(a)(3) of the 

Act describes the subsidy payment to be 

made to the sponsor of a qualified 

retiree prescription drug plan with 

respect to each qualifying covered 

retiree who is covered under the plan. 

Gross Covered Retiree Plan-Related 

Prescription Drug Costs 

Section 1860D–22(a)(3)(C)(ii) of the 

Act defines gross covered retiree planrelated prescription drug costs to mean 

specified costs incurred for a qualifying 

covered retiree enrolled in a qualified 

retiree prescription drug plan ‘‘during a 

coverage year.’’ (For ease of reference, 

we use the term ‘‘gross retiree costs’’

interchangeably with the defined term.) 

We explain below in the preamble 

discussion related to § 423.888, that we 

have tentatively determined that the 

subsidy should be based on calendar 

year data. For purposes of this 

definition, we simply use the term 

‘‘year;’’ in the final regulation, we will 

clarify whether it is a plan year or a 

calendar year. 

In accordance with section 1860D–

22(a)(3)(C)(ii) of the Act, we define the 

term, gross covered retiree plan-related 

prescription drug costs, (gross retiree 

costs) to mean the costs incurred under 

a qualified retiree prescription drug 

plan for a qualifying covered retiree that 

are directly related to the dispensing of 

covered Part D drugs during the year 

(other than administrative costs), 

whether they are paid under the plan or 

by the retiree. Costs for covered Part D 

drugs incurred under the plan that are 

paid for by the retiree include all retiree 

cost sharing under the plan (for 

example, deductibles or copayments). 

Costs for non-covered Part D drugs are 

not considered gross retiree costs, even 

if paid for under the plan. 

As discussed above, dispensing fees 

are included in gross retiree costs, but 

administrative costs are excluded. 

Therefore, we expect to monitor 

dispensing fees carefully through our 

audit activities in order to ensure that 

other administrative costs are not 

improperly included in the dispensing 

fees. 

Allowable Retiree Costs 

In accordance with section 1860D–

22(a)(3)(C)(i) of the Act, allowable 

retiree costs means gross covered retiree 

plan-related prescription drug costs 

between the cost threshold and cost 

limit that are actually paid by either the 

qualified retiree prescription drug plan 

or the qualifying covered retiree (or on 

the retiree’s behalf), net of any 

manufacturer or pharmacy discounts, 

chargebacks, rebates, and similar price 

concessions. For the purposes of 

determining the subsidy payment, 

allowable retiree costs include cost 

sharing paid ‘‘on behalf of’’ the 

qualifying covered retiree by any person 

or entity. This would include amounts 

paid by family members and charitable 

organizations to assist the retiree in his 

or her cost-sharing obligations. Amounts 

paid by other group health plans and 

insurers, such as under a spouse’s plan 

that provides secondary coverage 

towards the cost sharing, would also be 

considered allowable retiree costs. 

We note that the rules for calculating 

allowable costs under the subsidy 

provisions of section 1860D–22 of the 

Act must not be confused with the rules 

that pertain to the amount of cost 

sharing that must be paid by 

beneficiaries who enroll in Medicare 

Part D. Under section 1860D–2 of the 

Act (§ 423.466(b) of our proposed rule), 

beneficiary cost sharing under the PDP 

or MA–PD plan only counts toward 

reaching the annual ‘‘out of pocket 

threshold’’ that triggers catastrophic 

coverage if it is paid by the beneficiary 

or by another person such as a family 

member. In general, beneficiary cost 

sharing for which the beneficiary is 

reimbursed through insurance, a group 

health plan, or other third-party 

payment arrangement will not count 

toward the annual out-of-pocket 

threshold. The employer/union subsidy 

provisions contain no similar limitation. 

Thus, beneficiary cost sharing is an 

allowable cost regardless of who pays 

the cost sharing. 

Because allowable retiree costs 

exclude gross retiree costs below the 

cost threshold, a plan sponsor will be 

entitled to a subsidy payment for a 

qualifying covered retiree only if that 

individual’s gross retiree costs, or total 

drug spending under the plan for a year, 

exceed the cost threshold for that year. 

As noted above, allowable retiree 

costs are drug costs that are actually 

paid by either the qualified retiree 

prescription drug plan or the qualifying 

covered retiree (or on the retiree’s 

behalf), and therefore net of any drug 

discounts, chargebacks, rebates, and any 

other similar price concessions passed 

through to the plan or retiree. (For 

purposes of this discussion, we will 

refer to all of the immediately preceding 

terms as ‘‘rebates’’; that is, discounts, 

chargebacks, rebates, and similar price 

concessions). We understand that much 

of the rebate accounting is not applied 

in the context of point of sale claims 

data, but rather in periodic accounting 

adjustments, and that rebates are 

frequently reported along with 

administrative fees paid by the 

manufacturer. We are aware and 

concerned that, in some cases, plan 

sponsors may accept lower 

administrative costs or receive services 

at or below fair market value in lieu of 

some or all of the rebates. We are 

concerned that this practice may result 

in improper shifting of costs in order to 

inappropriately maximize subsidy 

amounts. We intend to monitor these 

arrangements closely to ensure that 

allowable retiree costs are not 

improperly inflated. We are also 

concerned that these accounting and 

business practices would be 

incompatible with the requirement to 

disclose all price concessions for 

purposes of determining allowable 

retiree costs and we, therefore, are 

proposing to require that the true cost of 

rebates be segregated in all records. We 

require that all rebates passed through 

to the plan sponsor and retiree in any 

form be subtracted when calculating 

allowable retiree costs. 

Due to the nature and timing of rebate 

accounting, we believe that this will 

require a form of step-down cost 

reporting in which rebates received at 

the aggregate level may be apportioned 

down to the level of plan enrollees 

incurring allowable retire costs on a 

reasonable basis. Since Medicare 

beneficiaries would be expected to have 

higher per capita prescription drug 

46740 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

utilization than other populations, we 

believe it would generally be 

appropriate to allocate rebates (and 

other similar price concessions) on the 

basis of percentage of dollars spent 

rather than of covered lives. The method 

of apportioning and applying rebates 

will be influenced by the payment 

methodology that is implemented for 

the retiree drug subsidy (see discussion 

in section 5 of this subpart). For 

example, in a one-time annual 

retroactive payment system, where 

payment of the subsidy is made after the 

close of the year, it should not be too 

difficult to factor in the rebates credited 

to the sponsor (or plan) for the period 

in question since the subsidy payment 

may occur after the rebates have been 

credited. Conversely, under a monthly 

payment system, factoring in the rebates 

would require a process to reflect the 

rebates as they are realized, because 

they are not likely to be determined and 

known until after some subsidy 

payments occur. 

We believe either approach would 

require a form of cost reporting in which 

rebates received at the aggregate plan 

level would be apportioned to plan 

enrollees. One approach would be to 

reduce the subsidy payments by a 

certain percentage calculated to equal 

the assumed size of the rebates expected 

to occur. After 2006, the amount of 

reduction could be based upon the 

rebates received in prior years. Once the 

actual rebates were credited for the year 

in which the subsidy payments were 

made, the payments could be 

reconciled. Alternatively, rebates could 

be accounted for and paid in the month 

in which they are received. We also 

briefly discuss how rebates could be 

applied to different payment 

methodologies in section 5(b) of this 

subpart. 

In any case, plans must require and 

keep accurate records on all price 

concessions and ensure that these are 

distinctly accounted for separately from 

administrative fees. We are considering 

how to best account for all of the price 

concessions and rebates. We welcome 

comments on the nature and scope of 

price concessions in this industry, and 

on the various forms these arrangements 

may take, as well as on the pass-through 

issue. We also welcome comments on 

how rebates and other forms of 

remuneration can be most accurately 

applied to the cost data to efficiently 

satisfy the requirement that all rebates 

must be netted out of allowable retiree 

costs, while minimizing the burden on 

sponsors. All cost reporting would be 

subject to inspection and audit 

(including periodic audits) by CMS and 

the OIG. As discussed later, to the 

extent either CMS or the OIG discover 

that a sponsor was overpaid for the 

retiree drug subsidy (that is, the records 

do not support the payments made, or 

there is insufficient documentation to 

determine whether the payments are 

correct), we may recoup the 

overpayments or take other appropriate 

action. The reopening and overpayment 

provisions are discussed in section 6 of 

this subpart R. 

Dispensing Fees 

For purposes of consistency, we plan 

to use the same definition that will be 

applied to PDP and MA–PD plans. See 

the discussion of dispensing fees in 

subpart C of the preamble to our 

proposed rule, which discusses possible 

definitions. 

3. Requirements to Apply for the Retiree 

Subsidy (§ 423.884) 

a. General Requirements 

This section outlines the general 

requirements related to applying for the 

subsidy payment described in this 

proposed rule. First, in order to be 

considered a qualified retiree 

prescription drug plan, a plan must 

meet the definition of employmentbased retiree health coverage as defined 

in § 423.882 of our proposed rule, and 

must also comply with the requirements 

proposed in § 423.884 and discussed in 

this section of the preamble. 

Additionally, a plan sponsor that wishes 

to be paid the Medicare subsidy must 

apply annually for the subsidy. In 

paragraph b, below, we describe the 

actuarial attestation that must be 

submitted with the subsidy application; 

in paragraph c, we describe the 

application process, including the 

information that must be submitted to 

establish that the sponsor qualifies for a 

subsidy; and in paragraph d, we 

describe the disclosure notices that plan 

sponsors are required to provide to 

beneficiaries. Finally, the sponsor must 

meet the requirements of proposed 

§ 423.888(d) with regard to maintenance 

and access to records for purposes of 

audit, as discussed in section 5 of this 

subpart, below. 

We intend to conduct outreach to 

plan sponsors, including State and local 

governments, who would be prospective 

applicants for these subsidy payments 

in order to encourage communication, 

better understand the needs of the 

employer community, and provide 

information on the retiree drug subsidy 

program, as well as to solicit suggestions 

on how we can best implement this 

program. We invite comments on the 

most effective methods of conducting 

outreach, as well as prospective venues 

for conducting that outreach. 

b. Attestation of Actuarial Value 

Amount 

1. Attestation Requirements 

In § 423.884(a) of our proposed rule 

we would require that the sponsor 

submit an attestation to us that the 

actuarial value of the prescription drug 

coverage under its retiree plan or plans 

is at least equal to the actuarial value of 

standard Medicare Part D prescription 

drug coverage. (A more complete 

discussion of actuarial equivalency 

follows, below.) In § 423.884(a)(1) of our 

proposed rule, we would require that 

the attestation be submitted annually 

after year 2006, but no later than 90 

days prior to the earlier of the start of 

the calendar year or plan year. (Our 

tentative decision is to use a calendar 

year.) For purposes of the initial 

application for the subsidy for 2006, the 

attestation must be submitted by 

September 30, 2005. Additionally, we 

would require that an updated 

attestation be submitted when mid-year 

changes to the drug coverage materially 

affect the drug coverage’s actuarial 

value. (A material change means any 

change that potentially causes a plan to 

no longer meet the actuarial equivalence 

test.) These submissions would not be 

required when non-material changes are 

made to the coverage (for example, 

when there are changes in the period of 

open enrollment). We would require 

that the attestation be submitted 90 days 

prior to the effective date of any 

material changes. If the impending 

changes result in the plan either no 

longer being a qualified retiree 

prescription drug plan or no longer 

providing creditable coverage because 

its benefits are no longer actuarially 

equivalent to Medicare Part D coverage 

for purposes of either actuarial test, we 

would require that beneficiaries be 

notified of this change 90 days prior to 

the change taking effect and informed 

regarding opportunities to enroll in 

Medicare Part D. (See subsequent 

discussion regarding disclosure notices.) 

We believe that requiring attestation 

on an annual basis and 90 days prior to 

material changes in coverage, with a 90 

day notice to beneficiaries when 

necessary, should provide sufficient 

assurance to beneficiaries and CMS that 

the plan meets requirements concerning 

actuarial equivalency and affords 

beneficiaries time to enroll in Medicare 

Part D without incurring a late 

enrollment penalty as provided for in 

§ 423.56 of our proposed rule. We 

would also require that the attestation, 

which must be signed by an authorized 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46741 

representative of the plan sponsor (or a 

plan administrator designated by the 

sponsor), include a certification, signed 

under penalty of perjury, that indicates 

that the information contained in the 

attestation is true and accurate to the 

best of the attester’s knowledge and 

which acknowledges that the 

information is being provided to obtain 

Federal funds. We welcome comments 

on whether these proposals provide 

sufficient protection for beneficiaries 

and whether these proposals would be 

operationally feasible without creating 

an undue burden for sponsors. 

2. Establishing Actuarial Equivalency 

Section 1860D–11(c) of the Act 

provides the Secretary with the 

authority to determine the standards 

and methods for determining actuarial 

equivalence. In developing standards for 

actuarial equivalence, our intent is to 

consider how to maximize coverage for 

retirees while limiting costs for the 

government, and the retiree drug 

subsidy is one important option for 

achieving this objective. The MMA 

provisions creating Part D provide 

multiple options for plan sponsors, 

ranging from participating in the retiree 

drug subsidy to various mechanisms for 

enrolling retirees in Part D prescription 

drug plans while offering enhanced 

benefits. Our goal is not only to protect, 

but also to enhance coverage offered to 

retirees. As discussed elsewhere, prior 

to enactment of the MMA, employers 

have been systematically restricting 

drug coverage for future retirees. Taken 

together, these legal and behavioral 

factors introduce substantial uncertainty 

about how plan sponsors will assess 

their options and react to the new Part 

D benefit. 

Congress has clearly and repeatedly 

articulated four key policy objectives for 

the Medicare retiree drug subsidy 

program. The first goal involves 

maximizing the number of retirees 

retaining employer-based drug coverage 

through the retiree drug subsidy 

program created by Section 1860D–22 of 

the Act. The second goal entails not 

creating windfalls, whereby retirees 

might receive a smaller subsidy from 

sponsors of their retiree drug plans than 

Medicare would pay on their behalf. 

The third goal is to minimize the 

administrative burdens on beneficiaries, 

employers and unions. The final goal is 

to minimize costs to the government of 

providing retiree drug subsidies (and 

not exceed the budget estimates). While 

the first, third and fourth goals received 

extensive discussion during the creation 

of MMA, the second goal has emerged 

largely in response to the possibility 

that the MMA might have created an 

unintended windfall. 

We believe the Secretary has authority 

to achieve these goals based on the 

requirements that plans qualifying for 

the retiree drug subsidy must offer at 

least actuarially equivalent benefits to 

those offered by standard Part D 

prescription drug plans (PDPs). Our 

proposed regulation reflects our attempt 

to accomplish the four objectives of 

maximizing the number of retirees 

benefiting from the retiree drug subsidy, 

avoiding windfalls, minimizing 

administrative burden and not 

exceeding budget estimates. In doing so, 

we are considering a range of potential 

options, each of which may have an 

impact on achieving the key objectives. 

We seek comments on how best to 

accomplish these goals, recognizing 

both that there may be tradeoffs, and 

that our implementation must be 

consistent with the statutory authority 

provided the Secretary. 

The definition of actuarial 

equivalence in this context may have an 

impact on our policy objectives. One 

possible definition would stipulate that 

plans must meet the same test as for 

‘‘creditable coverage.’’ The test for 

creditable coverage requires that, on 

average, the total or ‘‘gross’’ value of the 

benefit package offered by the employer 

at least equal that of the standard Part 

D benefit offered by PDPs, without 

regard to the financing of this benefit 

package. As we discuss in subpart B of 

this preamble, the main concern in 

establishing creditable coverage is in 

determining the level of health benefit 

coverage the beneficiary has had, and 

not on how it was financed, since no 

payments are involved. However, when 

applying this gross value (of plan 

payout) test in the context of the retiree 

drug subsidy, we must be concerned 

with whether our subsidy payments to 

sponsors will exceed the costs that 

sponsors actually incur in sponsoring 

the coverage. This one test, or ‘‘single 

prong’’ approach, to defining actuarial 

equivalence could not by itself preclude 

the existence of windfall payments. This 

is because, without considering 

financing, an employer theoretically 

could impose the full cost of the benefit 

package on the employee through 

employee premiums, and still be 

eligible for a subsidy payment if the 

package the employee was buying met 

the actuarial equivalence test. Or, the 

employer could contribute a smaller 

amount toward the financing of the 

package than it would receive in a 

subsidy payment. We seek comments on 

whether additional steps associated 

with this approach could ever preclude 

windfalls. In particular, some observers 

have argued that the forces in a 

competitive labor market, collectively 

bargained contracts, and constraints on 

changing state, local and other public 

sector retiree health plans obviate the 

likelihood of windfalls. We have serious 

reservations about the adequacy of such 

forces in precluding the existence of any 

windfalls without significant additional 

monitoring by Medicare or others to 

assure that benefit subsidy payments are 

passed on to augment benefits received 

by retirees. Such approaches may create 

excessive administrative burdens on 

retirees, employers, and unions, and 

thus alternative approaches to 

precluding windfalls are likely to be 

preferable. 

Another possible policy option would 

be to use the ‘‘one prong’’ approach to 

determining actuarial equivalency, but 

to also limit the amount of the retiree 

drug subsidy so that it could not exceed 

the amount paid by plan sponsors on 

behalf their retirees. This would assure 

the elimination of windfalls. However, 

while this approach would be simple 

both to describe and operationalize, we 

have questions about the adequacy of 

the legal basis underpinning such a 

policy. 

A third approach, which could be 

implemented in a variety of ways, 

would establish a ‘‘two-prong’’ test of 

actuarial equivalence: A ‘‘gross’’ test 

would assure the total value of benefits, 

and a ‘‘net’’ test would reflect only the 

value of benefits not financed by 

beneficiaries. This third approach is 

structured specifically to preclude 

windfalls. The first prong of the 

actuarial equivalency would again be a 

test based strictly on plan design. This 

test would evaluate whether the 

expected amount of paid claims (or 

‘‘plan payout’’) under the retiree 

prescription drug coverage is at least 

equal to the expected amount of paid 

claims under the standard Medicare Part 

D benefit. The second prong of the 

actuarial equivalency test would be a 

‘‘net value’’ test in which the gross value 

of the plan design would be reduced to 

account for the level of benefits 

financed solely by the beneficiary. For 

instance, the net value of the coverage 

could be calculated by subtracting the 

retiree premium from the expected 

amount of paid claims under the retiree 

drug program. In order to qualify for the 

subsidy, a sponsor’s plan would have to 

meet both prongs of the actuarial 

equivalence standard. 

The ‘‘net’’ prong of the two-prong test 

of actuarial equivalence could have 

several variants. While each variant of 

the two-prong test would preclude 

windfalls, each would present a 

different balance among potentially 

46742 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

competing objectives. At a minimum, 

we believe that the net value of the 

creditable coverage should as a policy 

matter at least equal the average per 

capita amount that Medicare would 

expect to pay as the retiree drug 

subsidy. (We estimate this value at $611 

in 2006.) While there may be policy 

advantages to this approach, we have 

questions about the adequacy of the 

legal basis underpinning such a policy. 

We specifically invite comment on the 

question of whether the statutory 

language could reasonably be 

interpreted to support this approach. 

Alternatively, a higher threshold could 

be required. For instance, we could 

require that this value be more closely 

related to the net value of the standard 

Medicare Part D benefit (which is the 

expected amount of paid claims under 

Medicare Part D less the monthly 

beneficiary Medicare Part D premium 

under § 423.286 of our proposed rule). 

However, as the threshold was raised, it 

would be more difficult for retiree plans 

to qualify, that is, to (1) not provide 

windfalls and (2) offer coverage that is 

at least as generous in overall actuarial 

value as the Medicare subsidy. 

Another alternative benchmark value 

for the net test could be the after-tax 

value of the expected average per capita 

retiree drug subsidy. (There is special 

tax treatment available for the retiree 

drug subsidy. Plan sponsors get to 

deduct all the associated expenses but 

the value of the subsidy payments is not 

recognized as income for tax purposes.) 

Unfortunately, determining the 

appropriate amounts to use for this 

benchmark would pose significant 

problems because of the heterogeneity 

of the plan sponsors. For example, we 

estimate that at least 60 percent of 

retirees that are age 65 and older receive 

retiree health benefits from entities that 

are exempt from taxation (including 

both public and nonprofit entities, 

based on data from the 2001 Medical 

Expenditure Panel Survey); for those 

plan sponsors subject to taxation, their 

rates of taxation vary markedly. In 

addition, as mentioned above, we have 

questions about the adequacy of the 

legal basis underpinning this approach. 

As noted above, adopting a two-prong 

test with the higher value for the net test 

could arguably provide greater 

protection to beneficiaries, but might 

drive plan sponsors out of participating 

in the retiree drug subsidy and toward 

using the Part D-based options for 

supporting and enhancing drug 

coverage. Conversely, adopting a lower 

value for the net test might qualify more 

plan sponsors to participate in the 

retiree drug subsidy, but it might also 

discourage some employers and unions 

from increasing their contributions to 

reach the higher threshold level, and 

thereby increasing generosity of 

coverage. Public comment would help 

limit uncertainty by clarifying the likely 

responses of plan sponsors to these 

different approaches. In addition, we 

solicit comments not only on the 

desirability of the different options, but 

also (as noted above) on the legal bases 

for possible options. 

In any case, the actuarial equivalence 

test(s) established by CMS must be 

applied to each sponsor’s retiree 

prescription drug plan in order to 

determine if it is a qualified retiree 

prescription drug plan for purposes of 

qualifying for a subsidy. In considering 

the point of reference for a ‘‘plan,’’ we 

recognize that there is tremendous 

diversity and complexity in prescription 

drug coverage options among employers 

and unions for retirees. There may be 

either different employer/union 

contribution levels or benefit designs 

within a single plan for various 

segments of retirees (referred to as 

‘‘tiered cost sharing’’). A qualified retiree 

prescription drug plan is defined with 

reference to the definition of a ‘‘group 

health plan’’ which section 1860D–

22(c)(3) of the Act specifies is to be the 

definition of that term in section 607(1) 

of ERISA. That definition states that the 

term ‘‘means an employee welfare 

benefit plan providing medical care 

* * * to participants or beneficiaries 

directly through insurance, 

reimbursement, or otherwise * * * .’’

Section 3(1) of ERISA in turn defines an 

employee welfare benefit plan as ‘‘any 

plan, fund, or program [which is] 

established or maintained by an 

employer or by an employee 

organization, or by both, to the extent 

that the plan, fund, or program was 

established or is maintained for the 

purpose of providing for its participants 

or their beneficiaries, through the 

purchase of insurance, or otherwise, 

* * * medical, surgical, or hospital care 

or benefits * * *.’’

Section 1860D–22(a)(2)(A) of the Act 

clearly indicates that a plan must meet 

the actuarial equivalence test in order to 

qualify for a subsidy. We propose to 

apply the ERISA definition in a way that 

is appropriate in the context of section 

1860D–22 of the Act, and recognizes the 

diversity in retiree drug coverage among 

employers and unions. Our proposal is 

modeled on the approach adopted by 

the Department of Treasury at 26 CFR 

§ 54.4980(B)(2), in the context of a 

different definition of ‘‘group health 

plan.’’ In the Questions and Answers 

that relate to that section, Q–6 and A–

6 take the position that all health 

benefits provided by a sponsor are 

presumed to be under a single plan 

unless it is clear from the plan 

instruments and instrumental operation 

that the plans are separate plan 

arrangements. We believe this proposed 

approach is familiar to plan sponsors, is 

appropriately flexible, and protects 

retiree-beneficiaries. We welcome 

comments on how best to apply the 

statutory definition of a ‘‘plan’’ within 

this context, especially to sponsors that 

offer a multiple choice of retiree plans 

with various levels of sponsor 

contributions. 

We believe we have discretion as to 

whether to require that the sponsor 

demonstrate that the value of the retiree 

coverage under the group health plan is 

actuarially equivalent to standard 

prescription drug coverage under Part D 

for each individual based on: (1) the 

benefit package received by the 

individual, or (2) on average across all 

participants and beneficiaries receiving 

coverage under the sponsor’s group 

health plan. We propose to require 

sponsors to apply the actuarial 

equivalence test to each group health 

plan as a whole, with the standard met 

if on average the actuarial value of 

retiree drug coverage under the plan is 

at least equal to the value of standard 

prescription drug coverage under Part D. 

We believe that this approach would be 

less burdensome for sponsors. 

As previously noted in subpart F of 

this preamble, we will provide 

additional information in the future on 

the processes for determining actuarial 

valuation, including that of retiree 

prescription drug coverage. We are 

currently considering the following 

guidelines—

• We anticipate that we would 

specify, as either recommended or 

required in further guidance, data 

sources, methodologies, assumptions, 

and other techniques in accordance 

with generally accepted actuarial 

principles. We would require that the 

actuarial attestation be provided to us 

and we would verify that the attestation 

was signed by a qualified actuary. In 

addition, we may select a random 

sample of attestations for which we 

would require additional information to 

provide a quality control review. Also, 

we expect that a detailed review of the 

actuarial attestation would be included 

in the auditing process. 

• Section 1860D–11(c)(3)(B) of the 

Act specifies that PDP sponsors or MA 

organizations offering MA–PD plans 

may use qualified independent actuaries 

in developing bids. We believe it is 

appropriate to adopt this model with 

respect to this proposed rule, allowing 

retiree plan sponsors to use outside 

actuaries in their processes. We would 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46743 

specify that a qualified actuary is an 

individual who is a member of the 

American Academy of Actuaries, 

because members of the Academy must 

meet not only educational and 

experience requirements, but also a 

code of professional conduct and 

standards of practice. These standards 

create a common ground for actuarial 

analysis. Furthermore, a member of the 

Academy is subject to its disciplinary 

action for violations of the code and 

standards. This same requirement is 

specified in the SCHIP legislation at 

section 2103(c)(4)(A) of the Act. 

c. Sponsor Application for Subsidy 

Payment and Required Information 

A plan sponsor who wishes to be paid 

the retiree drug subsidy must apply 

annually for the subsidy. We will 

provide the technical details (including 

important systems issues) to sponsors 

and other interested parties in the very 

near future in order to facilitate our 

developing appropriate guidance, which 

will, in turn, encourage sponsor 

participation and minimize the burden 

to sponsors to the maximum extent 

possible. We intend to actively seek 

comments from sponsors and to release 

guidance to sponsors in 2005. In order 

for plan sponsors to receive a subsidy 

payment for 2006, we would require 

that all plan sponsors apply for the 

subsidy payment no later than 

September 30, 2005. For future years, as 

described above in the discussion of 

attestation, we would require that plan 

sponsors apply for the subsidy no later 

than September 30 of the previous year. 

Table R–1, containing the key dates 

involved in the sponsor application 

process, is included at the end of this 

section. 

We request comment on this 

approach, including how such a 

deadline might interfere with a 

sponsor’s open season, and whether or 

not sponsors will already know, as early 

as 90 days prior to the start of the year, 

which plan option a beneficiary has 

enrolled in. For sponsors that institute 

retiree prescription drug coverage after 

September 30, 2005, we would require 

that these sponsors apply at least 150 

days prior to the start of the new plan 

for the first plan year. 

We would require that sponsors (or an 

administrator of the plan designated by 

the sponsor) provide all of the following 

information as part of the application 

for special subsidy payment—

• Employer Tax ID Number (if 

applicable); 

• Sponsor name; 

• Sponsor address; 

• Contact name, job title and email 

address; 

• Actuarial attestation and supporting 

documentation for each qualified retiree 

prescription drug plan for which the 

sponsor will be seeking subsidy 

payments; 

• Identifying information for each of 

the separate plans. 

Additionally, the following 

information must also be submitted for 

each plan—

• Full names of each qualifying 

covered retiree (as defined previously) 

enrolled in the sponsor’s prescription 

drug plan (including spouses and 

dependents if Medicare-eligible), and 

the following information—

• Health Insurance Claim (HIC) 

number (when available); 

• Date of birth; 

• Sex; 

• Social Security number; and 

• Relationship to the retired 

employee. 

(Nothing in this data collection 

discussion should be construed as 

limiting OIG authority to conduct any 

audits and evaluations necessary for 

carrying out our proposed regulations.) 

Since we will be dealing with 

individually identifiable health 

information, we provide elsewhere in 

this preamble a separate discussion of 

privacy issues related to the submission 

of this information. We note that, in 

most cases, the plan sponsor would not 

have access to claims information or 

similarly protected health information 

regarding retirees. Therefore, throughout 

this preamble where we refer to 

information provided by the plan 

sponsor, we may in fact mean by the 

plan administrator, insurer, or group 

health plan on behalf of the plan 

sponsor. In addition, we are aware that 

sponsors may not have information on 

Medicare Part D eligible individuals 

who receive benefits under the 

employer-sponsored plan as spouses or 

dependents of a plan participant. We are 

also aware that many employers do not 

currently collect information about 

dependents, but plan administrators 

may maintain that information about 

dependents. Moreover, we are also 

aware that all plans do not consistently 

collect Medicare Health Insurance 

Claim (HIC) and Social Security 

numbers. Therefore, in order to be able 

to make and/or audit subsidy payments, 

we need a process to be able to identify 

the Medicare beneficiaries on whose 

behalf the subsidy payments would be 

made. We welcome comments on the 

proposed information list. 

We encourage sponsors who plan to 

request a subsidy payment from 

Medicare to begin to evaluate the 

availability of this information and to 

plan for the creation of a file with this 

type of information contained in it. 

Technical systems specifications for the 

file would be included in guidance to 

sponsors from CMS. We actively seek 

input from employers, plan sponsors, 

plan administrators, and other 

interested parties to facilitate our 

developing the most appropriate, 

efficient, and effective guidance. 

We have worked with many 

employers and other insurers in the 

context of Medicare Secondary payer 

requirements, and we believe that this 

will help facilitate the identification 

process. We welcome the opportunity to 

work with employers and insurance 

companies in this regard. Additionally, 

we launched a ‘‘Voluntary Data Sharing’’

initiative in 2000 that allows CMS and 

employers to electronically exchange 

employee group health coverage 

information and Medicare entitlement 

information on a current basis. This 

process can, for example, identify 

whether a retiree or spouse is a 

Medicare beneficiary and the date of 

entitlement to Medicare. More 

information about the CMS Employer 

Voluntary Data Sharing initiative can be 

found at: http://www.cms.hhs.gov/ 

medicare/cob/employers/emp_vdsa.asp. 

Finally, an authorized representative 

of the requesting sponsor must sign the 

completed application. The application 

will specify the terms and conditions of 

eligibility to receive a subsidy payment. 

The application would require the 

sponsor to comply with all Federal laws 

and regulations, as well as the terms and 

conditions of eligibility for a subsidy 

payment, including auditing of claims 

for subsidy payment and combating 

fraud and abuse, any further 

certification that CMS may require. The 

sponsor would be required to 

acknowledge that the information is 

being provided to obtain Federal funds. 

The signed application would constitute 

an agreement between the sponsor and 

CMS and would be referred to as the 

‘‘sponsor agreement.’’ The sponsor 

would be required to include in all 

subcontracts with third party 

administrators and other subcontractors 

performing functions in connection 

with the sponsor retiree drug benefit an 

acknowledgement that the subcontractor 

knows and understands that all 

information provided in connection 

with the contract will be used for 

purposes of obtaining Federal 

reimbursement. 

Once the full application for subsidy 

payment is submitted, we would match 

the names and identification numbers of 

retirees submitted by the sponsor with 

the Medicare Data Base (MDB) to 

determine which individuals are both 

eligible for Medicare Part D (that is, 

46744 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

individuals who are entitled to benefits 

under Medicare Part A or who are 

enrolled under Medicare Part B) but 

who are not enrolled in Medicare Part 

D. We would then provide to the 

sponsor (or to a plan administrator 

designated by a sponsor) the names and 

other necessary identifying information, 

if any, of the sponsor’s qualifying 

covered retirees. 

We recognize that there would be a 

need to update information from 

sponsors on a routine basis in order to 

incorporate newly eligible retireebeneficiaries and to prevent 

overpayments and underpayments as 

qualifying covered retirees make 

switches between Medicare Part D and 

the retiree drug plan. We are 

considering options for this enrollment 

update process. One possibility is to use 

a complete enumeration file submitted 

as part of the annual application 

process, with subsequent, periodic 

updating. We would appreciate public 

comments on this issue. 

We are also considering and seek 

comment on whether to require a surety 

bond type of instrument or preferred 

creditor status ‘‘ as part of the 

enrollment process—in order to address 

situations related to businesses that may 

terminate or experience bankruptcy 

prior to completion of a final 

reconciliation. 

TABLE R–1.—PROPOSED KEY DATES

Publication of final rule Early 2005 

Application for Subsidy Due Date for All Sponsors, regardless of 

whether they operate on a calendar or plan.

No later than September 30, year 2005. 

Attestation of Actuarial Equivalence Due Date for all Sponsors ............. No later than September 30, 2005. 

Retiree drug subsidy Program Begins ..................................................... January 1, 2006. 

Application for Subsidy Due Date for plans operating on a plan year 

basis.

September 30, 2006 (for 2007) and each September 30 thereafter for 

subsequent years. 

Application for Subsidy and Attestation of Actuarial Value Due Date for 

plans operating on a calendar year basis.

September 30, 2006 (for 2007) and each September 30 thereafter for 

subsequent years. 

Application for Sponsors that institute coverage after September 30, 

2005.

150 days prior to the start of the new plan. 

Notice to CMS of mid-year plan changes that materially affect actuarial 

valuation.

90 days prior to the plan change. 

Notice to enrollees of plan changes that result in the plan no longer 

being a qualified retiree prescription drug plan.

90 days prior to the plan change. 

d. Creditable Coverage and Notification 

Section 1860D–22(a)(2)(c) of the Act 

specifies that in order for a sponsor’s 

plan to meet the definition of a qualified 

retiree prescription drug plan, the 

sponsor must provide for disclosure of 

whether coverage is ‘‘creditable 

coverage’’ in accordance with the 

proposed requirements set forth under 

proposed § 423.56 of our proposed rule. 

The actuarial equivalence standard for 

creditable coverage is the same as one 

of the tests proposed for the actuarial 

equivalence standard for qualified 

retiree prescription drug plans in order 

to qualify for a retiree drug subsidy. The 

actuarial equivalence standard for 

creditable coverage is the ‘‘gross value’’

test (that is, whether the expected 

amount of paid claims (or ‘‘plan 

payout’’) under the retiree prescription 

drug coverage is at least equal to the 

expected amount of paid claims under 

the standard Medicare Part D benefit), 

which is the so-called first prong of the 

actuarial equivalence test for purposes 

of qualifying for the retiree drug 

subsidy. 

As explained in subpart B of the 

preamble of our proposed rule, if a 

Medicare Part D eligible individual fails 

to enroll in Medicare Part D upon first 

becoming eligible for Medicare Part D, 

the individual would be subject to the 

late enrollment penalty if the individual 

elects to enroll in Medicare Part D at a 

later date. However, the late enrollment 

penalty would be waived if the 

beneficiary had creditable prescription 

drug coverage during the time he or she 

was not enrolled in Part D. 

Proposed § 423.56 of our proposed 

rule would require certain entities 

providing drug coverage, including 

group health plans, to disclose to Part D 

eligible individuals and CMS whether 

that coverage is considered ‘‘creditable 

coverage’’ as described in proposed 

§ 423.56(a) of our proposed rule, or 

whether the value of the coverage to the 

individual is at least actuarially 

equivalent to standard prescription drug 

coverage under Medicare Part D. 

Consequently, plan sponsors under this 

proposed rule would be subject to the 

requirements in proposed § 423.56 of 

our proposed rule governing disclosure 

of creditable coverage. 

As discussed in subpart B of our 

proposed rule and discussed below, we 

intend to describe the proposed process 

for providing this disclosure notice, 

including guidance on its content, 

placement, and timing of notice. The 

content of the disclosure notice and its 

timely receipt would be important 

components in the decision making 

process for beneficiaries, because the 

creditable status of the retiree’s drug 

coverage would have a direct impact on 

the assessment of late enrollment 

penalties associated with Medicare Part 

D premiums. Notifying the retiree of any 

subsequent changes in their creditable 

coverage status is equally important. 

Because retirees would have a limited 

time in which to make decisions about 

their Medicare Part D coverage without 

facing a penalty, it would be important 

that the notification of creditable status 

be provided in a timely and 

conspicuous manner. However, we are 

also concerned about the potential 

administrative burden imposed by this 

proposed requirement and therefore, we 

are soliciting comments on the format, 

placement, and timing of this notice. 

We have considered several 

approaches to implementing this 

requirement. One possible approach 

would be to provide the sponsors with 

standard language that could be 

incorporated into the required 

disclosure materials the sponsors 

routinely disseminate to their enrollees 

in their retiree drug plans. (We could 

provide standard language to be inserted 

into these materials.) We are soliciting 

comments regarding the types of 

materials that could provide an 

appropriate vehicle for this purpose, as 

well as ways to ensure that the notice 

is conspicuous and readily identified by 

recipients, particularly in those 

instances where the coverage is not 

creditable. 

Another possible approach would be 

to require each sponsor to issue a 

separate notice to each Part D eligible 

enrollee in their retiree drug plan. This 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46745 

type of notice would be the most 

conspicuous and would subsequently 

increase the likelihood that beneficiaries 

are made aware of the creditable 

coverage status of their prescription 

drug coverage. Because retirees are 

subject to financial penalties for the 

failure to maintain creditable coverage 

when they enroll in Medicare Part D 

after the initial enrollment period, a 

separate notice may better inform 

beneficiaries and ensure that they take 

appropriate action to avoid the 

penalties. The Health Insurance 

Portability and Accountability Act of 

1996 (HIPAA), Pub. L. 101–93, requires 

entities that offer health insurance 

coverage to inform their members, in 

writing, of the type and duration of 

‘‘creditable coverage.’’ Implementing 

regulations at 62 FR 16901 (April 8, 

1997) provided a ‘‘Certification of 

Creditable Coverage’’ that must be 

produced and disseminated to 

individuals when their coverage ends. 

We considered requiring that 

information about the creditable status 

of prescription drug coverage be 

included in this certification. However, 

since the certification required under 

HIPAA is not provided until after the 

coverage has ended, it would arrive too 

late to assist beneficiaries in deciding 

whether to enroll in Part D. However, 

the HIPAA certification may serve as a 

useful model, and we invite your 

comments about the administrative 

burden associated with producing and 

disseminating a similar notice of 

creditable status to beneficiaries. 

The timing and frequency of these 

notices would also be a key 

consideration. The initial notice of 

creditable status would have to be 

coordinated with the first ‘‘Annual 

Coordinated Enrollment Period for Part 

D,’’ which begins November 15, 2005, to 

ensure that retirees have this 

information when making their 

decisions regarding Part D coverage. 

Retirees would also need to know about 

any change in the creditable status of 

existing coverage before this change 

becomes effective so that they have 

sufficient time to decide whether to 

obtain Part D coverage. If a retiree’s 

creditable drug coverage ends or is 

changed to the extent that it is no longer 

creditable, the retiree has a ‘‘Special 

Enrollment Period’’ during which he or 

she can enroll in Part D without 

financial penalty. Thus, we believe that 

this notice should be provided, at a 

minimum of these two important times, 

and also upon request by the 

beneficiary. 

We view this process as an important 

one, and invite comments on how best 

to ensure that retirees receive timely 

and adequate notice of the creditable 

status of their prescription drug 

coverage without imposing a significant 

administrative burden on sponsors that 

provide the coverage. We also note that 

section 1860D–22(a)(2)(C) of the Act 

requires sponsors to disclose the 

creditable status of this coverage to us, 

and we invite your comments on the 

possible methods of providing this 

disclosure. 

4. Retiree Drug Subsidy Amounts 

(§ 423.886) 

As explained previously, § 423.886 

governs the subsidy amount a sponsor 

of a qualifying retiree prescription drug 

plan receives for each qualifying 

covered retiree that is enrolled with the 

sponsor in a year. The sponsor is 

eligible to receive a subsidy payment for 

each qualifying covered retiree whose 

gross covered retiree plan-related 

prescription drug costs exceed the cost 

threshold. The amount of the subsidy 

would be 28 percent of the allowable 

retiree costs attributable to the gross 

retiree costs that are above the threshold 

and do not exceed the cost limit. For 

plan years ending in 2006, the cost 

threshold is $250 and the cost limit is 

$5000. 

The cost threshold and cost limit for 

a plan year that ends after 2006 would 

be adjusted in the same manner that the 

annual Part D deductible and the annual 

Part D out-of-pocket threshold are 

adjusted annually under 

§ 423.104(e)(1)(ii) and 

§ 423.104(e)(4)(iii)(B) of our proposed 

rule, respectively. Accordingly, 

beginning in 2007, we will adjust the 

cost limit and cost threshold based on 

the annual percentage increase or 

decrease in average per capita 

expenditures for covered Part D drugs in 

the United States for Part D eligible 

individuals for the 12 month period 

ending in July of the previous year, with 

the cost threshold rounded to the 

nearest multiple of $5 and the cost limit 

rounded to the nearest multiple of $50. 

CMS claims that are generated by an 

overpayment of the subsidy to a 

sponsor, including collection of interest, 

administrative costs, and late payment 

penalties would be governed by 

regulations at 45 CFR Part 30, subpart B. 

5. Payment Methods, Including 

Provision of Necessary Information 

(§ 423.888) 

a. Plan Year Versus Coverage (Calendar) 

Year 

Under section 1860D–22(a)(3)(B) of 

the Act, the cost threshold and cost 

limits that determine the amount of the 

subsidy are calculated for ‘‘plan years 

that end in’’ 2006 and subsequent 

calendar years. However, section 

1860D–22(a)(3)(A) of the Act refers to 

the subsidy amount for a qualifying 

covered retiree for a ‘‘coverage year,’’

that is defined as calendar year. Thus, 

we believe that, in the context of section 

1860D–22 of the Act, the reference to 

retirees enrolled in a qualified plan 

‘‘during a coverage year’’ can be read to 

mean that the retiree must be enrolled 

during either a calendar year or plan 

year that ends in the specified calendar 

year. As explained below, we would 

prefer a strict calendar year basis and 

believe our proposed requirements 

would permit sponsors with noncalendar plan years to comply with 

reasonable modifications. We are 

interested in receiving comments on 

whether we should maintain our initial 

policy based on the calendar year or 

whether we should consider a plan year 

as the basis for the subsidy. 

While a calendar year approach is 

more straightforward from the 

perspective of Federal administration of 

the subsidy program, use of ‘‘plan year’’

may better conform to the accounting 

systems of the plans and the sponsors. 

However, we note that the Federal 

subsidy is related to drug spending, not 

plan coverage. If we do elect to use a 

‘‘plan year’’ as the basis for payment, we 

would use the definition of a ‘‘plan 

year’’ in section 3(39) of the Employee 

Retirement Income Security Act of 1974 

(ERISA), 29 U.S.C. 1002(39), which 

includes, for a plan, the calendar, 

policy, or fiscal year on which the 

records of a plan are kept. If we do elect 

to use a ‘‘plan year,’’ the statute makes 

clear that the cost threshold and the cost 

limit will apply based on the calendar 

year in which the ‘‘plan year’’ ends. For 

example, in the case of a July 1, 2006–

June 30, 2007, ‘‘plan year,’’ the cost 

threshold and the cost limit applicable 

in general in 2007 would also apply for 

this ‘‘plan year.’’ Because the actuarial 

attestation would be due no later than 

April 1, 2006 (90 days in advance of the 

plan year), it is quite possible that the 

cost threshold and cost limits for 2007 

would not yet have been calculated at 

that time. 

Another issue that is unique to the 

use of a ‘‘plan year’’ as a basis for the 

subsidy payment that arises in the first 

year of the program is how to handle 

plan years that begin in 2005. For 

example, if a plan year ends on June 30, 

2006, only six months of that plan year 

accrued after January 1, 2006. The 

following are at least three options for 

addressing this problem: 

(1) The first option is to start counting 

gross costs for prescriptions filled after 

January 1, 2006. That is, even though 

46746 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the plan year in this example began on 

July 1, 2005, gross costs of qualifying 

covered retirees would only take into 

account prescriptions filled beginning 

with January 1, 2006. These gross costs 

would have to exceed $250 before their 

associated allowable costs would be 

subsidy eligible. Since subsidy 

payments are not authorized prior to the 

start of the Part D program, this option 

represents the strictest reading of the 

statute, in that gross costs and, 

therefore, allowable costs, are calculated 

without regard to the portion of the plan 

year that falls before January 1, 2006. It 

would, however, disadvantage plans 

that choose to use plan year instead of 

calendar year, since total subsidy 

payments for calendar 2006 would be 

lower than they would have been if 

calendar year had been used since the 

cost threshold must be met a second 

time in calendar 2006. 

(2) The second option is to determine 

a subsidy amount as if the sponsor were 

authorized to receive subsidy payments 

for the entire ‘‘plan year’’ and then to 

prorate this amount based on the 

number of ‘‘plan year’’ months that fall 

in 2006. First, gross costs would be 

determined for the entire ‘‘plan year’’. 

Allowable costs and the subsidy amount 

would be derived based on the 

proportion of the gross costs that exceed 

the cost threshold but are less than the 

cost limit. Finally, the subsidy amount 

for the plan year would be prorated by 

the number of months of the plan year 

that fall in 2006. In our example of a 

July 1–June 30 plan year, six months 

would fall in 2006 so the annual 

subsidy amount would be cut in half. 

This option, while still consistent with 

the statute, would provide a larger 

payment than the first option. 

(3) The third option would determine 

subsidy amounts on monthly basis as if 

the sponsor were authorized to receive 

subsidy payments for the entire ‘‘plan 

year’’, but would then pay only the 

amounts for the ‘‘plan year’’ months that 

fall in 2006. The process for 

determining the subsidy is similar to 

that described in option two, but rather 

than calculating an annual subsidy 

amount, one would determine the 

subsidy payments applicable to costs 

incurred for each month of the plan 

year. The sponsor would then receive 

the subsidy payments for the months in 

the plan year that fell in 2006 (that is, 

January 1 through June 30, 2006). This 

option would require that the sponsor 

determine the month in which costs are 

incurred. Therefore, it adds some 

complexity to the calculation of the 

subsidy. However, since subsidy eligible 

expenditures are weighted more toward 

the latter part of the plan year, this 

option would produce a stream of 

subsidy dollars that would parallel the 

actual flow of the sponsor’s plan 

expenditures. 

We would like to receive your 

comments on these options or other 

possible approaches, as well as on the 

threshold issue of whether we should 

rely only on calendar years, as 

explained below. We again note that 

relying on calendar years avoids the 

complications discussed above. 

b. Payment Methodology 

Section 1860D–22(a)(5) of the Act 

specifies that payments to plan sponsors 

are to be made ‘‘in a manner similar to’’

the payment rules in section 1860D–

15(d) of the Act, which apply to 

payments made to PDP sponsors and 

MA organizations under Part D. We 

believe that section 1860D–15(d) of the 

Act gives us broad discretion to 

determine a payment method. We wish 

to develop a payment methodology that 

is beneficial to the sponsors, and is cost 

efficient. Some of the factors to consider 

in developing a system that will pay 

subsidies are whether it is 

technologically feasible and what it 

would cost. Another issue is that 

pharmaceutical rebates, which must be 

excluded from allowable retiree costs, 

are generally not factored into the 

payments at the point of sale but instead 

not until much later in the process. We 

also recognize that highly automated 

insurance carriers or pharmacy benefit 

managers (PBMs) are used by almost all 

the sponsors for collection of the claims 

data that will be key elements of the 

data required for the payment of the 

subsidy. 

Our proposed policy is predicated on 

the assumption that plan sponsors 

utilize the services of sophisticated 

point-of-sale claims payment agents 

such as PBMs. We further understand 

that PBMs (or comparable 

administrative entities) routinely 

adjudicate prescription drug claims on a 

real-time basis and have very limited 

claims (sometimes referred to as 

incurred, but not received) or payment 

lags. As a result, actual monthly 

expenditures are routinely known 

shortly after the close of a month. We 

outline below our proposed approach to 

calculating and paying the alternative 

subsidy to qualified retiree prescription 

drug plans in 2006 (using an actuarial 

attestation based on a plan year, but 

with the alternative subsidy computed 

on a calendar year basis): 

• For each month starting with 

January 2006, the plan sponsor would 

certify by the 15th of the following 

month (that is, February, 2006 for 

January, 2006) the total amount by 

which actual retiree-beneficiary gross 

drug spending exceeded the cost 

threshold yet remained below the cost 

limit. Medicare would pay 28 percent of 

the certified amount to the sponsor by 

the 30th of that month. Not later than 

45 days after the end of the calendar 

year, the plan sponsor would submit a 

final reconciliation (but for outstanding 

rebates) to us for payment by or, if 

applicable, to us. (We recognize that 

plan sponsors may not receive some 

rebates until after the close of the their 

plan year.) 

• In the month in which they are 

received (or recognized), the appropriate 

share of any discounts, rebates, or other 

price concessions, along with any 

adjustments to the actual expenditures 

for prior months, are reflected. Any 

amounts owed the government would 

offset the subsidy payment for that 

month, to the extent that the amount 

owed to the government would exceed 

any applicable monthly payment, the 

plan sponsor would pay this amount to 

us. 

• Plan sponsors (or more likely, plan 

administrators, insurers or group health 

plans on their behalf) would maintain 

detailed records of claims payment and 

other matters. The specifics of the data 

retention, data submission, audit and 

financial requirements would be 

determined in future instructions. 

We note that, due to our need for 

monthly coverage and spending data, 

this system could work equally well for 

plans whether their plan year is 

coterminous with or is different than the 

calendar year. Because the special 

subsidy is based on allowable gross drug 

spending, without regard to the 

relationship of this spending to plan 

coverage or reimbursement, we believe 

the amount of drug spending for each 

eligible retiree-beneficiary can be easily 

be extracted from the insurance 

coverage provided in a ‘‘plan year’’. We 

believe months, as opposed to a daily, 

weekly, or annual basis, constitute the 

appropriate unit for computing the 

special subsidy. We note that more 

detailed, disaggregated data would be 

needed for purposes of audits and 

annual reconciliations. 

Actual monthly payments could be 

adjusted by the actual amounts received 

in that month for discounts, chargebacks 

and rebates appropriately attributed to 

allowable gross costs (as defined for 

purposes of claiming the special 

subsidy). Under this approach, 

payments would be based on actual 

drug spending and discount, chargeback 

or rebate payments. While arguably 

more data intensive, we believe this to 

be the most straightforward option, 

minimizing reliance on projections and 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46747 

actuarial representations. It also would 

facilitate expeditiously paying sponsors 

full subsidy amounts to which they 

would be entitled. Any underpayment 

or overpayment would generally be 

dealt with through an adjustment to 

subsequent periodic payments. This 

option would provide a payment 

stream, which comes closest to 

subsidizing actual plan expenditures as 

they occur. 

The following items would be three 

possible alternative options to our 

proposed methodology discussed above 

and the broad outline of the process for 

receiving subsidy payments. Under all 

three alternative options, sponsors 

would have to meet the specified filing 

deadlines in order to receive subsidy 

payments: 

(1) The first alternative option would 

be to make a single payment after the 

close of the year. Under this option, by 

the start of the fourth month after the 

close of the plan or calendar year, 

sponsors whose attestation of actuarial 

equivalence had been approved for that 

year would submit to us the number of 

months of coverage for each qualifying 

covered retiree and their gross and 

allowable costs. (Partial years of 

coverage would result from individuals 

becoming qualifying covered retirees 

during the course of the year and also 

from decedents who die during the 

course of the year. In the case of new 

qualifying covered retirees, only their 

expenses from the month of their status 

change forward can be included in their 

gross and allowable costs, which would 

have to exceed the cost threshold in 

order for a payment to be made.) Gross 

and allowable costs would be derived 

directly from claims payments and 

retiree cost sharing for prescriptions 

dispensed during the plan year offset by 

appropriate rebate cost reporting (as 

discussed in section 2 of this subpart 

with respect to allowable retiree costs). 

The portion of gross costs that exceeded 

the cost threshold but were less than the 

cost limit would be derived. Discounts, 

chargebacks, and rebates, which already 

would have been factored for the year, 

would be removed from these gross 

costs to calculate allowable costs and 

the subsidy amount. We would review 

this submission and make a payment for 

the year by the end of the following 

month. This alternative option would be 

the simplest to administer and would 

obviate the need for interaction between 

CMS and sponsors other than during the 

review process. From the perspective of 

sponsors, however, this option may be 

less desirable since payment would not 

be received until after the close of the 

year. 

(2) The second alternative option 

would be to make interim payments 

throughout the year with a settlement 

after the end of plan or calendar year. 

Under this alternative option, sponsors 

desiring to receive subsidy payments 

would develop an estimate of per capita 

subsidy payments based on the plan’s 

claims history and the rebates or 

discounts received in the prior period. 

Sponsors would submit the estimate, as 

well as the basis for the estimate, at the 

same time that they submit their 

attestation of actuarial equivalence 

(which we have proposed in section 3(b) 

of the preamble to be three months prior 

to the start of the plan year). If the 

sponsor files on a timely basis and we 

agree that the sponsor offers a qualified 

retiree prescription drug plan, we would 

review the estimate and the 

documentation and determine an 

interim monthly per capita amount. 

Plans would be paid a percentage (70 

percent for 2006 and 2007, 90 percent 

for subsequent years) of this interim 

payment level on a periodic basis for 

each qualifying covered retiree based on 

the sponsor’s enrollment information 

which would be matched against 

Medicare records to verify qualifying 

status. We would pay less than 100 

percent of this amount to minimize the 

possibility of having to recoup large 

amounts of money at the time of 

settlement. We are proposing to pay 70 

percent in 2006 and 2007 given the 

significant uncertainty that will exist in 

estimating subsidy payments. We 

request comments on whether 

estimating techniques as to qualifying 

covered retirees and as to levels of drug 

spending during the year are reliable 

enough to justify a higher percentage. 

By the start of the fourth month after the 

close of the plan or calendar year, the 

sponsor would submit documentation 

on gross claim costs and rebates, as 

described in option 1, above. We would 

review the documentation and settle for 

the year by making an additional 

payment if more payment were due to 

the sponsor or by reducing subsequent 

interim payments to reflect any 

overpayment. This alternative option is 

more administratively complex than the 

first alternative option because it entails 

developing an interim payment amount 

and making those payments. It would, 

however, provide subsidy funding to 

sponsors during the plan or calendar 

year. 

(3) The third alternative option would 

be to make lagged payments based 

mainly on actual experience on a 

periodic basis throughout the year with 

a settlement after the end of the year 

limited to reconciling estimated versus 

actual discounts, chargebacks, and 

rebates. By the 15th of the month 

following the close of the payment 

period, sponsors whose attestation of 

actuarial equivalence had been 

approved would submit information to 

us on gross and allowable costs for the 

previous payment period for each 

qualifying covered retiree whose gross 

costs, coverage (that is, calendar) year to 

date, exceeded the cost threshold, but 

were not in excess of the cost limit. The 

information submission would be based 

on actual claims experience. Actual 

monthly payments could then be 

adjusted on a percentage basis for 

estimated discounts, chargebacks, and 

rebates (the sponsor would submit a 

justification, which we would approve, 

for the percentage used). By the 15th of 

the following month, we would review 

the submission and make payment. By 

the start of the fourth month after the 

close of the plan or calendar year, the 

sponsor would submit documentation 

on actual discounts, chargebacks, and 

rebates received for the plan compared 

to those estimated. Any under payment 

or overpayment would be dealt with 

through an adjustment to subsequent 

periodic payments. 

We would like your comments on the 

operational aspects of the proposed 

policy, as well as the broad alternative 

options, and on their desirability from 

the perspective of plan sponsors. 

In addition to the question of payment 

methodology, there is the issue of the 

periodicity of the subsidy payments. 

While this is not an issue with regard to 

an annual retroactive payment, the 

question of periodicity does arise with 

regard to the ongoing payment 

alternatives. We would like your 

comments on the use of bi-annual, 

quarterly or monthly payment periods 

under these approaches. We also 

considered a variable payment option in 

which the frequency of payment would 

vary in accordance with the size of the 

sponsor’s plan. For example, a sponsor 

with 10,000 or more qualifying covered 

retirees would receive monthly 

payments while sponsors with less than 

10,000 qualifying covered retirees 

would receive quarterly payments. We 

are concerned that this alternative may 

be inequitable in terms of cash flow and 

overly administratively complex to 

implement. Again we are asking for 

your comments, particularly with regard 

to the balance between timeliness 

versus administrative burden posed by 

monthly or quarterly payments versus 

annual payments. We are also asking for 

your comments on whether to use more 

than one of the payment alternatives 

described above based upon the size of 

46748 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the sponsor’s plan. For example, in 

order to minimize administrative 

burden on small businesses, sponsors 

with less than 100 qualifying retirees 

could receive an annual retroactive 

payment. We solicit comments, in 

particular on the issue of whether less 

frequent payments might be preferable 

for small employers because it would 

minimize their reporting burden. 

Our understanding is that PBMs and 

other entities currently involved in the 

administration of claims are highly 

automated and capable of efficiently 

and effectively providing the necessary 

information at low (incremental) cost in 

a timely manner. We are particularly 

interested in your comments about the 

capabilities of the service providers and 

their views, as well as the views of the 

plan sponsors and others, on the most 

appropriate arrangement, as well as 

your comments on the feasibility of the 

proposed approach and proposed 

alternative options. 

c. Data Collection 

Regardless of what payment 

methodology is ultimately chosen for 

the subsidy, we would need certain data 

from the sponsors of the plans (or the 

plan administrators, insurers or group 

health plans designated by the sponsors) 

in order to accurately calculate the 

amount of the subsidy to which the 

sponsor is entitled. This data would 

include updating of the information that 

was provided during the application 

process such as the names of the 

qualifying covered retirees enrolled in 

the plan, including the spouses and the 

dependents, the Health Insurance Claim 

(HIC) numbers (when available), social 

security numbers, dates of birth, sex, 

and relationship to the retired 

employees. We would also require an 

affirmation that the Medicare benefits of 

each qualifying covered retiree are not 

secondary to the sponsor’s retiree health 

coverage (if the Medicare benefits are 

secondary to the sponsor group health 

plan, that would indicate that the 

participant is not in retiree status and, 

thus, is not a qualifying covered retiree 

except in certain situations in which the 

retiree qualifies for Medicare based on 

ERSD status), and dates of enrollment in 

the sponsor’s retiree plan. 

The plan sponsor (or the designated 

administrator, insurer, or group health 

plan) would be required to submit cost 

data for each qualifying covered retiree. 

The timing of the submission and the 

relevant time period of the cost data is 

contingent on the payment methodology 

that is adopted in the final rule for the 

subsidy. A separate issue, however, is 

the level of detail of the cost data. There 

are two options, and a combination of 

the two, to be considered: 

(1) First, we could require that the 

sponsor (or the plan administrator, 

insurer, or group health plan designated 

by the sponsor) submit the aggregate 

total of all allowable drug costs of all of 

the qualifying covered retirees in the 

plan for the time period in question. 

This would be the cost incurred 

between the cost threshold and cost 

limit with an appropriate adjustment for 

rebates. This aggregate cost would not 

be broken down to each qualifying 

covered retiree. The sponsor (or 

administrator, insurer, or group health 

plan) would have to maintain the claims 

data to support its submission for audit 

purposes. While this option would 

probably be easier for the sponsors and 

would be the most protective of the 

individual’s privacy, it may be the most 

problematic in terms of assuring the 

accuracy of the subsidy payment. 

(2) A second option would be for the 

sponsor (or the plan administrator, 

insurer, or group health plan) to submit 

the aggregate allowable costs for each 

qualifying covered retiree for the time 

period in question. This would be more 

complex for the sponsor and would 

raise some privacy questions but would 

provide more assurance with regard to 

the accuracy of the subsidy payment. 

(3) A third option would be to 

combine various elements of the first 

two options. For example, the sponsor 

(or the administrator, insurer, or group 

health plan) would be required to 

submit information with the specificity 

outlined in the second option for each 

of the first two years of the subsidy’s 

availability. In the third and fourth 

years, however, the sponsor (or the 

administrator, insurer, or group health 

plan) would submit its claims data in 

accordance with the first option. 

(4) A fourth potential option that we 

considered and subsequently ruled out 

would have been for the sponsor (or the 

plan administrator, insurer, or group 

health plan) to submit the actual claims 

data for each qualifying covered retiree. 

This option, however, would have been 

the most complex in terms of 

administering the subsidy program and 

the most problematic in terms of 

privacy. In addition, the benefits of this 

option would not have outweighed the 

higher costs associated with submitting 

actual claims data for each qualifying 

covered retiree. 

As discussed in the next section, we 

would require the creation and retention 

of detailed, individual records reflecting 

both claims and financial data. In 

assessing the merits of the two options, 

it is important to understand our plans 

for vigorous implementation of our 

audit authority. We believe that a 

vigorous audit program is consistent 

with permitting the reporting of more 

aggregated data. For example, plan 

sponsors could report the aggregate total 

of gross allowable drug costs for all 

qualifying covered retiree-beneficiaries 

incurred in a month, adjusted to reflect 

discounts, chargebacks and rebates (we 

discuss the issue of adjustments based 

upon rebates and other price 

concessions in section 2 of this subpart 

in connection with the discussion of 

allowable retiree costs). In the end-ofyear report, CMS could require more 

detailed information on eligibility, drug 

spending, and discounts, rebates and 

chargebacks. Finally, we might require 

the retention of detailed enrollee 

records for audit or other analytical 

purposes. We believe that by requiring 

different levels of detail for data and 

records, depending on the purpose for 

which they are to be used, provides 

sponsors and plan administrators, 

insurers, or group health plans with a 

minimum amount of burden and a 

maximum amount of flexibility and 

time in which to produce the required 

records. We welcome your comments on 

these options or your proposals for other 

options. Regardless of what option is 

chosen, we would require that the data 

include the period of time when the cost 

was incurred, the period of Medicare 

eligibility for each qualifying covered 

retiree, and the period of enrollment in 

the sponsor’s retiree plan for each 

qualifying covered retiree. This is 

because, as mandated by section 1860D–

22 of the Act, only costs incurred while 

the Medicare beneficiary is enrolled in 

the sponsor’s drug plan and not in Part 

D can be considered allowable retiree 

costs. 

This proposed rule also specifies, as 

required by section 1860D–15(d) of the 

Act, that all information obtained 

pursuant to this subpart may be used by 

the officers, employees, and contractors 

of the Department of Health and Human 

Services only for the purposes of, and to 

the extent necessary in, carrying out this 

subpart R of part 423. 

d. Audits 

At § 423.888(d), we propose that the 

sponsor of the plan (or the plan 

administrator, insurer, or group health 

plan designated by the sponsor) would 

be required to maintain and provide 

access to sufficient records for our 

audits or audits of the OIG to assure the 

accuracy of the attestation regarding 

actuarial value and the accuracy of 

subsidy payments made under this 

subpart. This proposed rule specifies 

that the working documents and reports 

of the actuaries conducting the analyses 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46749 

that serve as the basis for the attestation, 

and all documentation of the costs 

incurred and utilization for the amount 

of the subsidy payment, including the 

underlying claims data, would be made 

available for audit inspection. All 

records would be maintained for at least 

6 years after the end of the plan year in 

which the costs were incurred. We 

believe that 6 years is a sufficient length 

of time to preserve our right to conduct 

follow-up audits and would not be too 

burdensome on the sponsors. Six years 

is also the length of time certain other 

Medicare records are required to be 

retained. In the event of an ongoing 

investigation, litigation or negotiation, 

we or the OIG may extend the 6-year 

retention period. We invite your 

comments on the appropriateness of this 

level of documentation, and any unique 

operational issues it may raise. We may 

conduct audits in a manner similar to 

the audits of financial records of PDP 

sponsors and MA organizations, as 

outlined in § 423.504(d)(2) of our 

proposed rule. 

6. Appeals (§ 423.890) 

Although the statute does not contain 

provisions for administrative appeals of 

the retiree drug subsidy amount, and 

although we do not believe there is a 

constitutional property interest in the 

retiree drug subsidy (See American 

Manufacturers Mutual Insurance Co. v. 

Sullivan, 526 U.S. 40 (1999) (individual 

did not have a property right in the 

receipt of payment of a bill for medical 

services before an agency determined 

that the services were reasonable and 

necessary); Giese v. Barnhart, 55 Fed. 

Appx. 799, 2002 WL 31856 (9th Cir. 

2002) (there is no ‘‘termination’’ of 

benefits warranting due process when 

the individual never qualified for 

benefits in the first place), we believe 

that it is prudent policy to allow an 

opportunity for review of certain agency 

decisions issued in relation to this 

subpart. Examples of these decisions are 

as follows—

• A retiree prescription drug plan is 

determined not to be actuarially 

equivalent. 

• An enrollee in a retiree prescription 

drug plan is determined not to be a 

qualifying covered retiree. 

• A determination of the subsidy 

amount to be paid to a sponsor. 

We propose using a three step process 

for review of subsidy determinations. 

(1) In the first step, the sponsor could 

request an informal written 

reconsideration by us of the subsidy 

determination. Initial subsidy 

determinations would be final and 

binding unless the sponsor requested 

reconsideration in a timely manner or 

we reopened the determination in 

accordance with the procedures 

discussed below. The request for 

reconsideration would have to be filed 

within 15 days of the date of the notice 

of the adverse determination. We 

believe a short time frame is necessary 

in order to ensure that subsidy amounts 

can be finalized in as expeditious a 

manner as possible. We note that the 15- 

day time frame is used in MA contract 

termination appeals (see § 422.650) and 

we believe employers are similar to MA 

organizations in their level of 

sophistication. We expect that sponsors 

possess adequate resources to meet the 

time line and pursue the appeals in the 

proper manner. The written 

reconsideration would be entirely on 

the papers. Sponsors would be able to 

submit a position paper and any 

additional evidence they wished us to 

consider. We would make its informal 

reconsideration determination on these 

papers and inform the sponsor of its 

decision. We could inform the sponsor 

of its determination orally (over the 

telephone) or in writing (by electronic 

mail or by post); however, on a 

sponsor’s request, we would put our 

decision in writing. We expect that 

when we make a reconsideration 

determination wholly favorable to the 

sponsor, a written decision will not be 

requested. Our reconsideration 

determination would be final and 

binding, unless the sponsor further 

appealed the determination or if we 

reopened the reconsideration 

determination in accordance with the 

reopening provisions discussed below. 

(2) The second step of the appeals 

process would be an informal hearing 

before our hearing officer (who was not 

a party to the initial decision). Requests 

for a hearing would need to be made 

within 15 days of the date the sponsor 

received our reconsideration decision. If 

there is a dispute as to the date of 

receipt, unless there was evidence to the 

contrary, we would assume that the 

sponsor received the decision at least 5 

days from the date on the written 

reconsideration decision. Because we 

expect that we would deliver only 

favorable decisions orally, we do not 

expect receipt of an orally 

communicated decision would be an 

issue in determining whether a party 

has met the deadline for requesting a 

hearing of an adverse determination. 

The hearing officer’s decision would be 

final and binding, unless further 

appealed to our Administrator. We have 

also proposed that the hearing officer 

appointed by the Administrator would 

be limited to a review of the record that 

was before us in making its initial or 

review determination and no new 

evidence could be presented at the 

hearing stage. The hearing officer’s 

scope of authority would be limited to 

determining whether we applied our 

own policies in accordance with the 

facts that were before us. Our hearing 

officer would have to render the 

decision in an as expeditious manner as 

possible. 

(3) The third step of the appeals 

process would be a review by our 

Administrator. A sponsor could request 

an Administrator review or the 

Administrator, on his or her own 

motion, could take review, but in either 

case this review would have to be 

requested (or taken) within 15 days of 

the hearing officer’s decision. Again, we 

would expect that sponsors received the 

hearing officer’s decision within 5 days 

of the date on this decision. 

We believe a three-step appeals 

process allowing an opportunity for 

informal written review, followed by an 

oral hearing would conserve both 

agency and sponsor resources and 

ensure that a more formal hearing 

process is not invoked unless necessary. 

However, we also have considered other 

options, including having at the second 

level of appeal a telephone hearing with 

a CMS hearing officer instead of an inperson hearing. Another option is for a 

hearing on the record with the Hearing 

Officer, but without the opportunity for 

oral testimony. Although we believe 

these rules are procedural rules not 

subject to notice and comment 

rulemaking, in the case of this new 

benefit, we would welcome comments 

on the sufficiency of these rules and the 

other options discussed above. 

In addition to the appeals process, we 

have included provisions for reopening 

and revising an initial or reconsidered 

determination. We believe the authority 

to reopen retiree drug subsidy 

determinations would be in keeping 

with our authority in section 1860D–

22(a)(2)(B) of the Act to ‘‘perform audits 

and other oversight activities necessary 

to ensure * * * accuracy of payments,’’

since this audit authority would not be 

meaningful if we could not reopen 

payment determinations we later 

determined to be erroneous. In addition, 

we believe that sections 1870 and 1871 

of the Act provide us with the authority 

to reopen final determinations of the 

retiree drug subsidy to such employers. 

Therefore, in this proposed rule we 

would include reopening provisions 

based on those used in Medicare claims 

reopening, and found in part 405 of the 

Code of Federal Regulations (subparts G 

and H). Including reopening provisions 

would allow us to ensure that any 

overpayments or underpayments 

46750 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

discovered as a result of oversight or 

audit could be rectified. Under our 

proposed provisions, reopening could 

occur for any reason within one year of 

the final determination of payment, 

within four years for good cause, or at 

any time when the initial, reconsidered, 

or revised determination was procured 

by fraud or similar fault. We could 

initiate a reopening on its own, or an 

employer could request reopening, but 

these requests would be at our 

discretion. The Supreme Court has 

determined that in the context of 

reopening cost reports, a fiscal 

intermediary’s decision not to reopen a 

final determination is not subject to 

judicial review, (See Your Home 

Visiting Nurse Services, Inc. v. Shalala, 

525 U.S. 449, 456 (1999)), and we 

believe the same reasoning would apply 

in the context of Part D. 

Good cause would be interpreted in 

the same manner as in Part 405 and as 

further clarified in the Medicare Carriers 

Manual (MCM), section 12100. Thus, 

good cause would exist, if—(a) new and 

material evidence, not readily available 

at the time of the determination, is 

uncovered; (b) there is an error on the 

face of the evidence on which such 

determination or decision is based; or, 

(c) there is a clerical error in 

determination. In order to meet the 

standard under (a), the evidence could 

not have been available at the time the 

determination was made. A clerical 

error constitutes such errors as 

computational mistakes. An error on the 

face of the evidence exists if it is clear, 

based upon the evidence that was before 

us when we reached our initial 

determination, that the initial 

determination is erroneous. For 

example, good cause would exist in 

cases where it is clear from the files that 

rebates or administrative costs were not 

appropriately accounted for, where 

computation errors had been made, 

where an employer included non-Part D 

drugs in their calculations, where 

individuals not enrolled in the plan 

were included in calculating payment, 

and in similar situations. Reopening 

could occur at any time if the 

underlying decision was obtained 

through fraud or similar fault—such as 

if an employer sponsor—or its 

subcontractor—knew or should have 

known that it was claiming erroneous 

subsidies. We believe it would be 

necessary to include subcontractors in 

this standard, since we expect many 

sponsors will contract with benefit 

administrators to manage the benefit, 

and these administrators will be 

providing data to CMS. We have not 

included provisions for reopening 

hearing officer or Administrator 

decisions, but are considering allowing 

for the reopenings as well. We request 

comments on this issue. 

7. Privacy 

The HIPAA Privacy Rule at 45 CFR 

part 160 and subparts A and E of part 

164 (‘‘Privacy Rule’’) applies to ‘‘covered 

entities,’’ which include group health 

plans and health insurance issuers, as 

defined in 45 CFR 160.103. Third party 

administrators would be business 

associates, as defined in 45 CFR 

160.103, of group health plans. 

Sponsors would not become covered 

entities by sponsoring a plan and do not 

have access to claims information or 

similar Protected Health Information 

necessary to support the subsidy 

payment. Much of the data that we 

would need to support the subsidy 

payment outlined above would be 

protected health information held by 

group health plans, insurers, and ‘‘third 

party administrators’’ on behalf of selffunded group health plans. 

Covered entities may only use or 

disclose protected health information as 

permitted or required by the Privacy 

Rule. A business associate contract 

generally must limit the business 

associate’s uses or disclosures of 

protected health information to those 

the covered entity could make. 

Permitted uses and disclosures include 

those for treatment, payment, and health 

care operations as well as those for 

public priority purposes, such as those 

uses and disclosures required by law (45 

CFR 164.512(a)). 

Section 423.888(b) would require the 

plan (or the third party administrator on 

behalf of the plan, as applicable) or the 

insurer of the plan to disclose certain 

data to CMS that is related to the retiree 

drug subsidy when directed by the plan 

sponsor to do so. We believe we have 

the authority to mandate the disclosure 

of this data to CMS pursuant to our 

oversight authority under section 

1860D–22(a)(2)(B) of the Act, which 

provides that the Secretary shall have 

the access to such records as necessary 

to ensure the adequacy of subsidy 

payments made to sponsors. A sponsor 

applying for the subsidy can direct the 

plans that it sponsors (or the third party 

administrators or the insurers, as 

applicable) to disclose the protected 

health information to us, and disclosure 

will be permitted under the Privacy 

Rule because the disclosure is required 

by law, that is, by this regulation. In 

order to protect the privacy of the 

information, the protected health 

information would be provided directly 

to CMS and would not be shared with 

the sponsor. (CMS would disclose the 

information on the enrollees’ Part D 

eligibility to the sponsors or the plan 

under § 423.884(b)(6).) We invite 

comment on the impact this will have 

on sponsors of retiree plans and on the 

group health plans, issuers, and thirdparty administrators of these plans. 

8. Change of Ownership (§ 423.892) 

Sponsors who apply for a subsidy 

payment would be required to comply 

with change of ownership requirements, 

similar to those set forth in proposed 

§ 423.551 for the MA–PD and PDP 

plans. However, for purposes of the 

retiree drug subsidy, we are proposing 

slightly different change of ownership 

provisions than those proposed in 

§ 423.551 for PDPs. We request 

comments regarding how these 

provisions could be modified to 

accomplish these objectives. In 

particular, we seek comments regarding: 

the situations which constitute a change 

of ownership, how these provisions 

should be applied to large companies 

with multiple business units, the 

notification requirements related to a 

change of ownership, and whether 

sponsors should be subject to novation 

agreement and facility leasing 

provisions similar to those proposed in 

§ 423.551. 

In § 423.892, we would carry over the 

three situations that constitute change of 

ownership (CHOW) in § 423.551 of our 

proposed rule. We would state that a 

CHOW includes the following—

• The removal, addition, or 

substitution of a partner, unless the 

partners expressly agree otherwise as 

permitted by applicable State law; 

• A transfer of substantially all of the 

assets of the sponsor to another party; or 

• The merger of the sponsor’s 

corporation into another corporation, or 

the consolidation of the sponsor’s 

organization with one or more other 

corporations, resulting in a new 

corporate body. 

The proposed exception to the three 

provisions discussed above would be 

that a transfer of corporate stock or the 

merger of another corporation into the 

sponsor’s organization, with the sponsor 

organization surviving, would not 

usually constitute a CHOW. 

We would require a sponsor that has 

a sponsor agreement in effect and who 

is considering or negotiating a CHOW, 

to notify us at least 60 days before the 

anticipated effective date of the change. 

In addition, we would also require that 

when there is a CHOW, and this results 

in a transfer of the liability for 

prescription drug costs, the existing 

subsidy agreement would automatically 

be assigned to the new owner. We 

would also require that the new owner 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46751 

to whom a sponsor agreement is 

assigned be subject to all applicable 

statutes and regulations and to the terms 

and conditions of the subsidy 

agreement. 

We welcome comments on any aspect 

of the proposed section on change of 

ownership. We are particularly 

interested in comments on situations in 

which a sponsor transfers substantial 

assets, but substantially less than all of 

its assets, to another party. Please 

describe the different scenarios that 

might develop under such 

circumstances, especially the extent to 

which benefits covered by the sponsor 

agreement might reasonably be expected 

to be provided by the old or new owner 

and the best approach for either 

transferring, issuing or reissuing 

sponsor agreements. We would also like 

to receive comments on scenarios that 

might develop if more than one entity 

retains or acquires liability for 

prescription drug costs as the result of 

the terms of a change in ownership. 

9. Construction (§ 423.894) 

Sections 423.890(a) through 

§ 423.890(d) are based on section 

1860D–22(a)(6) of the Act. It provides 

that nothing in section 1860D–22 of the 

Act must be interpreted as preventing—

• An individual who is eligible for 

Medicare Part D and who is covered 

under employment-based retiree health 

coverage from enrolling in a 

prescription drug plan or in a MA–PD 

plan; 

• The sponsor of employment-based 

retiree health coverage or an employer 

or other person from paying all or any 

part of any premium required for 

coverage under a prescription drug plan 

or MA–PD plan on behalf of an 

individual; 

• Employment-based retiree health 

coverage from providing coverage that is 

supplemental to the benefits provided 

under a prescription drug plan or a MA–

PD plan, including benefits to retirees 

who are not covered under a qualified 

retiree prescription drug plan, but who 

are enrolled in a PDP or MA–PD plan; 

• Employment-based retiree health 

coverage from providing coverage that is 

better than the standard prescription 

drug coverage (as defined in 

§ 423.104(e)) to retirees who are covered 

under a qualified retiree prescription 

drug plan; and 

• Sponsors from providing for 

flexibility in benefit design and 

pharmacy access provisions, without 

regard to the requirements for basic 

Medicare Part D drug coverage, as long 

as the actuarial equivalence requirement 

(as defined in § 423.884(a)) is met. 

S. Special Rules for States—Eligibility 

Determinations for Low-Income 

Subsidies, and General Payment 

Provisions 

1. Eligibility Determinations (§ 423.904) 

The MMA added a new section 1935 

to the Act, ‘‘Special Provisions Relating 

to Medicare Prescription Drug Benefit,’’

which specifies the requirements for 

States regarding low-income subsidies 

under the new part D benefit. In 

accordance with the statute, our 

proposed regulations at § 423.904(a) and 

(b) would require States to make initial 

eligibility determinations for premium 

and cost sharing subsidies based on 

applications filed with the States, to 

conduct periodic redeterminations 

consistent with the manner and 

frequency that redeterminations are 

conducted under Medicaid, and to 

notify us of eligibility determinations 

and redeterminations once they are 

made. 

In § 423.904(c), States would be 

directed to identify individuals who 

apply for the low-income subsidy who 

may also be eligible for programs under 

Medicaid that provide assistance with 

Medicare cost sharing and to offer 

enrollment in these programs. This 

requirement is consistent with existing 

obligations imposed on States when 

they make eligibility determinations for 

Medicaid. We also specify that States 

notify deemed subsidy eligibles of their 

subsidy eligibility. 

In section § 423.904(d), we would 

require States to begin accepting 

application forms for the low-income 

subsidy no later than July 1, 2005. Our 

rationale for requiring States to take 

applications earlier than the open 

enrollment period for PDP and MA–PD 

plans would be to allow more time to 

process the large number of expected 

subsidy applications at the beginning of 

the program. 

In section § 423.904(d), we would also 

require States to make available 

application forms, provide information 

on the nature of and requirements for 

the subsidy program, and provide 

assistance in completing subsidy 

applications. States also would be 

required to ensure that applicants or 

personal representatives attest to the 

accuracy of the information provided. In 

verifying application information, we 

would specify that States may require 

the submission of statements from 

financial institutions and may require 

that information on the application be 

subject to verification in a manner the 

State determines to be most costeffective and efficient. As we discuss 

under subpart P, we envision a process 

that will balance the need for program 

integrity with the goal of reducing 

paperwork burden and cost. 

In addition, § 423.904(d) would direct 

States to provide us with necessary 

information to carry out implementation 

of the Part D program. This will include 

information such as income levels for 

other low-income subsidy eligible 

individuals under § 423.773 needed to 

permit PDPs and MA–PDs to determine 

the amount of sliding scale premium 

subsidy that a person will receive under 

§ 423.780(b). 

In developing this proposed rule, we 

worked with the Social Security 

Administration (SSA) on a simplified 

application form and process for the 

low-income subsidy program. As a 

result, we developed uniform criteria for 

determining resources, income, and 

family size under the subsidy, which are 

reflected in the proposed definitions at 

§ 423.772, and the proposed eligibility 

requirements at § 423.773. 

We are considering a number of 

options to ease the burden on States and 

to ensure, to the degree permissible 

under the MMA, a consistent eligibility 

determination process. We invite 

comments from States on this issue. 

2. General Payment Provisions 

(§ 423.906) 

We specify in § 423.906(a) that States 

could receive the regular Federal match 

for administrative costs in determining 

subsidy eligibility. 

Section 1935(d) of the Act contains 

provisions on Medicaid coordination 

with Medicare prescription drug 

benefits. The proposed regulations 

specify in § 423.906(b) that, in the case 

of a person who is eligible for Part D 

and also eligible for full Medicaid 

benefits, medical assistance is not 

available for Medicaid covered drugs 

that could be covered under Part D or 

for cost sharing related to such drugs. In 

these cases Medicare is the primary 

payer. The provision of Part D covered 

drugs is no longer considered a benefit 

under the Medicaid program for full 

benefit dual eligibles, even if such 

individuals have not enrolled in a Part 

D plan. Therefore, no payment should 

be made under Medicaid for covered 

Part D prescription drugs for full benefit 

dual individuals. 

Also, in our proposed regulations in 

§ 423.906(c), we specify that for 

individuals enrolled in a drug plan 

under Part D or in an MA–PD States 

may elect to cover under Medicaid 

outpatient drugs, other than Part D 

covered drugs, in a manner as otherwise 

provided in their State Plan for 

individuals who are not full-benefit 

dual eligible individuals or through 

46752 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

arrangements with the PDP sponsor or 

MA–PD. 

3. Treatment of Territories (§ 423.907) 

Low-income Part D eligible 

individuals residing in the territories are 

not eligible for premium and costsharing subsidies. However, in 

accordance with section 1935(e) of the 

Act, territories may submit a plan to the 

Secretary under which medical 

assistance is to be provided to lowincome individuals for covered Part D 

drugs. Territories with approved plans 

will receive increased grants under 

sections 1108(f) and 1108(g) of the Act. 

Section 423.907 contains the provisions 

explaining the territories submittal of 

plans and the grant funding. 

4. State Contribution to Drug Benefit 

Costs Assumed by Medicare (§ 423.908 

through § 423.910) 

Medicare will subsidize prescription 

drug costs for full-benefit dual eligible 

individuals. However, in accordance 

with section 1935(c) of the Act, States 

and the District of Columbia will be 

responsible for making monthly 

payments to the Federal government 

beginning in January 2006 to defray a 

portion of the Medicare drug 

expenditures for these individuals. The 

statute directs, and we would specify, in 

§ 423.910(b)(2) that State payments 

would be made in a manner similar to 

the mechanism through which States 

pay Medicare Part B premiums on 

behalf of low-income individuals who 

are eligible for both Medicare and 

Medicaid, except that those payments 

will be deposited into the Medicare 

Prescription Drug Account in the 

Federal Supplementary Medical 

Insurance Trust Fund. 

As we are proposing to specify in 

§ 423.908 through § 423.910, to calculate 

the monthly State contributions, we 

would first calculate an amount we refer 

to as the projected monthly per capita 

drug payment. This amount is based in 

part on a State’s Medicaid per capita 

expenditures for covered Part D drugs 

for Medicare beneficiaries eligible for 

full benefits under Medicaid for 2003, 

which is equal to the weighted average 

of gross per capita Medicaid 

expenditures for prescription drugs for 

2003 for Medicaid recipients not 

receiving drugs through a managed care 

plan and the estimated actuarial value 

of prescription drugs benefits provided 

under a capitated managed care plan for 

these individuals in 2003. The weighted 

average would be based on the 

proportion of individuals who, in 2003, 

did and did not receive medical 

assistance for covered outpatient drugs 

through a Medicaid managed care plan. 

The gross per capita Medicaid 

expenditures for prescription drugs for 

2003 is equal to the average (mean) per 

person expenditures (including 

dispensing fees) for a State during 2003 

for covered Part D drugs provided to 

Medicare beneficiaries receiving full 

benefits under Medicaid who are not 

receiving medical assistance for drugs 

through a Medicaid managed care plan, 

based on data from the Medicaid 

Statistical Information System (MSIS) 

and other available data, as adjusted by 

an adjustment factor. 

We would apply an adjustment factor 

to the gross per capita Medicaid 

expenditures for prescription drugs. The 

adjustment factor for a State would have 

to equal the ratio of the aggregate 

payments to the State in 2003 under 

rebate agreements under section 1927 of 

the Act to a State’s 2003 gross 

expenditures for covered Part D drugs 

not received through a Medicaid 

managed care plan, based on data 

contained in the CMS–64 Medicaid 

expenditure report. We propose to 

define 2003 as CY 2003 (January 1, 

2003, through December 31, 2003). The 

gross per capita Medicaid expenditures 

for prescription drugs for 2003 will be 

reduced by this adjustment factor ratio. 

The projected monthly per capita 

drug payment for a month would be 

equal to 1⁄12 of the product of the State’s 

Medicaid per capita expenditures for 

covered Part D drugs for Medicare 

beneficiaries eligible for full benefits 

under Medicaid for 2003 and a 

proportion equal to 100 percent minus 

the Federal medical assistance 

percentage (as defined in section 

1905(b) of the Act) applicable to the 

State for the year for the month at issue. 

This amount would be increased by the 

growth factor for each year beginning in 

2004 through the year for the month at 

issue. The growth factor for years 2004, 

2005, and 2006 would be the average 

percent change from the previous year 

of the per capita amount of prescription 

drug expenditures (determined using 

the most recent National Health 

Expenditure projections). The growth 

factor for 2007 and succeeding years 

would equal the annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs in 

the United States for Part D eligible 

individuals for the 12-month period 

ending in July of the previous year. 

The monthly State contributions for 

each year, beginning in January of 2006, 

would be the product of the projected 

monthly per capita drug payment, the 

total number of full benefit dual eligible 

individuals for the State in the 

applicable month, and the applicable 

ten year phased-down factor for the year 

(see Table S–1). As illustrated in Table 

S–1, State contributions would decline 

each year until 2015, at which time the 

applicable 10 year phased-down factor 

for each year will be fixed at 75 percent. 

As specified in § 423.910(b)(3), failure 

on the part of a State to pay these State 

contribution amounts would result in 

interest accruing on those payments at 

the rate provided under section 

1903(d)(5) of the Act, in accordance 

with section 1935(c)(1)(C) of the Act. In 

addition, as required by the statute, we 

would immediately offset unpaid 

amounts and accrued interest against 

Federal Medicaid matching payments 

due to the State under section 1903(a) 

of the Act. As we specify in 

§ 423.910(e), we would perform periodic 

data matches to identify full-benefit 

dual eligibles for purposes of computing 

State contributions. As we specify in 

§ 423.910(d), States would be required 

to provide data on full benefit dual 

eligible enrollees in order to conduct the 

data match required under section 

1935(c)(1)(D) of the Act. 

States would make contributions only 

on behalf of Medicare beneficiaries who 

would otherwise be eligible for 

outpatient prescription drug benefits 

under Medicaid. States would not make 

contributions on behalf of individuals 

such as those QMBs who are not 

otherwise eligible for Medicaid, SLMBs, 

and QIs for whom the State will pay 

only Part B premiums or Medicare cost 

sharing on their behalf. In order to give 

meaning to the term full benefit dual 

eligible for purposes of the baseline 

calculation, we needed to define it in a 

manner that would permit the baseline 

calculation to operate. Therefore, we are 

proposing that Medicaid eligible 

individuals who receive comprehensive 

benefits including drug coverage under 

Medicaid and are also covered under 

Medicare Part A or Part B to be full 

benefit dual eligibles for purposes of 

calculating the baseline. This definition 

of full benefit dual eligibles excludes 

Medicare beneficiaries who receive 

Medicaid drug coverage under a section 

1115 Pharmacy Plus demonstration. 

As we specify in § 423.910(g), to assist 

States in their budget planning, we must 

notify States by October 15 each year of 

the projected monthly per capita drug 

payment calculation for the next 

calendar year. 

The ten-year phased-down State 

contribution factors are identified below 

in Table S–1. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46753 

TABLE S–1.—ANNUAL PHASED—

DOWN PERCENTAGES OF STATE

CONTRIBUTIONS TO MEDICARE PART

D DRUG BENEFIT COSTS

Year State 

Percentage 

2006 .......................................... 90 

2007 .......................................... 881⁄3

2008 .......................................... 862⁄3

2009 .......................................... 85 

2010 .......................................... 831⁄3

2011 .......................................... 812⁄3

2012 .......................................... 80 

2013 .......................................... 781⁄3

2014 .......................................... 762⁄3

2015 and thereafter .................. 75 

T—Part D Provisions Affecting 

Physician Self-Referral, Cost-Based 

HMO, PACE, and Medigap 

Requirements 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘T–Part D Provisions Affecting SelfReferral, Cost-Based HMO, PACE, and 

Medigap Requirements’’ at the 

beginning of your comments.) 

Subpart T includes discussion of 

several other regulatory areas that 

would be affected by the proposed 

provisions implementing the Medicare 

prescription drug benefit. In the 

discussion that follows, we specify the 

revised requirements for physician selfreferral prohibition, cost-based HMOs, 

PACE organizations, and Medigap 

policies. Any corresponding regulation 

text appears before or after the section 

423 rules in subpart A of our proposed 

rules. 

1. Definition of Outpatient Prescription 

Drugs for Purposes of Physician SelfReferral Prohibition (§ 411.351) 

Section 1877 of the Act, also known 

as the physician self-referral law, 

prohibits a physician from making 

referrals for certain designated health 

services (DHS) payable by Medicare to 

an entity with which the physician (or 

an immediate family member) has a 

financial relationship (ownership or 

compensation) unless an exception 

applies. Section 1877 of the Act also 

prohibits the DHS entity from 

submitting claims to Medicare for DHS 

furnished as a result of a prohibited 

referral. 

‘‘Outpatient prescription drugs’’ are a 

designated health service under section 

1877 of the Act. We have defined in 

regulation ‘‘outpatient prescription 

drugs’’ for purposes of the physician 

self-referral prohibition as ‘‘all 

prescription drugs covered by Medicare 

Part B’’ (§ 411.351). However, effective 

January 1, 2006, additional outpatient 

drugs will be covered under Medicare 

Part D. These additional covered Part D 

drugs are defined elsewhere in this 

preamble in II.C.1 of Subpart J, and in 

regulations text at § 423.100. 

As a result of the proposed Medicare 

prescription drug benefit provisions, we 

propose to amend the physician selfreferral definition of ‘‘outpatient 

prescription drugs’’ at § 411.351 to 

include the additional outpatient drugs 

covered under the new Part D benefit. 

Specifically, we propose to define 

‘‘outpatient prescription drugs’’ for 

purposes of the physician self-referral 

prohibition as ‘‘all drugs covered under 

Medicare Part B and Part D.’’ We believe 

that referrals for Part D drugs are subject 

to the same risk of overutilization and 

anti-competitive behavior as referrals for 

Part B drugs when a financial 

relationship exists between the referring 

physician and the entity furnishing the 

drugs. We are soliciting comments on 

this proposed definition. 

2. Cost-Based HMOs and CMPS offering 

Part D coverage (§ 417.440 and 

§ 417.534) 

Section 1860D–21(e) of the Act 

provides that Part D rules will generally 

apply to reasonable cost reimbursement 

HMOs and CMPs (Competitive Medical 

Plans) that contract under section 1876 

of the Act and that offer qualified 

prescription drug coverage to Part D 

eligible enrollees in the same manner as 

such rules apply to local MA–PD plans 

(described in section 1851(a)(2)(A)(i) of 

the Act). As a result, 42 CFR part 417 

must be revised to reflect the treatment 

of an HMO or CMP as a local MA–PD 

plan. To codify these changes in 

regulation we are revising § 417.440(b) 

specifying that an HMO or CMP may 

offer qualified prescription drug 

coverage. In new § 417.534(b)(4), we 

specify that to the extent that a cost 

HMO or CMP chooses to participate in 

the Part D program by offering qualified 

prescription drug coverage to its 

members, any costs associated with the 

offering of Part D benefits may not be 

claimed on its Medicare cost report. 

Section 1860D–21(e)(2) of the Act 

reinforces the fact that section 1876 

reasonable cost contracts that offer Part 

D of Medicare may do so only as MA–

PD plans. This section of the statute 

stipulates that section 1876 reasonable 

cost contracts may only offer Part D 

coverage to individuals also enrolled for 

Medicare in the reasonable cost 

contract. In other words, section 1876 

reasonable cost HMOs and CMPs are not 

permitted to operate as ‘‘free standing’’

PDPs. 

Section 1860D–21(e)(3) of the Act 

provides that the Part D bids of section 

1876 reasonable cost contracts will not 

be included in the computation of the 

national average monthly bid amount 

and the low-income benchmark 

premium amount. We discuss the 

national average monthly bid amount in 

the subpart F preamble and the lowincome benchmark premium amount in 

the subpart P preamble. 

The waiver authority provided in 

section 1860D–21(c) of the Act would be 

available to section 1876 reasonable cost 

HMOs and CMPs in the same manner as 

it is available to MA–PD plans. We 

discuss section 1860D–21(c) of the Act 

and the waiver authority it provides in 

the subpart J preamble. To the extent 

that a Part D requirement is in conflict 

with or duplicative of a section 1876 

requirement, or to the extent that a 

waiver would promote coordination of 

Part A and Part B benefits with Part D 

benefits, waiver would also be available 

to section 1876 reasonable cost HMOs 

and CMPs. We invite comment on 

whether there are any Part D 

requirements otherwise applicable to 

MA–PD plans that would be uniquely 

problematic to implement for section 

1876 reasonable cost HMOs and CMPs. 

3. PACE Organizations Offering Part D 

Coverage 

a. Overview 

Section 1860D–1(a)(1) of the Act 

provides that in general each Part D 

eligible individual is entitled to obtain 

qualified prescription drug coverage as 

a fee-for-service enrollee or a MA 

enrollee. Although PACE enrollees are 

neither fee-for-service nor MA 

beneficiaries, those entitled to benefits 

under Part A or enrolled under Part B 

will be Part D eligible individuals. 

Section 1860D–21(f)(1) of the Act 

further specifies that a PACE program 

may elect to provide qualified 

prescription drug coverage to its Part D 

eligible enrollees. 

Currently, sections 1894 and 1934 of 

the Act require PACE organizations to 

provide enrollees with all medically 

necessary prescription drugs. Drugs 

covered under Medicare Parts A and B 

are included in the monthly Medicare 

capitation rate paid to PACE 

organizations for Medicare beneficiaries, 

while outpatient prescription drugs are 

included as a portion of the monthly 

Medicaid capitation rate paid to PACE 

organizations for Medicaid recipients or 

the Medicaid premium paid by nonMedicaid recipients. The MMA alters 

the payment structure for covered Part 

D drugs for PACE organizations by 

shifting the payer source for PACE 

enrollees who are full benefit dual 

eligibles (as defined under section 

46754 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

1935(b)(6) of the Act) from Medicaid to 

Medicare, and in part from the 

beneficiary to Medicare in the case of 

non-full benefit dual eligibles who elect 

to enroll in Part D. Prescription drug 

coverage for PACE enrollees enrolled in 

Medicaid who are not Medicare 

beneficiaries would continue to be 

funded by the State through their 

monthly capitation payment to the 

PACE organization. 

As discussed in proposed § 423.34(d), 

in accordance with section 1935(d)(1) of 

the Act, full benefit dual eligibles will 

no longer be eligible for medical 

assistance for covered Part D drugs 

under Medicaid; rather, such 

individuals may only receive coverage 

for covered Part D drugs under Part D 

of Medicare. Consequently, in order for 

PACE organizations to continue to meet 

the statutory requirement to provide 

prescription drug coverage to their 

enrollees, and ensure that they receive 

adequate payment for the provision of 

covered Part D drugs, PACE 

organizations will need to offer 

qualified prescription drug coverage to 

their Part D eligible enrollees. 

The MMA provides little specific 

guidance for implementing the 

prescription drug benefit for Part D 

eligible PACE enrollees. Section 1860D–

21(f) of the Act indicates that to the 

extent a PACE program elects to provide 

qualified prescription drug coverage to 

Part D eligible individuals, Part D 

requirements apply to the provisions of 

such coverage in a manner that is 

similar to that of MA–PD local plans. 

Furthermore, the PACE organization 

may be deemed as an MA–PD local 

plan. 

We believe that Congress did not 

intend to alter the way in which PACE 

services, including outpatient 

prescription drugs, are currently being 

provided to enrollees. Therefore, we are 

proposing that PACE organizations not 

be deemed as MA–PD local plans. 

Rather, PACE organizations would be 

treated in a manner that is similar to an 

MA–PD local plan for purposes of 

payment under Part D. This approach is 

consistent with section 1894(d)(1) of the 

Act that provides that payments will be 

made to PACE organizations in the same 

manner and from the same sources as 

payments are made to a 

Medicare+Choice (now MA) 

organization. 

In order to account for the shift in 

payer source for dual eligible and 

Medicare-only PACE enrollees, we 

believe that PACE organizations would 

elect to provide Part D coverage to their 

enrollees in order to receive payment for 

prescription drugs. We view the Part D 

requirements that are associated with 

payment as most directly relevant to 

PACE organizations. However, because 

all Part D requirements applicable to 

MA–PD local plans apply in a similar 

manner to PACE organizations, we also 

discuss a limited set of non-payment 

related Part D provisions that would be 

directly relevant to PACE. 

A background of the PACE model is 

provided below followed by a 

discussion of Part D requirements as 

they relate to PACE programs offering 

qualified prescription drug coverage. 

b. Background 

Sections 4801 through 4803 of the 

Balanced Budget Act of 1997 (Pub. L. 

105–33) established PACE as a Medicare 

benefit category and a State plan option 

under Medicaid. PACE organizations 

provide services to frail, elderly 

individuals as an alternative to nursing 

home placement. The PACE benefit 

includes all Medicare benefits under 

Parts A and B, all services in the 

Medicaid State plan, and any other 

service(s) deemed necessary by the 

PACE interdisciplinary team. The PACE 

benefit currently includes outpatient 

prescription drugs as well as over-thecounter medications that are indicated 

by the participant’s care plan. Thus, all 

PACE organizations have been 

providing the equivalent of qualified 

prescription drug coverage as described 

in proposed part 423. 

Similar to institutionalized 

individuals, PACE participants do not 

acquire their prescription drugs directly 

from pharmacies, except in unusual 

circumstances such as when a 

participant is away from the PACE 

organization’s service area and requires 

urgent care. Rather, the PACE 

organization either dispenses 

prescription drugs directly to 

participants from its own in-house 

pharmacy or obtains prescription drugs 

from a contracted pharmacy that 

delivers the medications to PACE 

participants. 

PACE organizations are risk-bearing 

entities that receive a capitated monthly 

rate from Medicare for Medicarecovered services and from Medicaid for 

Medicaid-covered services. As required 

by sections 1894(f)(2)(B) and 

1934(f)(2)(B) of the Act, the PACE 

organization pools payments received 

from all sources in order to provide all 

services needed by its enrollees, 

including services covered by neither 

Medicare nor Medicaid. Most PACE 

enrollees are dually eligible for 

Medicare and Medicaid; however, 

participants may be eligible for 

Medicare only or Medicaid only. 

Sections 1894(b)(1)(A) and 1934(b)(1)(A) 

of the Act require the PACE 

organization to provide all covered 

services to enrollees regardless of source 

of payment. PACE statutory language 

further clarifies that deductibles, copayments, coinsurance, or other costsharing responsibilities do not apply for 

PACE participants. Consequently, a 

PACE organization may not charge its 

participants any cost-sharing. We note 

that payment of premiums is permitted 

under the PACE statutory language. 

The PACE Medicare and Medicaid 

regulations are located in part 460 of 

title 42 of the CFR. As directed by 

sections 1894 and 1934 of the Act, these 

regulatory requirements are a blend of 

Medicare Advantage (MA) and 

Medicaid managed care requirements as 

well as requirements from the PACE 

Protocol that was created by On Lok, 

Inc. under a demonstration with the 

Secretary. Thus, although certain PACE 

requirements are the same or similar to 

the proposed MA requirements, most 

are unique to PACE. 

c. Payment Related Requirements for 

MA–PD Plans and PACE Organizations 

i. Part D Bids for Basic Prescription 

Drug Coverage 

Section 1860D–11(b) of the Act 

requires entities seeking to offer 

qualified prescription drug coverage 

under Part D, including MA–PD plans, 

PDPs, 1876 cost plans, and PACE 

organizations to participate in a bidding 

process. As discussed in § 423.279 of 

the proposed rule, these bids would 

serve as the basis for establishing a 

national average monthly bid amount 

under § 423.780 of our proposed rule 

that would be applicable to all plans, 

including PACE organizations. 

However, section 1860D–21(f)(3) of the 

Act specifies that the bids of certain 

plans, including PACE organizations, 

would not be included in the 

computation of the national average 

benchmark amount as well as the lowincome benchmark premium amount 

under § 423.780(a). 

In accordance with proposed subpart 

F, we are proposing that each PACE 

organization would submit a Part D bid 

that would reflect its average monthly 

revenue requirements to provide 

qualified prescription drug coverage, 

including enhanced alternative 

prescription drug coverage, for a Part D 

eligible individual with a national 

average risk profile. This bidding 

process would occur in a similar 

manner as for MA–PD plans and PDPs. 

In accordance with § 423.265(c)(3) of 

our proposed rule, the Part D bids 

would be prepared according to CMS 

guidelines on actuarial valuation and 

actuarially certified. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46755 

Plans would use qualified actuaries to 

prepare their bids in accordance with 

these principles. However, we are 

concerned that requiring small PACE 

organizations to independently contract 

with actuaries would be costly and 

burdensome. In order to minimize their 

cost, PACE organizations may choose to 

collectively contract with an outside 

actuary to develop the methodology for 

establishing a bid, however, each bid 

would need to be actuarily certified. We 

note that although each PACE 

organization’s bid would not necessarily 

be the same, all would follow the same 

methodology in that they would be 

required to include the cost of providing 

basic drug coverage. 

Since PACE organizations are 

required to enroll Medicare-only 

individuals who meet PACE eligibility 

requirements, all PACE organization 

bids would also be required to include 

the portion of the bid attributable to the 

cost of providing the enhanced 

alternative prescription drug coverage 

discussed later in this section. 

ii. Part D Premiums for Prescription 

Drug Coverage 

As stated previously, PACE 

organizations are required to provide 

uniform benefits to all enrollees 

regardless of source of payment. We 

have reviewed the proposed Title I 

regulation in conjunction with the 

PACE regulation and have identified 

that there would be 3 primary categories 

of PACE enrollees under the MMA: (1) 

Individuals enrolled in Medicaid, but 

not Medicare (Medicaid-only); (2) 

Individuals enrolled in Medicare and 

Medicaid (Dual eligibles); and (3) 

Individuals enrolled in Medicare, but 

not Medicaid (Medicare-only). Within 

the Medicare-only category of enrollees 

would be 3 subcategories: (a) Those 

individuals with income below 135 

percent of the Federal poverty line (FPL) 

and resources below three times the 

maximum amount of resources an 

individual may have and still be eligible 

for supplemental security income under 

Title XVI of the Act, (b) those 

individuals with income below 150 

percent of the FPL and resources in 

2006 that do not exceed $10,000 if 

single, or $20,000 if married as set forth 

under proposed § 423.773(d) and, (c) 

those individuals with income above 

150 percent FPL or resources that 

exceed the amounts set forth under 

§ 423.773(b)(2) or (d)(2). 

To ensure that PACE organizations 

receive payment for the Part D benefit 

that is consistent with the MMA and 

PACE statutory requirements, we are 

proposing policies to address these 

categories of PACE enrollees. We note 

that Medicaid-only PACE enrollees are 

ineligible for Part D prescription drug 

coverage. Prescription drug coverage 

offered by the State would be funded 

through the Medicaid portion of the 

monthly capitation rate paid to the 

PACE organization. 

Since section 1894 of the Act 

precludes cost sharing for PACE 

enrollees, our only option is to require 

PACE organizations to offer qualified 

prescription drug coverage without costsharing obligations. Therefore, for dual 

eligible and Medicare-only PACE 

enrollees, we are proposing that PACE 

organizations offer enhanced alternative 

prescription drug packages with no 

enrollee cost-sharing. For both dual 

eligibles and Medicare-only enrollees, 

CMS would pay PACE organizations a 

direct subsidy, as calculated under 

§ 423.329(a)(1). In addition, the PACE 

organization would receive low-income 

premium and cost sharing subsidy 

payments or partial subsidy payments 

for those enrollees who qualify for the 

low-income subsidy. We note that dual 

eligible beneficiaries are deemed 

eligible for the full low-income subsidy 

under § 423.773(c), which includes a 

premium subsidy up to the low-income 

benchmark premium amount under 

§ 423.780(a) or, if greater, the lowest 

beneficiary premium amount for a PDP 

offering basic prescription drug 

coverage in the PDP region where the 

beneficiary resides. We believe that as 

compared to larger PDPs and MA–PD 

plans, PACE organizations may lack the 

purchasing power to obtain significant 

discounts and other price concessions 

for covered Part D drugs. We, therefore, 

expect that some PACE organizations 

will submit bids under Part D that on 

average are higher than those submitted 

by other Part D plans. Consequently, 

because the low-income premium 

subsidy payments are based on regional 

bid averages, the premium subsidy 

payments received by PACE 

organizations might be lower than their 

Part D basic beneficiary premiums, and 

thus might not cover the full costs of 

providing dual eligible beneficiaries 

coverage for covered Part D drugs. 

(Section 1860D–13(a)(1) of the Act 

requires that the enrollee’s premium 

would be increased to cover this 

discrepancy between the plan bid and 

the national average monthly bid 

amount as described under 

§ 423.286(d)(1)). 

We are concerned about the impact on 

low-income PACE enrollees and request 

public comment on other approaches to 

handling this premium differential. We 

note also that Medicare-only 

beneficiaries who do not qualify for the 

low-income subsidy or only qualify for 

the partial low-income subsidy under 

§ 423.780(b) would also be responsible 

for paying the difference between the 

low-income premium subsidy and the 

plan’s beneficiary premium. 

The enhanced alternative prescription 

drug premium amount would be 

established by the PACE organization 

during the bidding process and would 

take into account the additional cost of 

providing a prescription drug package to 

enrollees without the application of 

cost-sharing. Premium amounts actually 

paid by PACE enrollees would vary for 

dual eligibles and for Medicare-only 

PACE enrollees depending on whether 

the enrollee qualifies for the low-income 

premium subsidy. 

Section 423.104(g)(2) of our proposed 

rule specifies that a plan may not offer 

enhanced alternative prescription drug 

coverage unless it also offers basic 

prescription drug coverage. In this 

instance, PACE organizations vary from 

MA–PD plans in that their enrollees are 

exempt from cost-sharing. It would be 

impractical to offer basic prescription 

drug coverage to PACE enrollees 

because stand-alone basic prescription 

drug coverage assumes beneficiary costsharing. As codified in § 423.458(d) of 

our proposed rule, section 1860D–

21(c)(2) of the Act establishes authority 

for CMS to waive Part D provisions for 

PACE organizations that: (1) Conflict 

with PACE provisions (2) duplicate 

PACE requirements; or (3) improve the 

coordination of benefits between Part D 

and PACE. Under this authority we are 

proposing to waive § 423.104(g)(2) for 

PACE organizations in order to promote 

coordination of benefits between Part D 

and PACE. 

Section 423.265(b) of our proposed 

rule specifies that each potential PDP 

sponsor or MA organization planning to 

offer an MA–PD plan must submit Part 

D bids and supplemental information 

not later than the first Monday in June 

for each prescription drug or MA–PD 

plan it intends to offer in the subsequent 

calendar year. 

The start-up of a new PACE 

organization may take from 2.5–3 years 

to develop the capacity to offer PACE 

services, including capital expenditures 

associated with constructing or 

renovating space for a PACE Center. In 

addition, as required by sections 1894 

and 1934 of the Act, many activities 

associated with PACE involve the 

States. For example, PACE applications 

are submitted to the State for review 

prior to CMS review and the PACE 

program agreement is a 3-party contract; 

CMS, the State in which the potential 

PACE program is located, and the PACE 

organization. We do not believe it 

would be appropriate for a potential 

46756 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

PACE organization to miss the deadline 

for submission of bids because of 

logistical issues associated with PACE. 

For these reasons, we are proposing to 

waive our proposed § 423.265(b). 

iii. Risk Corridor Payments 

Proposed §§ 423.308 and 423.336 

define allowable risk corridor costs and 

outline the risk corridor payment 

methodology. As stated previously, risk 

corridor payments allow plans to 

transition from administratively set 

payment rates to market based payment 

rates by limiting some of the risk of 

bidding. Their purpose is to adjust for 

significant differences in the projected 

cost and actual cost of providing basic 

prescription drug benefits. We have 

reviewed Part D risk corridor payment 

provisions and have determined that 

they do not conflict with the PACE 

requirement of full financial risk in 

§§ 1894(f)(2)(B)(v) and 1934(f)(2)(B)(v) 

of the Act. Therefore, we are proposing 

that PACE organizations would be 

eligible to participate in the Part D risk 

corridor provision. 

In accordance with proposed 

§ 423.308, PACE organizations would be 

required to track allowable risk corridor 

costs for all Part D eligible PACE 

enrollees for purposes of risk corridor 

payments. We note that the costs for 

Medicare only enrollees (who would be 

purchasing enhanced alternative 

prescription drug coverage) must be 

adjusted not only to exclude any costs 

attributable to benefits beyond basic 

coverage, but also to exclude any basic 

coverage costs determined to be 

attributable to increased utilization over 

the standard benefit as the result of the 

insurance effect of enhanced alternative 

coverage in accordance with CMS 

guidelines on actuarial valuation. 

iv. Reinsurance Payments 

Part D reinsurance payments are 

available to Part D plans for allowable 

reinsurance costs above the annual outof-pocket threshold. As discussed in 

Subpart C, only certain out-of-pocket 

costs, or true out-of-pocket expenditures 

(TrOOP), actually incurred by the 

beneficiary, another person, an SPAP, or 

paid for by CMS in the form of the lowincome cost sharing subsidy count 

toward the annual out-of-pocket 

threshold. Because PACE organizations 

are precluded from imposing costsharing on their enrollees, PACE 

enrollees will not incur any direct costsharing that would count toward 

TrOOP. However, for dual eligibles and 

other Medicare-only enrollees who 

qualify for the low-income subsidy, the 

low-income subsidy amounts received 

by the PACE programs will count 

toward the annual out-of-pocket 

threshold. Consequently, for enrollees 

with high drug costs that qualify for the 

low-income subsidy, PACE programs 

will be eligible for reinsurance 

payments. In accordance with proposed 

§ 423.800 PACE organizations would be 

required to track the application of lowincome cost sharing subsidies to be 

applied to the out-of-pocket threshold 

for purposes of reinsurance payments. 

In contrast, PACE organization will not 

receive any reinsurance payments for 

Medicare-only enrollees who do not 

qualify for the low-income subsidy, 

since these individuals will have no 

incurred costs that count toward the 

out-of-pocket threshold. 

We request public comment 

concerning the impact of these rules on 

PACE organizations. We are particularly 

interested in receiving drug utilization 

information from PACE organizations. 

We also request public comments 

identifying additional alternatives for 

providing comparable prescription drug 

benefits to PACE enrollees. 

d. Application of Additional MA–PD 

Plan Requirements to PACE 

Organizations 

As discussed previously, § 423.458(d) 

establishes regulatory authority for CMS 

to waive Part D provisions for PACE 

organizations. Section 423.458(d) states 

that PACE organizations may request 

waivers from CMS. Initially, CMS will 

identify Part D provisions on behalf of 

PACE organizations that we believe 

require waivers. We have identified the 

non-payment related Part D provisions 

listed below to waive on behalf of PACE 

organizations. The provisions identified 

below do not represent an exhaustive 

list of all necessary waivers. We request 

public comment identifying any 

additional Part D requirements that 

meet the criteria of section 1860D–

21(c)(2) of the Act. We plan to provide 

this more comprehensive listing of Part 

D provisions that CMS would waive on 

behalf of PACE organizations. 

i. Requirements for Providing 

Information About Part D 

Sections 423.48 and 423.128 of the 

proposed regulation specify 

requirements for providing information 

about Part D and for the dissemination 

of plan information. Plans would be 

required to provide information to CMS 

regarding benefits, formularies, 

premiums, cost sharing, and enrollee 

satisfaction. This information would be 

published in Medicare’s comparative 

plan brochures and provide key 

information for beneficiaries to use in 

making informed decisions about Part D 

prescription drug coverage. 

We believe that the differences 

between MA–PD plans/PDPs and PACE 

would complicate comparison and 

confuse beneficiaries. In addition to 

specific eligibility requirements for 

enrollment in PACE, PACE 

organizations exist only in those States 

that elect to include PACE in their 

Medicaid State plan. We are concerned 

that including PACE information in the 

comparative plan brochure would be 

misleading and specifically request 

public comment on the advantages and 

disadvantages of including PACE in the 

MA–PD/PDP comparative brochure. We 

are proposing that PACE organizations 

receive a waiver of this requirement in 

order to promote better coordination of 

the benefits under PACE and Part D. 

ii. Negotiated Prices 

Section 423.104(g) of the proposed 

rule would require MA–PD plans and 

PDPs to provide enrollees with access to 

negotiated drug prices. Since PACE 

enrollees receive the vast majority of 

their prescription drugs directly from 

the PACE organization with no cost 

sharing applied, the negotiated price 

requirement is already accounted for 

under part 460. Therefore, we are 

proposing a waiver of § 423.104(g) in 

order to promote better coordination of 

benefits between Part D and PACE. 

iii. Access to Pharmacy Networks 

Section 423.120(a)(1) of the proposed 

rule would require that a plan’s 

contracted pharmacy network be located 

within specified distances from 

enrollees. Because PACE enrollees 

receive their prescription drugs directly 

from their PACE organization as 

opposed to through a pharmacy, the 

distance between the enrollee and a 

network pharmacy is irrelevant. We 

believe that requiring a PACE 

organization to set up a pharmacy 

network would be burdensome, costly, 

and unnecessary and diverts funds from 

patient care. Thus, we are proposing to 

waive this requirement in order to 

promote better coordination of benefits 

between PACE and Part D. 

iv. Single Card, Standardized 

Technology 

Section 423.120(c) of the proposed 

rule would require plans to employ the 

use of a card or other type of 

standardized technology to assist 

enrollees in accessing negotiated prices 

for Part D drugs. Since PACE 

participants do not routinely acquire 

their prescription drugs directly from 

pharmacies, requiring PACE 

organizations to develop standardized 

technology would be burdensome, 

costly, and unnecessary and diverts 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46757 

funds away from patient care. Therefore, 

we are proposing to waive proposed 

§ 423.120(c) under the authority of 

1860D–21(c)(2) of the Act for PACE 

organizations to promote better 

coordination of benefits between Part D 

and PACE. 

v. Out-of-Network Pharmacies 

Section 423.124 of the proposed rule 

specifies access requirements for drugs 

obtained through out-of-network 

pharmacies. These provisions would 

ensure that enrollees residing in long 

term care facilities have access to drugs 

in an out-of-network long term care 

pharmacy and AI/AN enrollees have 

access to an out-of-network I/T/U 

pharmacy. Enrollees who obtain their 

Part D covered drugs from these out-ofnetwork pharmacies would be 

financially responsible for deductibles 

or cost-sharing applicable under 

network pharmacies. 

Under the current PACE regulations 

in §§ 460.90(a) and 460.100, PACE 

organizations are responsible for all 

prescription drugs, including those 

provided to any participants residing in 

long term care facilities, AI/AN, and 

those associated with an emergency 

health event or an approved urgent care 

need. As noted previously, PACE 

participants are not responsible for 

deductibles, co-payments, coinsurance, 

or other cost sharing associated with 

prescription drugs. In the PACE 

program, when participants are out of 

the service area and need prescription 

drugs, the PACE organization would 

arrange payment in full with the 

pharmacy. 

As noted previously, PACE 

organizations are required to provide all 

PACE enrollees with prescription drug 

coverage. Therefore, we view the out of 

network pharmacy requirements as 

duplicative of PACE regulations. Thus, 

we are proposing to waive § 423.124 of 

the proposed rule for the reasons noted 

above. 

vi. Disclosure of Price Difference 

Between Part D Drug and Generic 

Equivalent 

Public disclosure requirements in 

proposed § 423.132 provide that a PDP 

or MA–PD plan must ensure that its 

pharmacies inform enrollees of any 

differential between the negotiated price 

for a covered Part D drug and the lowest 

priced generic equivalent. This 

requirement is inconsistent with the 

PACE model. PACE participants or their 

caregivers work with the PACE 

interdisciplinary team in making care 

planning decisions and have input into 

all aspects of their care, including 

prescription drug use. For this reason, 

we are proposing a waiver of the public 

disclosure requirement in proposed 

§ 423.132 under the authority of section 

1860D–21(c)(2) of the Act for PACE 

organizations in order to promote better 

coordination of benefits between Part D 

and PACE. 

vii. Privacy, Confidentiality, and 

Accuracy of Records Requirements 

Requirements associated with 

privacy, confidentiality, and accuracy of 

enrollees’ records under Part D are 

included in proposed § 423.136. We 

view these requirements as duplicative 

of § 460.200(e) of the PACE regulation. 

We believe that the PACE regulations 

are providing the same protections as 

would be provided under proposed 

§ 423.136. For the reasons noted above, 

we are proposing to waive § 423.136. 

viii. Medication Therapy Management 

Program 

The medication therapy management 

program requirements in proposed 

§ 423.150 would require MA–PDs and 

PDPs to employ pharmacists to counsel 

beneficiaries who have chronic 

conditions and use multiple drugs to 

ensure they are taking safe combinations 

of prescription drugs and using the 

drugs properly. PACE enrollees 

typically suffer from multiple health 

conditions that necessitate close 

monitoring by their interdisciplinary 

team. Currently, PACE organizations 

have pharmacists on staff or under 

contract, working with PACE primary 

care physicians as they develop the 

participants’ care plans and monitor 

their drug regimens. In addition, the 

PACE interdisciplinary team, through 

its daily interactions with PACE 

participants and their caregivers, 

provides counseling to ensure that 

medication regimens are followed. We 

believe that the existing PACE 

regulations satisfy or exceed the 

medication therapy management 

program requirements in proposed 

§ 423.150. For the reasons noted above, 

we are proposing to waive proposed 

§ 423.150 for PACE organizations. 

ix. Licensing 

Proposed § 423.401 specifies licensing 

requirements for PDPs. A PDP must be 

organized and licensed under State law 

as a risk-bearing entity eligible to offer 

health insurance or health benefits 

coverage in each State in which it offers 

a prescription drug plan. A similar 

requirement exists for MA–PDs. 

Organizations that are not licensed 

under State law would obtain 

certification from the State that the 

organization meets financial solvency 

and other standards required by the 

State for it to operate. 

We view these requirements as 

duplicative of PACE requirements. First, 

sections 1894(e)(2)(iv) and 1943(e)(2)(iv) 

of the Act require PACE organizations to 

meet applicable State and local laws 

and requirements. In addition, sections 

1894(f)(2)(B)(v) and 1934(f)(2)(B)(v) of 

the Act require PACE organizations to 

be at full financial risk. Therefore, we 

believe PACE organizations are meeting 

the intent of these MA requirements. 

For the reasons noted above, we are 

proposing to waive § 423.401 for PACE 

because we believe they are duplicative 

of PACE requirements. 

x. Determinations and Appeals 

Processes 

Proposed process requirements for 

grievances, coverage determinations, 

reconsiderations, and appeals under 

Part D are discussed in Subpart M. We 

believe the PACE grievance and appeals 

processes under §§ 460.120 and 460.122 

meet the intent of the MMA since they 

would accommodate complaints 

regarding prescription drug coverage. 

Therefore, we are proposing to waive 

§§ 423.560–423.638 for PACE 

organizations because we believe they 

are duplicative of PACE requirements. 

xi. Application Process 

Subpart K of proposed part 423 

includes requirements governing the 

application process, contracts with PDP 

sponsors, and reporting requirements. 

Sections 1894 and 1934 of the Act, as 

well as PACE regulations in subparts B 

and C specify application and contract 

(called a program agreement in 

accordance with sections 1894 and 1934 

of the Act) requirements for PACE that 

duplicate requirements in subpart K. 

For this reason, we are proposing to 

waive the sections in proposed subpart 

K that address the application process 

and contract requirements. 

We invite comments on the MMA 

requirements we have proposed to be 

waived for PACE organizations and ask 

for comment on additional waivers that 

may be needed to integrate the Medicare 

prescription drug benefit and the PACE 

benefit. 

4. Medicare Supplemental Policies 

a. Overview and Background 

In this proposed rule, we are 

including two provisions related to 

Medicare supplemental (Medigap) 

policies. As required under section 

1882(v), as added by section 104 of 

MMA, we are setting forth standards for 

the written disclosure notice that 

Medigap insurers must provide to their 

46758 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

policyholders who have drug coverage. 

In addition, in order to reflect the 

addition of the Medicare drug benefit by 

MMA, we are proposing to revise the 

definition of a Medigap policy. 

i. Medicare Supplemental Policies 

A Medicare supplemental (Medigap) 

policy is a health insurance policy sold 

by private insurance companies to fill 

the ‘‘gaps’’ in original Medicare plan 

coverage. A Medigap policy typically 

provides coverage for some or all of the 

deductible and coinsurance amounts 

applicable to Medicare-covered services 

and sometimes covers items and 

services that are not covered by 

Medicare. Under section 1882 of the 

Social Security Act (Act), Medigap 

policies generally may not be sold 

unless they conform to one of the 10 

standardized benefit packages that have 

been defined, and designated as plans 

‘‘A’’ through ‘‘J,’’ by the National 

Association of Insurance Commissioners 

(NAIC). Three States (Massachusetts, 

Minnesota, and Wisconsin) have 

different standardized Medigap plans 

and are sometimes referred to in this 

context as the ‘‘waiver’’ States. 

Three of the 10 standardized Medigap 

plans (Plans H, I, and J) contain 

coverage for outpatient prescription 

drugs. In addition, there are Medigap 

policies issued before the 

standardization requirements went into 

effect (‘‘prestandardized’’ Medigap 

plans) that cover drugs, as well as 

Medigap policies in the waiver States, 

some of which have varying levels of 

coverage for outpatient prescription 

drugs. 

ii. Legislative Authority and 

Background 

In connection with the addition of a 

prescription drug benefit to Medicare, 

the MMA also prescribes changes to the 

law applicable to Medigap policies. 

Among other requirements, section 

1882(v) of the Social Security Act, as 

added by section 104 of the MMA, 

requires Medigap issuers to provide a 

written disclosure notice to individuals 

who currently have a policy with 

prescription drug coverage. (Section 

1882(v)(6)(A) specifies that this is to be 

called a ‘‘Medicare Rx policy.’’) The 

MMA also requires that the Secretary 

establish standards for this disclosure 

notice in consultation with the National 

Association of Insurance Commissioners 

(NAIC). 

The purpose of this disclosure notice 

is to inform an individual who has a 

Medigap Rx policy about his or her 

Medigap choices once the new Medicare 

Prescription Drug Benefit Program 

(Medicare Part D) goes into effect on 

January 1, 2006. Specifically, effective 

on that date, section 1882(v) will 

prohibit the sale of new Medigap Rx 

policies, and require the elimination of 

drug coverage from Medigap Rx policies 

held by beneficiaries who enroll under 

Part D. The statute permits the renewal 

of Medigap Rx policies if the policy was 

purchased prior to January 1, 2006, and 

the individual does not enroll in Part D. 

In addition, beneficiaries who do not 

enroll in Part D during the Initial 

Enrollment Period, and choose to enroll 

later, will be charged higher Part D 

premiums unless they can establish that 

they had creditable prescription drug 

coverage prior to enrolling in Part D. 

Under section 1860D–13(b)(4)(F) of the 

Act, and § 423.56(a) of this proposed 

rule, Medigap policies meet the 

definition of creditable prescription 

drug coverage if they also meet actuarial 

equivalence requirements. 

Issuers of Medigap insurance policies 

are required to provide disclosure 

notices to policyholders with Medigap 

Rx policies that inform them of their 

options under the new legislation, as 

well as informing them whether or not 

their policies constitute ‘‘creditable 

prescription drug coverage.’’ As 

explained in the preamble to Subpart B 

of this proposed rule, to be considered 

creditable prescription drug coverage, 

the coverage must be determined (in a 

manner specified by the Secretary) to 

provide prescription drug coverage the 

actuarial value of which (as defined by 

the Secretary) equals or exceeds the 

actuarial value of standard prescription 

drug coverage under Medicare Part D. 

Subparts B and F of this proposed rule 

provide additional detail on creditable 

coverage and actuarial equivalence. 

b. Definition of Medicare Supplemental 

Policy 

Because of the importance of these 

disclosure notices to beneficiaries, we 

believe it is necessary to clarify what 

comes within the scope of a Medigap Rx 

policy. We are proposing to revise and 

clarify the definition of a Medicare 

supplement (Medigap) policy, currently 

codified at 42 CFR 403.205, to reflect 

the addition of the Medicare drug 

benefit by MMA. There was some 

ambiguity in the past about whether a 

policy that covered only prescription 

drugs, either as a separate, ‘‘stand-alone’’

policy or as a rider to another policy, 

met the definition of a Medigap policy. 

The ambiguity was created by the fact 

that there was no Medicare drug benefit 

to supplement, and has been resolved 

with the enactment of the Medicare 

drug benefit. There has also been some 

confusion about whether a rider 

attached to a Medigap policy is 

considered to be part of the policy, and 

therefore subject to Medigap 

requirements. 

Accordingly, we propose to revise the 

definition of a Medigap policy, effective 

January 1, 2006, to include any 

insurance policies or riders that contain 

a prescription drug benefit, and that are 

primarily designed for, or are primarily 

marketed and sold to Medicare 

beneficiaries. We are also proposing to 

clarify that any rider attached to a 

Medigap policy is an integral part of the 

policy. All the requirements that apply 

to the base policy, such as guaranteed 

renewability or disclosure requirements, 

would apply to the rider. Thus, for 

instance, if an insurer offers an optional 

prescription drug rider that can be 

added to any other policies, addition of 

the rider would make the entire policy 

a Medigap prescription drug policy 

(Medigap Rx policy) subject to the 

disclosure requirements for these 

policies in section 1882(v) of the Act. 

Moreover, any stand-alone drug 

policies that were not previously 

considered to meet the definition of a 

Medigap policy, will meet that 

definition as of January 1, 2006, when 

the prescription drug benefit takes 

effect, and new sales of these policies 

would be prohibited after that date. 

c. Standards for the Disclosure Notice 

That Medicare Supplemental (Medigap) 

Issuers Are Required To Provide Current 

Policy Holders With Drug Coverage 

i. General 

We believe that the statute is quite 

clear about the choices that need to be 

made by beneficiaries who hold 

Medigap Rx policies. Therefore, we 

propose to establish standards for the 

disclosure notice in the form of a 

required notice that sets forth those 

choices. The proposed notice is set forth 

below. 

ii. Timing and Content of the Disclosure 

Notice 

The statute requires Medigap issuers 

to send a written disclosure notice to 

each individual who is a policyholder 

or certificate holder of a Medigap Rx 

policy at the most recent available 

address of that individual. The issuers 

must send the disclosure notice during 

the 60-day period immediately 

preceding the initial Medicare Part D 

enrollment period. The initial 

enrollment period (IEP) for Medicare 

Part D runs from November 15, 2005 

through May 15, 2006. Accordingly, 

Medigap issuers must send the written 

disclosure notice between September 

16, 2005 and November 15, 2005. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46759 

The written disclosure notice must 

inform the individual of his or her 

Medigap options if the individual does 

or does not enroll in Medicare Part D. 

These include the following: 

• If the individual does enroll in Part 

D, he or she can keep the Medigap 

policy but the drug coverage must be 

eliminated. 

• If the individual enrolls in a 

Medicare Part D Prescription Drug Plan 

(PDP) during the initial enrollment 

period (IEP), the individual also has the 

right to buy another Medigap plan, from 

the same issuer, that does not include 

drug coverage. The individual has a 

guaranteed right to buy Plan A, B, C, or 

F (including the high deductible Plan F) 

or one of the new Medigap benefit 

packages mandated by section 104(b) of 

the MMA (which are expected to be 

designated K and L), if these plans are 

offered by the issuer and available to 

new enrollees. The issuer may also offer 

other Medigap plans on a guaranteed 

issue basis. 

• If the individual does not enroll in 

Part D, he or she has the option of 

keeping the Medigap policy with drug 

coverage. 

• If the individual does not enroll in 

Part D during the IEP, the individual 

may continue enrollment in his or her 

current Medigap plan without change, 

but the individual will lose the right to 

buy another Medigap plan on a 

guaranteed issue basis. In addition, if 

the current Medigap plan does not 

provide creditable prescription drug 

coverage, there are limitations on the 

periods in a year in which the 

individual may enroll in Medicare Part 

D and any such enrollment may be 

subject to a late enrollment penalty 

(increased premium) if the current 

Medigap plan does not provide 

creditable prescription drug coverage. 

We also propose to require that the 

disclosure notice contain information 

on the potential impact of an 

individual’s election on his or her 

Medigap premiums. 

It is important to note that the 

disclosure requirement in section 104 of 

the MMA that applies to Medigap 

issuers is separate from the disclosure 

requirement contained in section 101 of 

the MMA (section 1860D–13 of the Act). 

The disclosure requirement in section 

104 of the MMA applies exclusively to 

issuers of Medigap policies and contains 

very specific statutory criteria for the 

disclosure notice. The disclosure 

requirement in section 101 of the MMA 

applies to various forms of prescription 

drug coverage, including Medigap. See 

Subpart B. 

The MMA requires that these entities, 

including Medigap issuers, disclose to 

the Secretary, as well as to the Part D 

eligible individuals, whether the 

coverage they provide currently meets 

the actuarial equivalence requirement 

for creditable coverage. The entities 

must also notify the individuals if the 

coverage changes so that it no longer 

meets the actuarial equivalence 

requirement. Section 101 of the MMA 

directs the Secretary to establish 

procedures for the documentation of 

creditable prescription drug coverage by 

these entities. We are developing 

procedures for the disclosure 

requirements in section 101 of the 

MMA. In Subpart B of this proposed 

rule, we provide a discussion of the 

disclosure provisions in section 101 of 

the MMA. 

iii. Medigap Policies as Creditable 

Coverage 

Medigap issuers will be responsible 

for determining whether the drug 

coverage under their policies is 

creditable drug coverage in accordance 

with the final rule implementing the 

Part D drug benefit. However, The CMS 

actuaries have determined that, if the 

final Part D regulations were to reflect 

the definition of creditable prescription 

drug coverage in this proposed rule, 

drug coverage in standardized Medigap 

Plans H and I would not meet such a 

standard. Since actuarial equivalence 

can be demonstrated using a group’s 

experience, it is possible to have a 

specific group for which the drug 

coverage in standardized Medigap Plan 

J would be creditable prescription drug 

coverage. However, based on the 

distributions of drug utilization that the 

actuaries have seen so far, they believe 

that drug coverage in standardized 

Medigap Plan J would be unlikely to 

meet the definition of creditable 

prescription drug coverage based on this 

proposed rule. We caution, however, 

that whether or not coverage is 

creditable cannot be determined until 

we have issued a final rule 

implementing the new Part D drug 

benefit. 

iv. Required Disclosure Notice 

The disclosure notice set forth below 

contains the basic language that would 

be required to be included in all 

disclosure notices sent by Medigap 

issuers. It also proposes specific 

language to be included for policies that 

do not provide creditable coverage. We 

propose to use the same basic model for 

policies that do provide creditable 

coverage, but we are not proposing exact 

language at this time. We are instead 

inviting comments on how the draft 

notice could be adapted for the types of 

policies that might provide creditable 

coverage. As noted above, it is highly 

unlikely, though theoretically possible, 

that a standardized Plan J could be 

found to provide creditable coverage. In 

addition, some pre-standardized 

policies with drug coverage, as well as 

policies sold in any of the three 

‘‘waiver’’ states of Massachusetts, 

Minnesota and Wisconsin might qualify. 

We would, however, note that we 

expect to require that the notice 

informing policyholders that they do 

have creditable coverage must advise 

them that they may be subject to late 

enrollment penalties under Part D if 

they eventually enroll in a Part D plan 

and have not maintained the creditable 

drug coverage they have under their 

Medigap policies. 

In addition, we plan to work with the 

waiver States so that in the event the 

coverage offered in those States meets 

the definition of creditable coverage, 

there will be a required disclosure 

notice appropriate for use in those 

States. We are also soliciting comments 

on what to include in these potential 

model disclosure notices. 

The following is a proposed 

disclosure notice for Medigap issuers to 

use for Medigap policies that do not 

have creditable drug coverage. As stated 

above, this group likely will include 

standardized Medigap Plans H, I, and J, 

as well as prestandardized Medigap 

plans, or plans sold in waiver states, 

that do not provide creditable drug 

coverage. The information shown in 

brackets represents text that may be 

modified by the Medigap issuer based 

on State law or the issuer’s own 

policies. For example, if the Medigap 

issuer wishes to offer additional plans 

on a guaranteed issue basis if the 

individual enrolls in Medicare Part D 

during the IEP and wants to buy a 

Medigap plan without drug coverage, 

the issuer may tailor the required 

language to add that guaranteed issue 

offering. 

This draft disclosure notice reflects 

consultation with the NAIC. We 

provided the NAIC with an earlier draft 

of the disclosure notice. After having an 

opportunity to review our disclosure 

notice, the NAIC’s Senior Issues Task 

Force prepared its own version of the 

draft disclosure notice. We participated 

in lengthy discussions of these draft 

versions of the disclosure notice at 

NAIC meetings and during conference 

calls. The disclosure notice largely 

reflects the disclosure notice developed 

by the NAIC’s Senior Issues Task Force. 

We have, however, made some changes 

to ensure that the draft fully complies 

with the statutory requirements and we 

will consult further with the NAIC. 

46760 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

The draft model disclosure notice text 

follows: 

Important Notice to Medicare Supplement 

Policyholders Who Have Prescription Drug 

Benefits 

You have a Medicare Supplement 

(Medigap) policy from [name of company] 

that includes an outpatient prescription drug 

benefit. Please read this entire notice about 

your Medigap policy and the new Medicare 

Prescription Drug Program (Medicare Part D). 

The coverage options that will be available to 

you under Part D beginning January 1, 2006 

will provide greater value than your current 

coverage. It is important to know this because 

it will affect the important choices you have 

to make about your drug coverage. 

You can enroll in the new Medicare 

Prescription Drug Program (Medicare Part D) 

from November 15, 2005 to May 15, 2006. 

Medicare Part D is voluntary; you can choose 

to enroll or not to enroll. There are two ways 

to enroll in Medicare Part D. If you want to 

stay in Original Medicare with a Medigap 

policy, you can enroll in a Prescription Drug 

Plan (PDP). Or you may choose to enroll in 

a Medicare Advantage (MA) plan that covers 

prescription drugs. If you enroll in a 

Medicare Advantage plan that covers 

prescription drugs, you will get all your 

Medicare benefits from that plan and you 

may get little benefit from a Medigap policy. 

Call 1–800-MEDICARE (1–800–633–4227) or 

visit www.medicare.gov on the web for more 

information about Medicare Advantage or 

Medicare Part D. 

If You Do Not Enroll in Part D 

If you decide not to enroll in the new 

Medicare Prescription Drug Program 

(Medicare Part D), you can keep your current 

Medigap policy without changes and you do 

not need to do anything in reply to this 

notice. However, because the outpatient 

prescription drug benefit in your policy is 

not equal in value to the Medicare Part D 

benefit, you should keep in mind that you 

will probably be charged higher Part D 

premiums if you want to enroll in Medicare 

Part D after May 15, 2006. Make sure you 

read the section called ‘‘If You Enroll in 

Medicare Part D After May 15, 2006.’’

If You Enroll in Part D By May 15, 2006 

If you enroll in the new Medicare 

Prescription Drug Program (Medicare Part D) 

through a PDP on or before May 15, 2006 and 

you want to keep a Medigap policy, you have 

the following options: 

You can keep your current Medigap policy, 

but Federal law requires us to remove the 

prescription drug coverage, and adjust your 

premium. [In your case, the new premium 

will be [issuer insert dollar amount of 

premium]]; If you choose this option, you 

must notify us promptly of the effective date 

of your Part D enrollment so that we can 

remove the drug coverage from your policy 

as of that date. [Insert options for notifying 

issuer] 

or 

You can cancel your existing policy and 

enroll in one of our other plans that does not 

contain outpatient prescription drug coverage 

[Plans A, B, C, F (including the high 

deductible Plan F), and the plans likely to be 

designated K or L] [issuer insert plans from 

above list that you currently offer or any 

others you may want to offer], regardless of 

your health. [Descriptions of these plans and 

their current premiums are enclosed—OR—

If you would like information about one or 

more of these plans, please contact us at 1–

800–000–0000 or www.issuer.com]. [If you 

want a new Medigap policy, you must apply 

for it within 63 days of your enrollment in 

the new Medicare Prescription Drug Program 

(Medicare Part D)]. You must notify us 

promptly of the date your Part D enrollment 

will begin so that we can start your new 

policy without drug coverage as of that date. 

If you enroll in Part D and you do not 

apply for a different Medigap policy, you can 

keep your current Medigap policy but the 

drug coverage will be removed from the 

policy, as described in Option #1. 

If You Enroll in Medicare Part D After May 

15, 2006 

If you do not enroll in the Medicare 

Prescription Drug Program (Medicare Part D) 

during the initial Medicare Part D enrollment 

period, but want to do so after May 15, 2006, 

you need to know [three] things. 

1. There are limitations on when you can 

enroll in Medicare Part D. Generally, you will 

only be able to enroll between November 

15th and December 31st each year. 

2. Because you will be enrolling after May 

15, 2006, you will have to pay a higher 

monthly premium for Medicare Part D than 

if you enrolled by May 15, 2006, unless you 

have other coverage that qualifies you to 

enroll without a late enrollment penalty. You 

will pay this higher premium for as long as 

you have Part D coverage. Also, the longer 

you wait to join Part D, the higher your 

premium will be. 

3. You may not be able to enroll in another 

Medigap policy with our company, as you 

could have if you had enrolled in Medicare 

Part D by May 15, 2006. You will be able to 

keep your current policy with the drug 

benefit removed. 

If you enroll in Medicare Part D after May 

15, 2006, please let us know as soon as 

possible. Federal law requires us to remove 

the prescription drug benefit from your 

Medigap policy and adjust your premium. 

Effect on Premiums 

In making your decision about what to do, 

please keep in mind that the law requires us 

to make changes to our plans. These changes, 

and the decisions that policyholders like you 

will make, will have an effect on future 

premiums. Please contact us so we can 

discuss the likely differences in premiums, 

depending on which choices you make now 

and how those premiums may change over 

time. 

Assistance 

If you need help understanding your 

choices, please contact us at 1–800–000–0000 

or www.issuer.com for more information 

[insert issuer phone number and website 

address]. 

Your State Health Insurance Assistance 

Program (SHIP) can help you with 

information about your Medigap policy and 

the new Medicare Prescription Drug Program 

(Medicare Part D). You can reach the SHIP 

Program [at insert SHIP number—OR by 

finding your State’s Program number on the 

next page]. 

For more information about Medicare Part 

D, call 1–800–MEDICARE (1–800–633–4227). 

Information is also available at 

www.medicare.gov on the web. 

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 30-day 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 OMB should approve 

an information collection, section 

3506(c)(2)(A) of the PRA requires that 

we solicit comment 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. 

Below is a summary of the proposed 

information collection requirements 

outlined in this regulation. We are 

soliciting comment on these proposed 

requirements, before they are submitted 

to OMB for PRA approval. 

Subpart A—General Provisions 

Subpart A does not contain any 

requirements subject to the PRA. 

Subpart B—Eligibility and Enrollment 

Section 423.34 Enrollment process 

(b) A Part D eligible individual 

seeking to enroll in a PDP must 

complete and submit the PDP’s 

enrollment form to the PDP prior to 

enrollment. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit 

the required enrollment application to a 

PDP sponsor. We estimate that it will 

take 30 minutes to complete and submit 

the required application to the PDP. 

During the first Part D initial enrollment 

period, it is estimated that 24 million 

individuals will complete and submit 

these applications. This estimate is 

based on preliminary estimates of the 

number of individuals who will enroll 

in PDPs in 2006. In 2007, and beyond, 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46761 

the number of enrollments will be 

substantially less, since an individual 

will generally be limited to changing 

PDPs during the annual coordinated 

election period, therefore, it is estimated 

6 million individuals may change their 

PDPs annually and that 2 million new 

beneficiaries will be making first time 

elections into PDPs. 

(c) A PDP sponsor must provide each 

individual with prompt notice of 

acceptance or denial of the individual’s 

enrollment request. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor to disclose 

to an individual notice of acceptance or 

denial of the individual’s enrollment 

request. Although we have no basis at 

this time for estimating either the 

number of regions or the number of 

participating plans, a rough estimate is 

that during the first Part D initial 

enrollment period a total of 24 million 

notices will be disclosed, affecting 

approximately 100 PDPs (based upon an 

estimate of 2 PDPs per 50 states, if each 

state were to be a region, or 

alternatively, 4 PDPs for each of 25 

regions). Given that each PDP will be 

creating disclosure notices for mass 

mailings, we are proposing the 

following burden estimates. We estimate 

that it will take each PDP approximately 

8 hours to produce each notice—either 

an acceptance or a denial notice must be 

provided. We further estimate that on 

average, it will take each PDP sponsor 

1 minute to assemble and disseminate 

each notice. We further estimate that on 

average, it will take each sponsor 4,000 

hours to disclose 240,000 notices during 

this first year. In 2007, and beyond, we 

estimate that 60,000 notices will be 

disclosed annually at 1,000 hours per 

sponsor. This assumption is based on 

that fact that once the notices have been 

standardized, a PDP sponsor will massproduce and mail the required notices. 

Section 423.36 Enrollment Periods 

(c) An individual is eligible to enroll 

in a Part D plan, enroll in a PDP, or 

disenroll from a PDP and enroll in 

another PDP, if the individual 

demonstrates to CMS, in accordance 

with guidelines CMS issues, that the 

PDP sponsor offering the PDP 

substantially violated a material 

provision of its contract under this part 

that meets the requirements set forth in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit 

the required materials to CMS 

demonstrating that a PDP substantially 

violated a material provision of its 

contract. Based on our experience with 

the current Medicare+Choice program, 

we would expect that few, if any, 

individuals will avail themselves of this 

option. Generally, in those instances 

where CMS has found that an M+C 

organization has substantially violated a 

material provision of its contract, CMS 

has taken the necessary action on behalf 

of these individuals. Thus, we do not 

estimate any burden on individuals 

under this provision. 

Section 423.42 Coordination of 

Enrollment and Disenrollment Through 

PDPs. 

(a) An individual may enroll in, or 

disenroll from a PDP during the 

enrollment periods specified in 

§ 423.36, by filing the appropriate 

enrollment form with the PDP sponsor 

or through other mechanisms CMS 

determines appropriate. 

The burden associated with this is 

discussed above in §§ 423.34 and 423.36 

of the PRA section. 

(c) Each PDP sponsor must submit 

every disenrollment notice to CMS 

within timeframes CMS specifies. The 

PDP sponsor must also provide each 

enrollee with a notice of disenrollment 

and file and retain disenrollment 

requests for the period specified in CMS 

instructions. 

The burden associated with these 

requirements is the time and effort 

necessary for a PDP sponsor to disclose 

the disenrollment notice to each 

enrollee and CMS, and file/retain 

disenrollment requests for the period 

specified in CMS instructions. We 

estimate that on an annual basis there 

will be approximately 24,000 

disenrollments per PDP sponsor. Given 

that each sponsor will be creating a 

standardized disclosure notice for mass 

mailings, we are proposing the 

following burden estimates. We estimate 

that it will take each PDP sponsor 

approximately 8 hours to produce the 

standardized notice. We further estimate 

that on average, it will take each PDP 

sponsor 1 minute to disclose each notice 

and that on average each PDP sponsor 

will be required to disclose 24,000 

notices on an annual basis for an annual 

burden of 400 hours. Once the notice 

has been disclosed to the enrollee the 

PDP sponsor will forward a copy of the 

notice to CMS on a batch basis. We 

estimate that it will require each PDP 

sponsor 52 hours on an annual basis to 

send the batch files of disenrollment 

notices to CMS on an annual basis. In 

regard to the record retention 

requirement we estimate that it will 

require each of the PDP sponsors 52 

hours on an annual basis to maintain 

the required documentation. While this 

estimate may appear low, we believe the 

retention of the documentation will 

most likely be an automated process. 

Section 423.44 Disenrollment by the 

PDP. 

(c) If the disenrollment is for any of 

the reasons specified in paragraphs 

(b)(1), (b)(2)(i), or (b)(iv) of this section, 

the PDP sponsor must give the 

individual timely notice of the 

disenrollment, that meets the 

requirements set forth in this section, 

with an explanation of why the PDP is 

planning to disenroll the individual. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor to disclose 

to an individual notice of disenrollment. 

We estimate that on an annual basis it 

will require a total of 576,100 notices, 

affecting each PDP sponsors to some 

degree, as described below. Given that 

each PDP sponsor will be creating 

disclosure notices for mass mailings, we 

are proposing the following burden 

estimates. We estimate that it will take 

each PDP sponsor approximately 8 

hours to produce the standardized 

notice. We further estimate that on 

average, it will take each PDP 1 minute 

to disclose each notice. Burden 

estimates for these disenrollments are 

provided below. 

(d) A PDP sponsor may disenroll an 

individual from the PDP for failure to 

pay any monthly premium if the PDP 

sponsor can demonstrate to CMS that it 

made reasonable efforts to collect the 

unpaid premium amount. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor to submit 

the required materials to CMS 

demonstrating that the PDP sponsor 

made reasonable efforts to collect the 

unpaid premium amount and the time 

and effort necessary for a PDP sponsor 

to disclose to an individual the notice 

of disenrollment. We estimate that it 

will take a PDP 5 minutes to submit the 

required documentation to CMS for 

each occurrence and that each of the 

PDP sponsors will be required to submit 

the necessary documentation to CMS 

960 times on an annual basis. We 

estimate that on an annual basis 96,000 

individuals will be disenrolled for 

failure to pay premiums, and it will take 

each PDP 1 minute to disclose each 

notice and that each PDP will be 

required to disclose 960 notices on an 

annual basis for a annual burden of 16 

hours. 

To disenroll an individual from its 

PDP, based on an individual’s behavior, 

the PDP sponsor must document the 

enrollee’s behavior, its own efforts to 

resolve any problems, as described in 

paragraphs (d)(2)(i) through (d)(2)(iii) of 

46762 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

this section and any extenuating 

circumstances. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP to document and 

retain the documentation that meets the 

requirements set forth in this section. 

We estimate that it will take a PDP 3 

hours to capture and retain the required 

documentation for each occurrence and 

that each PDP will have 1 occurrence on 

an annual basis. 

The PDP sponsor must disenroll an 

individual when the individual no 

longer resides in the PDP’s service area. 

We estimate that on an annual basis 

240,000 individuals will be disenrolled 

for moving out of the service area, and 

it will take each PDP 1 minute to 

disclose each notice. It is estimated that 

each PDP will disclose 24,000 notices 

on an annual basis for a annual burden 

of 400 hours. 

When a PDP contract terminates as 

provided in § 423.507 through 423.510 

as the PDP sponsor must send a notice 

to the enrollee before the effective date 

of the plan termination or area 

reduction. The notice must provide an 

effective date of the plan termination 

and a description of alternatives for 

obtaining benefits under Part D. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor to disclose 

to an individual the notice of 

disenrollment. We estimate that on an 

annual basis it will require a total of 

240,000 notices, affecting approximately 

10 PDPs. Given that each PDP will be 

creating disclosure notices for mass 

mailings, we are proposing the 

following burden estimates. We estimate 

that it will take each PDP sponsor 

approximately 8 hours to produce the 

standardized notice. We further estimate 

that on average, it will take each PDP 1 

minute to disclose each notice and that 

each PDP will be required to disclose 

24,000 notices on an annual basis for a 

annual burden of 400 hours. 

Section 423.48 Information About Part 

D. 

Each PDP and MA–PD plan must 

provide, on an annual basis, and in a 

format and using standard terminology 

that CMS may specify in guidance, the 

information necessary to enable CMS to 

provide to current and potential Part D 

eligible individuals the information they 

need to make informed decisions among 

the available choices for Part D 

coverage. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP to submit the 

required materials to CMS. We estimate 

that on an annual basis it will take 100 

PDP sponsors 2 hours to submit the 

required documentation to CMS. 

Section 423.50 Approval of Marketing 

Materials and Enrollment Forms 

(a) At least 45 days (or 10 days if 

using marketing materials that use, 

without modification, proposed model 

language as specified by CMS) before 

the date of distribution, the PDP sponsor 

must submit the its marketing materials 

and forms, as defined in paragraph (b) 

of this section, to CMS for review. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP to submit the 

required materials to CMS. We estimate 

that on an annual basis it will take 100 

PDP sponsors 2 hours to submit the 

required documentation to CMS. 

Section 423.56 Procedures To 

Document Creditable Status of 

Prescription Drug Coverage 

(b) Each entity or State that offers 

prescription drug coverage under any of 

the types described in § 423.4 must 

disclose, to all Part D eligible 

individuals whether such coverage 

meets the requirements of actuarial 

equivalence set forth in § 423.265. 

The burden associated with this 

requirement is the time and effort 

necessary for each of these entities and 

States to disclose to an individual notice 

of coverage. We estimate that on an 

annual basis it will require a total of 

5,800,000 notices, affecting slightly over 

440,000 entities, including 440,000 

employer and union-sponsored group 

health plans with Medicare-eligible 

workers, and fewer than 200 other 

entities including over 100 Medigap 

plans, State Pharmaceutical Assistance 

Programs, and a handful of State 

Pharmacy Plus programs. [Note: A 

discussion of the costs of the disclosure 

notices for public and private employer 

and union sponsored qualified 

prescription drug plans is in the impact 

analysis section on payments to 

sponsors of retiree prescription drug 

plans.] Given that each entity and State 

will be creating disclosure notices for 

mass mailings, we are proposing the 

following burden estimates. We estimate 

that it will take each entity or State 

approximately 8 hours to produce the 

standardized notice. We further estimate 

that on average, it will take each entity 

1 minute to disclose each notice. It is 

estimated that the burden per entity will 

be as follows: 

—On average, the 4 State Pharmacy Plus 

programs will provide 169,118 notices 

for an annual burden of 2819 hours 

(these notices are required in 2005 

even though, as discussed elsewhere 

in this preamble, these States may 

decide to lower their costs while 

maintaining equivalent benefits by 

replacing or reforming these 

programs). 

—On average each of the 440,000 group 

health plans will provide 4.5 notices 

for an annual burden of .075 hours. 

—On average each of the 20 State 

Pharmaceutical Assistance Programs 

will provide 60,000 notices for an 

annual burden of 1000 hours. 

—On average each of an estimated 120 

Medigap issuers will provide 15,833 

notices for an annual burden of 264 

hours. 

(c) Each entity must disclose their 

creditable coverage status to CMS in a 

form and manner described by CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for each entity to submit the 

required creditable coverage status 

materials to CMS. We estimate that on 

an annual basis it will take each entity 

1 hour to submit the required 

documentation to CMS. 

Subpart C—Benefits and Beneficiary 

Protections. 

(h) A PDP sponsor or an MA 

organization offering qualified 

prescription drug coverage is required to 

disclose to CMS data on aggregate 

negotiated price concessions obtained 

from pharmaceutical manufacturers and 

passed through to beneficiaries, via 

pharmacies and other dispensers, in the 

form of lower subsidies, prices, and/or 

monthly beneficiary prescription drug 

premiums, in the manner and frequency 

specified by CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsor or an MA 

organization to disclose to CMS the 

aggregated negotiated price data on 

concessions to CMS. We estimate that 

on an annual basis it will take 100 PDPs 

and 350 organizations 10 hours to 

submit the required documentation to 

CMS for total annual burden of 4,500 

hours. 

Section 423.120 Access to Covered 

Part D Drugs 

(b) A PDP sponsor or MA 

organization’s formulary must be 

reviewed by a pharmacy and 

therapeutic committee that committee 

must maintain written documentation of 

its decisions regarding formulary 

development and revision. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP or MA committee to 

document and retain the documentation 

that meets the requirements set forth in 

this section. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46763 

We estimate that it will take 100 PDPs 

and 350 providers PDP or MA entity 1 

hour each to capture and retain the 

required documentation on an annual 

basis for total annual burden of 450 

hours. 

A PDP sponsor or MA organization 

offering an MA–PD plan must provide 

notice of at least 30 days to CMS, 

affected enrollees, authorized 

prescribers, pharmacies, and 

pharmacists prior to removing a covered 

Part D drug from its formulary, or 

making any change in the preferred or 

tiered cost-sharing status of a covered 

Part D drug. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity offering an MA–

PD PDP plan to provide notice of at least 

30 days to CMS, affected enrollees, 

authorized prescribers, pharmacies, and 

pharmacists of the removal of a covered 

Part D drug from its formulary. 

Given that each entity will be creating 

disclosure notices for mass mailings, we 

are proposing the following burden 

estimates. We estimate that on an 

annual basis it will take each entity 

approximately 1 hour to produce the 

standardized notice. We further estimate 

that on average, it will take 100 PDP’s 

and 350 MA organizations 40 hours to 

disclose the required notice for a total 

annual burden of 18,450 hours. 

(c) A PDP sponsor or MA organization 

offering an MA–PD plan must issue and 

reissue, as necessary, a card or other 

type of technology to its enrollees to use 

to access negotiated prices for covered 

Part D drugs. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to provide each 

enrollee a card. The burden associated 

with this requirement is reflected in 

section 423.128. 

Section 423.128 Dissemination of Plan 

Information 

(a) A PDP sponsor or MA organization 

offering an MA–PD plan must disclose 

its plans information as required by this 

section to each enrollee of a prescription 

drug plan offered by the sponsor under 

this part and to Part D eligible 

individuals. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor or MA 

organization offering an MA–PD plan to 

disclose its plans information. We 

estimate that it will require 100 PDP 

sponsors and 350 MA organizations 80 

hours on an annual basis to prepare the 

plan materials. We further estimate that 

on an annual basis, on average, it will 

require each entity 120 hours on an 

annual basis to disclose the required 

materials to enrollees and eligible 

individuals for a total annual burden of 

90,000 hours. 

(e) A PDP sponsor or MA organization 

offering qualified prescription drug 

coverage must furnish to enrollees, an 

explanation of benefits when 

prescription drug benefits are provided 

under qualified prescription drug 

coverage that meets the requirements et 

forth in this section. 

The burden associated with this 

requirement is the time and effort 

necessary for 100 PDP sponsors and 350 

MA organizations offering an MA–PD 

plan must disclose an explanation of 

benefits when prescription drug benefits 

to enrollees. We estimate that it will 

require each entity 160 hours on an 

annual basis disseminate the required 

materials for total annual burden of 

56,000 hours. 

Subpart D—Cost Control and Quality 

Improvement Requirements for 

Prescription Drug Benefit Plans 

Section 423.153 Cost and Utilization 

Management, Quality Assurance, 

Medication Therapy Management 

Programs, and Programs To Control 

Fraud, Abuse, and Waste 

(d) To become a PDP sponsor an 

applicant must disclose to CMS and 

others upon request, the amount of the 

management and dispensing fees and 

the portion paid for medication therapy 

management services to pharmacists. 

The burden associated with this 

requirement is the time and effort 

necessary for an applicant to submit the 

required information to CMS upon 

request. We estimate that is will require 

100 applicants, 30 minutes each to 

provide the required material to CMS 

for consideration for a total annual 

burden of 50 hours. 

Section 423.168 Accreditation 

Organizations 

(c) An accreditation organization 

approved by CMS must provide to CMS 

in written form and on a monthly basis 

all of the following required by this part. 

Since CMS expects to contract with 

less then 10 organizations on an annual 

basis, this requirement is not subject to 

the PRA. 

Section 423.171 Procedures for 

Approval of Accreditation as a Basis for 

Deeming Compliance 

(a) A private, national accreditation 

organization applying for approval must 

furnish to CMS all of the information 

and materials set forth in this part. 

Since CMS expects to less then 10 

applicants on an annual basis, this 

requirement is not subject to the PRA. 

Subpart F—Submission of Bids and 

Monthly Beneficiary Premiums; Plan 

Approval 

Section 423.265 Submission of Bids 

and Related Information 

(a) An applicant may submit a bid 

that meets the requirements set forth in 

this section, to become a PDP sponsor 

or to become an MA organization 

offering an MA–PD plan. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to submit the 

required materials to CMS. We estimate 

we will receive 100 PDP and 350 MA 

applications on an annual basis and that 

it will requires each entity 80 hours to 

submit the required documentation to 

CMS for total annual burden of 26,000 

hours. 

Subpart G—Payments to PDP 

Sponsors and MA–PD Plans for All 

Medicare Beneficiaries for Qualified 

Prescription Drug Coverage 

Section 423.329 Determination of 

Payment 

(b) PDP sponsors must submit data 

regarding drug claims to CMS that can 

be linked at the individual level to Part 

A and Part B data in a form and manner 

similar to the process provided under 

§ 422.310 and other information as CMS 

determines necessary. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors submit the 

required claims data to CMS. We 

estimate that on an annual basis it will 

take 100 PDPs 52 hours to submit the 

required documentation to CMS for total 

annual burden of 5,200 hours. 

Section 423.336 Risksharing 

Arrangements 

(a) A PDP sponsor may submit a bid 

that requests a decrease in the 

applicable first or second threshold risk 

percentages or an increase in the 

percents applied under paragraph (b) of 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors submit the 

required bid materials to CMS. We 

estimate that on an annual basis it will 

take 10 PDPs 20 hours to submit the 

required documentation to CMS for total 

annual burden of 300 hours. 

(c) Within 6 months of the end of a 

coverage year, the PDP sponsor or MA 

organization offering a MA–PD plan 

sponsor must provide to CMS the cost 

data requirements set forth in the 

paragraph. 

The burden associated with this 

requirement is the time and effort 

46764 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

necessary for PDP sponsors submit the 

required cost data to CMS. We estimate 

that on an annual basis it will take 100 

PDP sponsors and 350 MA organizations 

10 hours to submit the required 

documentation to CMS for total annual 

burden of 45,000 hours. 

Section 423.343 Retroactive 

Adjustments and Reconciliations 

(c) Within 6 months after the end of 

a coverage year, the PDP sponsor or MA 

organization offering a MA–PD plan 

must provide CMS must provide to CMS 

the data requirements set forth in the 

paragraph. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors and MA 

organizations to submit the required 

data to CMS. We estimate that on an 

annual basis it will take 100 PDP 

sponsors and 350 MA organizations 10 

hours to submit the required 

documentation to CMS for total annual 

burden of 4,500 hours. 

(d) Within 6 months after the end of 

a coverage year, the PDP sponsor or MA 

organization offering a MA–PD plan 

must provide CMS the cost data 

requirements set forth in the paragraph. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors and MA 

organizations to submit the required 

cost data to CMS. We estimate that on 

an annual basis it will take 100 PDP 

sponsors and 350 MA organizations 10 

hours to submit the required 

documentation to CMS for total annual 

burden of 4,500 hours. 

Subpart I—Organization Compliance 

With State Law and Preemption by 

Federal Law 

Section 423.410 Waiver of Certain 

Requirements To Expand Choice 

(f) Under this section a prospective 

prescription drug plan (PDP) applicant 

may submit a waiver application to 

CMS to waive certain state licensure 

and fiscal solvency requirements in 

order to contract with CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP applicant to submit 

a waiver application that meets the 

requirements of this section. We 

estimate that on an annual basis it will 

take 100 applicants 10 hours to submit 

the required waiver documentation to 

CMS for total annual burden of 1000 

hours. 

Subpart J—Special Part D Rules for 

Organizations Offering MA Plans and 

Coordination under the Part D Program 

Section 423.458 Application of Part D 

Rules to MA–PD plans on and After 

January 1, 2006 

(c) Organizations offering or seeking 

to offer a Medicare AdvantagePrescription Drug plan may request 

from CMS in writing waiver or 

modification of those requirements 

under Part D of Medicare that are 

duplicative of, or that are in conflict 

with provisions otherwise applicable to 

the plan under Part C of Medicare. 

The burden associated with this 

requirement is the time and effort 

necessary for an organization to submit 

the required waiver information to CMS 

for consideration. We estimate we will 

receive 10 waiver applicants, 20 hours 

to provide the required material to CMS 

for consideration for a total annual 

burden of 200 hours. 

Section 423.462 Additional Part D 

Waiver Authority for Prescription Drug 

Plans 

(a) Prescription drug plans may 

request, in writing, a waiver or 

modification of those requirements 

under Part D of Medicare that hinder the 

design of, the offering of, or the 

enrollment in, prescription drug plans 

under contracts between prescription 

drug plans and employers, labor 

organizations, or the trustees of funds 

established by one or more employers or 

labor organizations to furnish benefits to 

the entity’s employees, former 

employees, or members or former 

members of labor organizations. 

The burden associated with this 

requirement is the time and effort 

necessary for an organization to submit 

the required waiver information to CMS 

for consideration. We estimate we will 

receive 10 waiver applicants, 20 hours 

to provide the required material to CMS 

for consideration for a total annual 

burden of 200 hours. 

Subpart K—Application Procedures 

and Contracts With PDP Sponsors 

Section 423.502 Application 

Requirements 

(b) In order to become a PDP sponsor, 

an entity, or an individual authorized to 

act for the entity (the applicant), must 

complete and submit a certified 

application in the form and manner 

required by CMS that meets the 

requirements set forth in this section. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors and MA 

organizations to submit the required 

application materials to CMS. We 

estimate that on an annual basis it will 

take 100 PDP sponsors and 350 MA 

organizations 10 hours to submit the 

required documentation to CMS for total 

annual burden of 4,500 hours. 

Section 423.505 Contract Provisions 

(d) The PDP sponsor agrees must 

maintain for 6 years books, records, 

documents, and other evidence of 

accounting procedures and practices 

that are sufficient to meet the 

requirements set forth in this section. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors and MA 

organizations to maintain the required 

documentation outlined in this section. 

We estimate that on an annual basis it 

will take 100 PDP sponsors and 350 MA 

organizations 52 hours to maintain the 

required documentation on an annual 

basis, for total annual burden of 23,400 

hours. 

(f) The PDP sponsor must submit to 

CMS certified financial information that 

must include the requirements set forth 

in this section. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors and MA 

organizations to submit the required 

certified data to CMS. We estimate that 

on an annual basis it will take 100 PDP 

sponsors and 350 MA organizations 8 

hours to submit the required 

documentation to CMS for total annual 

burden of 3,600 hours. 

(g) PDP sponsors must inform all 

related entities, contractors and 

subcontractors that payments they 

receive are, in whole or in part, from 

Federal funds. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to all related entities. We 

estimate that it will require each of the 

100 PDP sponsors 8 hour on an annual 

basis to disclose the information for a 

total annual burden of 800 hours. 

(j) As a condition for receiving a 

monthly payment under subpart G of 

this part, the PDP sponsor agrees that its 

chief executive officer (CEO), chief 

financial officer (CFO), or an individual 

delegated the authority must request 

payment under the contract on a 

document that certifies the accuracy, 

completeness, and truthfulness of all 

data related to payment, as stipulated in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for 100 PDP sponsors to 

submit the required certified document 

that meets all of the certification 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46765 

requirements referenced in this section 

to CMS. We estimate that on an annual 

basis it will take 100 PDP sponsors 8 

hours to submit the required 

documentation to CMS for total annual 

burden of 800 hours. 

Section 423.507 Nonrenewal of 

Contract 

(a) If a PDP sponsor does not intend 

to renew its contract, it must notify CMS 

in writing by the first Monday of June 

in the year in which the contract ends 

and notify, in an manner that meets the 

requirements of this section, each 

Medicare enrollee, at least 90 days 

before the date on which the 

nonrenewal is effective. 

The burden associated with this 

requirement is the time and effort 

necessary for a PDP sponsor to submit 

a notice of nonrenewal to CMS. We 

estimate that on an annual basis it will 

take 10 PDP sponsors 1 hour to submit 

the required documentation to CMS for 

total annual burden of 10 hours. 

Section 423.508 Modification or 

Termination of Contract by Mutual 

Consent 

(b) If the contract is terminated by 

mutual consent, the PDP sponsor must 

provide notice to its Medicare enrollees 

and the general public as provided in 

paragraph (c) of this section. 

Based on our experience with the 

M+C program CMS does not anticipate 

that more then 9 of these terminations 

will occur on an annual basis. 

Section 423.509 Termination of 

Contract by CMS 

(b) If CMS notifies the PDP sponsor in 

writing 90 days before the intended date 

of their termination the PDP sponsor 

must notify its Medicare enrollees of the 

termination by mail at least 30 days 

before the effective date of the 

termination. 

The PDP sponsor must also notify the 

general public of the termination at least 

30 days before the effective date of the 

termination by publishing a notice in 

one or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

service area. 

Based on our experience with the 

M+C program CMS does not anticipate 

that more than 9 of these terminations 

will occur on an annual basis. 

Section 423.510 Termination of 

Contract by the PDP Sponsor 

(a) If a PDP sponsor terminates its 

contract because CMS fails to 

substantially carry out the terms of the 

contract the PDP sponsor must give 

advance notice to CMS, its Medicare 

enrollees, and the general public in a 

manner that meets the requirements set 

forth in the section. 

Based on our experience with the 

M+C program CMS does not anticipate 

that more than 9 of these terminations 

will occur on an annual basis. 

Section 423.514 Reporting 

Requirements 

(b) Each PDP sponsor must report to 

CMS or other Federal agencies, on an 

annual basis the information necessary 

to meet the requirements set forth in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for 100 PDP sponsors to 

submit the required document that 

meets all of the requirements referenced 

in this section to CMS or other federal 

agencies. We estimate that on an annual 

basis it will take 100 PDP sponsors 40 

hours to submit the required 

documentation, for total annual burden 

of 4,000 hours. 

(f) Each PDP sponsor must make the 

information reported to CMS under this 

section available to its enrollees upon 

reasonable request. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors to disclose 

the required materials that meet all of 

the requirements referenced in this 

section to the public upon request. We 

estimate that on an annual basis it will 

take 100 PDP sponsors 20 hours to 

submit the required documentation, for 

total annual burden of 2,000 hours. 

Subpart L—Effect of Change of 

Ownership or Leasing of Facilities 

During Term of Contract 

Section 423.551 General Provisions 

Paragraph (c) states that a PDP 

sponsor that has a Medicare contract in 

effect under § 423.502 of this part and 

is considering or negotiating a change in 

ownership must notify CMS at least 60 

days before the anticipated effective 

date of the change. The PDP sponsor 

must also provide updated financial 

information and a discussion of the 

financial and solvency impact of the 

change of ownership on the surviving 

organization. 

The burden associated with this 

requirement is the time and effort of the 

PDP sponsor considering or negotiating 

a change in ownership, to notify CMS 

and provide the information specified in 

this section. While this requirement is 

subject to the PRA, we believe that it 

would affect less than 10 entities on an 

annual basis; therefore, it is exempt 

from the PRA in accordance with 5 CFR 

1320.4. 

Section 423.552 Novation Agreement 

Requirements 

Paragraph (a) discusses the conditions 

for CMS approval of a novation 

agreement. This paragraph requires the 

PDP sponsor to notify CMS at least 60 

days before the date of the proposed 

change of ownership and requires them 

to provide CMS with updated financial 

information and a discussion of the 

financial solvency impact of the change 

of ownership on the surviving 

organization. 

The burden associated with this 

requirement is discussed above in 

§ 423.551 of the PRA section. 

This paragraph also requires the PDP 

sponsor to submit to CMS, at least 30 

days before the proposed change of 

ownership date, 3 signed copies of the 

novation agreement containing the 

provisions specified in this section, and 

1 copy of other relevant documents 

required by CMS. 

The burden associated with this 

requirement is time and effort of the 

PDP sponsor to provide CMS with the 

required documentation. While this 

requirement is subject to the PRA, we 

believe that it would affect less than 10 

entities on an annual basis; therefore, it 

is exempt from the PRA in accordance 

with 5 CFR 1320.4. 

Subpart M—Grievances, Coverage 

Determinations, and Appeals 

Section 423.562 General Provisions 

Paragraph (a). A PDP sponsor must 

ensure that all enrollees receive written 

information about the Grievance and 

appeal procedures that are available to 

them through the PDP sponsor and that 

meet the requirements set forth in this 

section. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 8 hours on an annual basis to 

disclose the information for a total 

annual burden of 800 hours. 

Section 423.564 Grievance Procedures 

Paragraph (e). The PDP sponsor must 

maintain records on all grievances 

received both orally and in writing, 

including, at a minimum, the date of 

receipt, final disposition of the 

grievance, and the date that the PDP 

sponsor notified the enrollee of the 

disposition. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors to maintain 

the required documentation outlined in 

this section. We estimate that on an 

46766 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

annual basis it will take 100 PDP 

sponsors 52 hours to maintain the 

required documentation on an annual 

basis, for total annual burden of 5,200 

hours. 

Section 423.568 Standard Timeframe 

and Notice Requirements for Coverage 

Determinations 

Paragraph (a). When a party makes a 

request for a drug benefit, the PDP 

sponsor must notify the enrollee of its 

determination as expeditiously as the 

enrollee’s health condition requires, but 

no later than 14 calendar days after 

receipt of the request. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 8 hours on an annual basis to 

disclose the information for a total 

annual burden of 800 hours. 

If the PDP sponsor extends the 

timeframe, it must notify the enrollee in 

writing of the reasons for the delay, and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the sponsor’s decision to 

invoke an extension. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 4 hours on an annual basis to 

disclose the information for a total 

annual burden of 400 hours. 

Paragraph (b). If a PDP sponsor 

decides to deny a drug benefit, in whole 

or in part, it must give the enrollee 

written notice of the determination. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 4 hours on an annual basis to 

disclose the information for a total 

annual burden of 400 hours. 

Section 423.570 Expediting Certain 

Coverage Determinations 

Paragraph (c). The PDP sponsor must 

document all oral requests in writing 

and maintain the documentation in the 

case file. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors to maintain 

the required documentation outlined in 

this section. We estimate that on an 

annual basis it will take 100 PDP 

sponsors 26 hours to maintain the 

required documentation on an annual 

basis, for total annual burden of 2,600 

hours. 

Paragraph (d). If a PDP sponsor denies 

a request for expedited determination, it 

must give the enrollee prompt oral 

notice of the denial and subsequently 

deliver, within 3 calendar days, a 

written letter that explains the notice 

requirements set forth in this section. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 4 hours on an annual basis to 

disclose the information for a total 

annual burden of 400 hours. 

Section 423.572 Timeframes and 

Notice Requirements for Expedited 

Coverage Determinations 

Paragraph (a). Except as provided in 

paragraph (b) of this section, a PDP 

sponsor that approves a request for 

expedited determination must make its 

determination and notify the enrollee 

(and the prescribing physician involved, 

as appropriate) of its decision, whether 

adverse or favorable, as expeditiously as 

the enrollee’s health condition requires, 

but no later than 72 hours after 

receiving the request. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee and 

prescribing physician involved. We 

estimate that it will require each of the 

100 PDP sponsors 4 hours on an annual 

basis to disclose the information for a 

total annual burden of 400 hours. 

(b) When the PDP sponsor extends the 

deadline, it must notify the enrollee in 

writing of the reasons for the delay and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the sponsor’s decision to 

invoke an extension. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 4 hours on an annual basis to 

disclose the information for a total 

annual burden of 400 hours. 

(c) If the PDP sponsor first notifies an 

enrollee of an adverse expedited 

determination orally, it must mail 

written confirmation to the enrollee 

within 3 calendar days of the oral 

notification. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 4 hours on an annual basis to 

disclose the information for a total 

annual burden of 400 hours. 

§ 423.578 Exceptions process. 

Paragraph (a). An enrollee, the 

enrollee’s authorized representative, or 

the enrollee’s prescribing physician may 

file a request for an exception. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit a 

request for exception. We estimate it 

will require an individual 30 minutes to 

provide the request and that each of the 

100 PDP sponsors will receive 20 

requests on an annual basis. Therefore, 

we estimate a total annual burden of 

1000 hours. 

Paragraph (b). An enrollee, the 

enrollee’s authorized representative, or 

the prescribing physician (on behalf of 

the enrollee) may file an exception 

request. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit a 

request for exception. We estimate it 

will require an individual 30 minutes to 

provide the request and that that each 

of the 100 PDP sponsors will receive 20 

requests on an annual basis. Therefore, 

we estimate a total annual burden of 

1000 hours. 

A PDP sponsor may require a written 

certification from the enrollee’s 

prescribing physician that the requested 

prescription drug is medically necessary 

to treat the enrollee’s disease or medical 

condition. 

The burden associated with this 

requirement is the time and effort 

necessary for a prescribing physician to 

submit the required documentation to 

the PDP sponsor. We estimate it will 

require a prescribing physician 30 

minutes to provide the request and that 

that each of the 100 PDP sponsors will 

make 10 requests on an annual basis. 

Therefore, we estimate a total annual 

burden of 500 hours. 

Section 423.582 Request for a 

Standard Redetermination 

Paragraph (a) An enrollee must ask for 

a redetermination by making an oral or 

written request with a PDP sponsor that 

made the coverage determination or a 

SSA office. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit a 

request for redetermination. We 

estimate it will require an individual 30 

minutes to provide the request and that 

each of the 100 PDP sponsors will 

receive 20 requests on an annual basis. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46767 

Therefore, we estimate a total annual 

burden of 1000 hours. 

(c) If the 60-day period in which to 

file a request for a redetermination has 

expired, an enrollee may file a request 

for redetermination and extension of 

time frame with the PDP sponsor. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit a 

request for extension of 

redetermination. We estimate it will 

require an individual 15 minutes to 

provide the request and that each of the 

100 PDP sponsors will receive 10 

requests on an annual basis. Therefore, 

we estimate a total annual burden of 250 

hours. 

Paragraph (d) The person who files a 

request for redetermination may 

withdraw it by filing a written request 

for withdrawal at one of the places 

listed in paragraph (a) of this section. 

The burden associated with this 

requirement is the time and effort 

necessary for an individual to submit a 

withdraw request. We estimate it will 

require an individual 15 minutes to 

provide the request and that each of the 

100 PDP sponsors will receive 10 

requests on an annual basis. Therefore, 

we estimate a total annual burden of 250 

hours. 

Section 423.584 Expediting Certain 

Redeterminations 

Paragraph (c) The PDP sponsor must 

document all oral requests in writing, 

and maintain the documentation in the 

case file. 

The burden associated with this 

requirement is the time and effort 

necessary for PDP sponsors to maintain 

the required documentation outlined in 

this section. We estimate that on an 

annual basis it will take 100 PDP 

sponsors 8 hours to maintain the 

required documentation on an annual 

basis, for total annual burden of 800 

hours. 

(d) If a PDP sponsor denies a request 

for expedited redetermination, it must 

give the enrollee prompt oral notice, 

and subsequently deliver, within 3 

calendar days, a written letter that 

explains the requirements set forth in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 2 hours on an annual basis to 

disclose the information for a total 

annual burden of 200 hours. 

Section 423.590 Timeframes and 

Responsibility for Making 

Redeterminations 

Paragraph (a) When the PDP sponsor 

extends the timeframe, it must notify 

the enrollee in writing of the reasons for 

the delay, and inform the enrollee of the 

right to file an expedited grievance if he 

or she disagrees with the PDP sponsor’s 

decision to invoke an extension. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 2 hours on an annual basis to 

disclose the information for a total 

annual burden of 200 hours. 

(d) The PDP sponsor must notify the 

enrollee of its determination as 

expeditiously as the enrollee’s health 

condition requires but no later than 

upon expiration of the extension. 

The burden associated with this 

requirement is the time and effort 

necessary for each of the 100 PDP 

sponsors to disclose the necessary 

information to an enrollee. We estimate 

that it will require each of the 100 PDP 

sponsors 2 hours on an annual basis to 

disclose the information for a total 

annual burden of 200 hours. 

Subpart N—Medicare Contract 

Determinations and Appeals 

This Subpart deals with Contract 

Determinations and Appeals; therefore, 

the information collection requirements 

referenced in this Subpart are exempt 

from the PRA in accordance with 5 CFR 

1320.4(a)(2) during the conduct of an 

administrative action, investigation, 

and/or audit. 

Subpart O—Intermediate Sanctions 

Section 423.756 Procedures for 

Imposing Sanctions 

(a) Before imposing the intermediate 

sanctions specified in this section, CMS 

will allow the PDP sponsor to provide 

evidence that it has not committed an 

act or failed to comply with the 

requirements as described. In addition, 

CMS may allow additional time for the 

PDP sponsor to provide the evidence if 

the PDP sponsor sends a written request 

providing a credible explanation of why 

additional time is necessary. 

These information collection 

requirements are exempt from the PRA 

in accordance with 5 CFR 1320.4(a)(2) 

during the conduct of an administrative 

action, investigation, and/or audit. 

Subpart P—Premiums and CostSharing Subsidies for Low-Income 

Individuals 

Section 423.774 Eligibility 

Determinations, Redeterminations and 

Applications 

Paragraph (d) of this section discusses 

the application requirements for 

individuals applying for low-income 

subsidy. This paragraph states that 

individuals applying for low-income 

subsidy, or a personal representative 

applying on the individual’s behalf, 

must complete all required elements of 

the application, provide any statements 

from financial institutions, as requested, 

to support information in the 

application, and certify, as to the 

accuracy of the information provided on 

the application form. 

The burden associated with this 

requirement is the time and effort for 

the individual or personal 

representative applying on the 

individual’s behalf, to complete the lowincome subsidy application, provide 

financial statements as requested and to 

certify that the information provided is 

accurate. These collection requirements 

are subject to the PRA; however, the 

burden associated with these 

requirements is currently approved 

under OMB# 0938–0467 with a current 

expiration date of October 31, 2005. We 

will revise this currently approved PRA 

package to incorporate the burden being 

imposed on new enrollees. We estimate 

that this requirement will impose a 

burden on 4.5 new enrollees for a total 

additional burden of 750,000 hours 

annually (4.5 × 10 minutes). 

Section 423.800 Administration of 

Subsidy Program 

Paragraph (b) of this section requires 

the PDP sponsor offering the PDP, or the 

MA organization offering the MA–PD 

plan, to reduce the individual’s 

premiums and cost-sharing as 

applicable and provide information to 

CMS on the amount of such reductions, 

in a manner determined by CMS. This 

paragraph also requires the PDP sponsor 

and MD–PD organization to maintain 

documentation to track the application 

of the low-income cost-sharing 

subsidies to be applied to the out-ofpocket threshold. 

The burden associated with these 

requirements is the time and effort for 

the PDP sponsor or the MA organization 

to provide information to CMS and to 

maintain documentation. We estimate 

that it will take each of the 100 PDP 

sponsors and each of the 350 MA 

organizations approximately 52 hours 

on an annual basis to provide the 

information to CMS. We also estimate 

46768 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

that it will take approximately 26 hours 

for each entity to maintain the 

information for tracking purposes. 

Therefore, we estimate that it will take 

approximately 35,100 total hours 

annually to comply with these 

requirements. 

Subpart Q—Guaranteeing Access to a 

Choice of Coverage 

Section 423.859 Assuring Access to a 

Choice of Coverage 

(c) states that CMS may waive or 

modify the requirements of this part if 

an entity seeking to become a 

prescription drug plan in a State other 

than the 50 States or the District of 

Columbia requests waiver or 

modification of any Part D in order to 

provide qualified prescription drug 

coverage in a State other than the 50 

States or the District of Columbia. 

The burden associated with this 

requirement is the time and effort for 

the PDP to make a request of waiver or 

modification to CMS. We estimate that 

approximately 2 PDPs will request a 

waiver or modification on an annual 

basis. Since this requirement affects less 

than 10, it is exempt from the PRA in 

accordance with 5 CFR 1320.3. 

Section 423.863 Submission and 

Approval of Bids 

Paragraph (a) discusses the process 

CMS uses for the solicitation and 

approval of bids. CMS solicits bids from 

eligible fallback entities for the offering 

in all fallback service areas in one or 

more PDP regions of a fallback 

prescription drug plan. CMS specifies 

the form and manner in which fallback 

bids are submitted in separate guidance 

to bidders. 

The burden associated with this 

requirement is the time and effort for 

the fallback entities to prepare and 

submit a bid. 

We estimate as an upper limit that 

approximately 20 fallback entities will 

submit a bid every three years. We also 

estimate that it will take each fallback 

entity approximately 80 hours to 

complete and submit the bid to CMS. 

Therefore, we estimate it will take a 

total of (5 * 80) /3 = 133.33 hours on an 

annual basis to comply with this 

requirement. 

Paragraph (b) discusses the 

procedures CMS uses to enter into 

contracts. CMS solicits bids from 

eligible fallback entities and uses 

competitive procedures to enter into 

contracts. 

The burden associated with this 

requirement is the time and effort for 

the fallback entities to enter into a 

contract with CMS. 

We estimate, again as an upper limit, 

that approximately 5 fallback entities 

will enter into a contract with CMS on 

an annual basis. Since this requirement 

affects less than 10, it is exempt from 

the PRA in accordance with 5 CFR 

1320.4. 

Section 423.871 Contract Terms and 

Conditions 

Paragraph (f) states that each contract 

for a fallback prescription drug plan 

requires an eligible fallback entity 

offering a fallback prescription drug 

plan to provide CMS with the 

information CMS determines is 

necessary to carry out the requirements 

of this section. 

The burden associated with this 

requirement is the time required of the 

fallback prescription drug plan to 

provide CMS with the information CMS 

determines necessary. We estimate that 

approximately 5 fallback prescription 

drug plans will enter into a contract 

with CMS. Since this requirement 

affects less than 10, it is exempt from 

the PRA in accordance with 5 CFR 

1320.4. 

Subpart R—Payments to Sponsors of 

Retiree Prescription Drug Plans 

Section 423.884 Requirements for 

Qualified Retiree Prescription Drug 

Plans 

(a) and (b) In order to qualify for the 

retiree drug subsidy, the employer or 

union sponsor shall file an annual 

application with CMS for each qualified 

prescription drug plan maintained, 

including an attestation as to actuarial 

value. For convenience, these 

applications may be packaged together. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to submit the 

application to CMS. The requirements 

of this part state that an application 

must provide sponsor and plan 

identification information, together with 

an actuarially-certified attestation that 

the actuarial value of the prescription 

drug coverage in each such plan is at 

least equal to the actuarial value of 

standard Medicare Part D prescription 

drug coverage in accordance with 

actuarial guidelines established by CMS 

in accordance with generally accepted 

actuarial principles. If there is a change 

during the year that materially affects 

the actuarial value of their drug 

coverage, sponsors will need to submit 

an updated attestation. Sponsors will 

also be required to collect identifying 

information on their qualifying covered 

retirees. 

For each entity we estimate an 

average of 2 hours administrative work 

to assemble the application, 31 hours for 

systems changes to extract identifying 

information on qualifying covered 

retirees and about 17 hours for 

preparation of the actuarial attestations, 

for a total of approximately 50 hours, for 

each prescription drug plan. The 17- 

hour estimate for preparation of 

actuarial attestations is a weighted 

average. See the economic impact 

section of this proposed regulation for 

the analysis pertaining to the range of 

time needed for sponsors of various 

sizes and numbers of plans. 

For the number of entities applying 

for the subsidy, we have used 50,000, 

our estimate of the total number of 

public, private, and union sponsors 

projected to offer retiree prescription 

drug coverage in 2005. We have 

estimated on the basis of this figure in 

order to calculate the highest potential 

burden. 

The total burden for preparation and 

filing of the 2005 applications for 50,000 

sponsors is 2,500,000 hours. We also 

estimate that 5 percent of the initial 

applications may have to be refiled due 

to mid-year changes to drug coverage 

that materially affect actuarial value. We 

estimate 125,000 hours for this activity. 

If CMS determines that a sponsor of 

a retiree prescription drug program 

meets all of the requirements of this 

section, it will send to the sponsor a 

written notice of that determination 

along with two copies of the sponsor 

agreement outlining the conditions for 

obtaining a subsidy payment. If the 

sponsor wishes to participate in the 

subsidy program, it must return both 

copies of the agreement, signed by an 

authorized representative, to CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to submit the 

required signed agreements to CMS. We 

estimate that on an annual basis it will 

take 50,000 entities 30 minutes to 

submit the required agreements to CMS, 

for a total of 25,000 hours. 

(c) Each entity must disclose the 

creditable coverage status for each 

prescription drug plan to CMS in a form 

and manner described by CMS. We 

estimate this activity to take about 1 

hour each for a total of approximately 

50,000 hours. 

In addition, each entity must notify 

each Part D eligible individual of the 

plan’s creditable coverage status in a 

form and manner prescribed by CMS. 

The burden associated with the sponsor 

notices is required by § 423.56 of the 

proposed regulation, as discussed 

earlier in this analysis. 

For the sponsors of retiree drug 

coverage, we estimate that it will take 

50,000 entities approximately 8 hours 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46769 

each to produce a standardized notice 

for a total of 400,000 burden hours. 

Given that each entity will be creating 

disclosure notices for mass mailings, we 

are proposing the following burden 

estimates. We estimate that it will take 

each of them 4 hours to disclose, on 

average, 240 (rounded) notices (or 1 

minute per notice), for a total burden of 

200,000 hours. This estimate is based on 

that assumption that once the notices 

have been standardized, each entity will 

mass-produce and mail the required 

notices. 

If an individual establishes to CMS 

that he or she was not adequately 

informed that he or she no longer had 

creditable prescription drug coverage or 

the coverage is involuntarily reduced, 

the individual may apply to CMS to 

have the coverage treated as creditable 

coverage so as to not be subject to the 

late enrollment fee described in 

§ 423.46. The burden associated with 

this requirement is the time and effort 

necessary for an individual to apply to 

CMS to have such coverage treated as 

creditable coverage. While we have no 

way of determining how many 

individuals will apply to CMS, for the 

purpose of providing an upper bound 

estimate for public comment we 

estimate that on an annual basis it will 

take 100,000 individuals 15 minutes to 

apply to CMS, for a total of 25,000 

hours. 

(d) The employer or union sponsor of 

the plan must maintain the records 

outlined in this section for 6 years after 

the expiration of the plan year in which 

the costs were incurred. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to maintain the 

required documentation for six years. 

We estimate that on an annual basis it 

will take 50,000 entities 20 hours to 

retain the required documentation, for a 

total of 1,000,000 burden hours. 

Section 423.890 Appeals 

The information collection 

requirements set forth in this section are 

exempt from the PRA as stipulated in 5 

CFR 1320.4. 

Section 423.892 Change in Ownership 

A sponsor who is contemplating or 

negotiating a change of ownership must 

notify CMS. We estimate that 

approximately 5 percent of sponsors 

will fall into this category in a given 

year. 

The burden associated with this 

requirement is the time and effort 

necessary for a sponsoring entity to 

submit the required notification to CMS. 

On an annual basis it will take 2,500 

entities (5 percent of 50,000) about 30 

minutes to submit the required 

notification to CMS, for a total of 

approximately 1,250 burden hours. 

Subpart S—Special Rules for States—

Eligibility Determinations for Subsidies 

and General Payment Provisions 

Section 423.904 Eligibility 

Determinations for Low-Income 

Subsidies 

Paragraph (b) of this section states the 

State agency must inform CMS of cases 

where eligibility is established or 

redetermined. 

The burden associated with the 

requirement on State agencies to inform 

CMS of cases where eligibility is 

established or redetermined is estimated 

to total approximately 11,220 annual 

hours. We estimate that there will be 

approximately 600,000 of these cases on 

an annual basis. We also estimate that 

it will take approximately 10 hours per 

month for the State agency to inform 

CMS of these cases. 

Paragraph (d) of this section requires 

States to make available—low-income 

subsidy application forms, information 

on the nature of, and eligibility 

requirements for the subsidies under 

this section, and offer assistance with 

the completion of the application forms. 

States must require an individual or 

personal representative applying for the 

low-income subsidy to complete all 

required elements, provide documents 

as necessary, and certify as to the 

accuracy of the information provided. In 

addition, States must provide CMS with 

other information as specified by CMS 

that may be needed to carry out the 

requirements of the Part D prescription 

drug benefit. 

The burden associated with the 

requirement on States to make available 

the information specified in this section 

is subject to the PRA; however, we 

believe the burden for this requirement 

to be a reasonable and customary 

business practice; therefore, imposes no 

additional burden on the States. 

The burden associated with the 

requirement on States to require the 

applicant of the low-income subsidy to 

complete all required elements, to 

provide documents, and to certify as to 

the accuracy of the information is 

subject to the PRA; however, the burden 

associated with this requirement is 

discussed in § 423.774 above. 

The burden associated with the 

requirement on States to provide CMS 

with other information as specified by 

CMS is estimated to total approximately 

1,020 annual hours. Since it is difficult 

to determine at this time the volume of 

information CMS will request, we are 

estimating that it will take on average 20 

hours per State on an annual basis to 

provide CMS with the specified 

information. 

Section 423.907 Treatment of 

Territories 

Paragraph (a) of this section discusses 

the requirements on territories to submit 

plans for approval by the Secretary to 

receive increased grants. This paragraph 

states that a territory may submit a plan 

to the Secretary under which medical 

assistance is to be provided to lowincome individuals for the provision of 

covered Part D drugs. Paragraph (b) of 

this section describes what a plan must 

include. 

The burden associated with this 

requirement is the time and effort of 

territories to prepare and submit a plan 

for approval. While this requirement is 

subject to the PRA, we estimate that this 

requirement would affect only 5 

territories; therefore, it is exempt from 

the PRA in accordance with 5 CFR 

1320.4. 

Section 423.908 Phased-Down State 

Contribution to Drug Benefit Costs 

Assumed by Medicare 

Paragraph (d) of this section discusses 

the requirements on States to submit 

MSIS data. This paragraph requires 

States to provide accurate and complete 

coding to identify the numbers and 

types of Medicaid and Medicare dual 

eligibles in their MSIS data submittals. 

The burden associated with the 

requirement on States to provide 

accurate and complete coding in their 

MSIS data submittals is subject to the 

PRA; however, this requirement is 

already approved under OMB #0938–

0502 with a current expiration date of 

January 31, 2006. 

Paragraph (e) of section requires 

States to submit an electronic file, in a 

manner specified by the Secretary, 

identifying each full benefit dual 

eligible enrolled in the State for each 

month with Part D drug coverage who 

is also determined to be full benefit 

eligible by the State for full Medicaid 

benefits. 

The burden associated with the 

requirement on States to submit an 

electronic file identifying each full 

benefit dual eligible enrolled in the 

State for each month with Part D drug 

coverage is estimated to total 

approximately 120 hours per State on an 

annual basis. We estimate that it will 

take approximately 10 hours for each 

State to submit an electronic file on a 

monthly basis. Therefore, we estimate a 

total burden of 6,120 hours on an 

annual basis. Startup development effort 

is estimated at 100 hours per State for 

a total of 5,100 hours. 

46770 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: 

Centers for Medicare and Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Attn: John Burke (CMS–4068–P), 

Room C5–13–28, 7500 Security 

Boulevard, Baltimore, MD 21244–

1850; 

and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: Christopher Martin, CMS 

Desk Officer (CMS–4068–P), 

christopher_martin@omb.eop.gov. Fax 

(202) 395–6974. 

IV. Regulatory Impact Statement 

A. Overall Impact 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Impact Analysis’’ at the beginning of 

your comments.] 

We have examined the impacts of this 

proposed rulemaking under Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

Regulatory Flexibility Act (RFA) 

(September 16, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform 

Act of 1995 (Pub. L. 104–4), Executive 

Order 13132 on Federalism, 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 impact 

and equity). A regulatory impact 

analysis (RIA) must be prepared for 

major rules with economically 

significant effects ($100 million or more 

in any one year). Our estimate is that 

this rulemaking is ‘‘economically 

significant’’ as measured by the $100 

million standard, and hence also a 

major rule under the Congressional 

Review Act. Accordingly, we have 

prepared a regulatory impact analysis. 

The Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) amends Title XVIII of the 

Social Security Act (the Act) to create a 

voluntary prescription drug benefit 

within the Medicare program beginning 

in 2006. The Medicare prescription drug 

benefit will make prescription drugs 

more affordable for beneficiaries by 

offering subsidized Medicare 

prescription drug coverage to all 

beneficiaries, with even more generous 

assistance available to low-income 

beneficiaries. We believe that this is an 

important step in modernizing the 

Medicare program to better meet 

beneficiaries’ needs. We anticipate that 

by giving beneficiaries access to 

affordable insurance coverage that helps 

them to pay for their outpatient 

prescription drugs—which have become 

a critical component in the delivery of 

comprehensive, quality health care 

services—the Medicare prescription 

drug benefit will help beneficiaries to 

lead healthier, more productive lives, 

while also helping to improve the 

effectiveness of the Medicare program. 

The MMA also authorizes Medicare to 

make retiree drug subsidy payments to 

employers and unions that provide 

qualified retiree prescription drug 

coverage to beneficiaries who do not 

enroll in a Part D plan. This alternative 

retiree drug subsidy provides special 

tax-favored payments to the qualified 

retiree health plans. The retiree drug 

subsidy program has highly flexible 

rules that permit employers and unions 

to continue providing drug coverage to 

their Medicare-eligible retirees while 

retaining their current plan designs that 

are at least equivalent to the standard 

Part D benefit and using the drug 

subsidy to reduce the cost of providing 

generous coverage. 

With the trend toward declining 

retiree health insurance coverage that 

has occurred over the past decade, the 

Medicare alternative retiree drug 

subsidy is intended to ‘‘help employers 

[to] retain and enhance their 

prescription drug coverage so that the 

current erosion in coverage would 

plateau or even improve’’ (Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 Conference 

Report, p. 53). 

Medicare Part D also offers employers 

a variety of other options for continuing 

to assist their Medicare retirees. They 

can also choose to provide enhanced 

drug coverage to their Medicare-eligible 

retirees through or in coordination with 

Part D by encouraging their Medicareeligible retirees to enroll in Part D (with 

Medicare subsidizing the costs of their 

standard Part D benefits), and providing 

enhanced coverage over and above the 

standard Part D benefit. This can be 

achieved by either providing separate 

supplemental drug coverage that wraps 

around a Part D plan (similar to policies 

that wrap around Medicare benefits 

under Part A and Part B), arranging for 

a Part D plan (that is, a prescription 

drug plan (PDP) or Medicare Advantage 

Prescription Drug Plan (MA–PD)) to 

provide enhanced benefits to their 

retirees, or choosing to become a Part D 

plan that offers enhanced benefits to 

their retirees. In all of these cases, 

financial support from the new 

Medicare drug subsidy can augment 

contributions by employers to provide a 

more generous and less costly drug 

benefit for retirees than is possible 

through employer support alone. 

We believe that the implementation of 

Medicare Part D, including the Medicare 

retiree drug subsidy and the other 

opportunities it affords employers for 

providing continued prescription drug 

assistance to their Medicare retirees, 

will result in combined aggregate 

payments by employers and Medicare 

for drug coverage on behalf of retirees 

generally being greater—and frequently 

significantly greater—than they 

otherwise would have been without the 

enactment of the MMA. Furthermore, 

the Medicare prescription drug benefit 

and retiree drug subsidy represent a 

particularly important strengthening of 

health care coverage for future 

Medicare-eligible retirees, given the 

erosion in the availability and 

generosity of employer-sponsored 

retiree coverage for future Medicare 

beneficiaries that has already been 

taking place, as is discussed in further 

detail subsequently in this impact 

analysis. 

We estimate that in calendar year (CY) 

2006 about 41 million Medicare 

beneficiaries will receive drug coverage 

either through a Medicare Part D plan 

(that is, by enrolling in a PDP or MA–

PD), including beneficiaries who receive 

supplemental premium subsidies and 

enhanced drug coverage as a new retiree 

benefit, or through an employer or 

union sponsored retiree plan that is 

sufficiently generous to qualify for the 

Medicare retiree drug subsidy. By CY 

2010, due to growth in the overall 

Medicare population, we estimate that 

nearly 45 million Medicare beneficiaries 

will be receiving such coverage. 

The Medicare drug benefit, including 

the retiree drug subsidy, will lead to an 

increase in Federal spending on 

Medicare benefits and a decrease in 

Federal spending on Medicaid benefits 

(as dual eligibles’ drug coverage is 

shifted from Medicaid to Medicare). The 

net effect of these changes on Federal 

outlays is estimated to be $48 billion in 

CY 2006 and $67 billion in CY 2010, 

with the total effect estimated to be $287 

billion over the period from CY 2006–

2010. The vast majority of this Federal 

spending is on Medicare subsidies that 

defray the cost of the Medicare drug 

benefit for beneficiaries, that provide 

substantial additional cost-sharing and 

premium assistance to low-income 

beneficiaries, and that make it more 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46771 

affordable for employers to continue to 

provide and support high quality retiree 

drug coverage. We also anticipate that 

States will save money due to the 

Medicare drug benefit, as responsibility 

for drug coverage for full-benefit dual 

eligibles is shifted from Medicaid to 

Medicare and as State spending on State 

prescription drug assistance programs is 

likely to be at least partly displaced by 

the Medicare drug benefit. We also 

estimate that many more eligible lowincome beneficiaries will take up 

Medicaid and other low-income 

benefits, in addition to the 

comprehensive Medicare drug benefit, 

as a result of the additional value of the 

drug benefit and unprecedented 

beneficiary outreach activities. Taking 

all of these considerations together, we 

estimate that the Medicare drug benefit 

will lead to net State budgetary savings 

of about $500 million in CY 2006 and 

$3.0 billion in CY 2010, with total net 

savings of about $8.2 billion over the 

period from CY 2006–2010. 

As discussed in more detail in section 

L of the impact analysis, from both an 

economic and budgetary accounting 

perspective, Federal spending on the 

Medicare drug benefit largely represents 

transfers of Federal budget revenue from 

taxpayers to Medicare beneficiaries and 

retiree plans sponsored by private and 

public sector employers and unions. 

Also, from an economic perspective, 

there is effectively a transfer of Federal 

budget revenues from taxpayers to State 

governments, as Medicare pays for some 

of the costs of drug coverage for fullbenefit dual eligibles that had been 

previously paid for by States and as the 

Medicare drug benefit displaces some 

State spending on prescription drug 

assistance programs. In addition, a 

portion of the Federal spending on 

Medicare Part D is for administrative 

costs incurred by PDPs and MA–PDs to 

administer the benefit. 

B. Unfunded Mandates 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies assess anticipated 

costs and benefits and take certain other 

actions before issuing a proposed rule 

(and subsequent final rule) that includes 

any Federal mandate 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 anticipate that this 

rule would not impose costs above the 

$110 million UMRA threshold on State, 

local, or tribal governments. With the 

exception of the electronic prescribing 

provisions (for which we are unable to 

develop a cost estimate because 

standards are still to be developed), we 

have determined that this rule would 

not impose costs on the private sector 

exceeding $110 million. 

1. Private Sector 

There are two provisions of the MMA 

that are reflected in this notice of 

proposed rulemaking that represent 

mandates on the private sector as 

defined by the UMRA: Provisions 

related to disclosure notices of 

creditable coverage and electronic 

prescribing. 

As discussed elsewhere in this 

document, certain private sector 

entities—Medigap plans and private 

sector employer or union sponsored 

health plans that provide drug coverage 

to Medicare beneficiaries who are 

retired or who are active workers—are 

required to provide at certain times 

disclosure notices on whether the 

coverage provided equals or exceeds the 

actuarial value of defined standard Part 

D coverage. Later in the impact analysis 

we provide a discussion of the costs 

expected to be borne in providing such 

notices, including the costs associated 

with performing the actuarial valuation 

of the drug benefits. The largest cost for 

providing these notices is expected to 

occur in the months preceding the 

implementation of the drug benefit in 

January 2006 when the largest volume 

of notices need to be provided. 

Following receipt of these notices, 

beneficiaries will be making choices 

regarding where they receive their drug 

coverage. 

For private sector employers that 

provide retiree drug coverage, the 

implementation of Medicare Part D, 

including the Medicare retiree drug 

subsidy program, is expected to produce 

net savings that far exceed the costs of 

the disclosure notices. This is true both 

for employers that choose to obtain the 

retiree drug subsidy, and for employers 

and unions that decide to restructure 

their prescription drug coverage to 

provide continued assistance by paying 

Medicare Part D premiums and/or 

supplementing the Medicare 

prescription drug benefit. 

For those private entities that will not 

achieve savings—Medigap insurers and 

group health plans that offer coverage 

only to beneficiaries who are active 

workers, not retirees—the cost of 

providing disclosure notices is 

estimated to be approximately $69 

million in 2005 (which translates into 

an average of roughly $154 per 

employer that offers drug coverage to 

Medicare beneficiaries who are active 

workers and about $11,050 per Medigap 

insurer). Thus, the costs associated with 

the notice requirements are not 

expected to reach the $110 million 

UMRA threshold. 

Another private sector mandate in the 

MMA is that no later than April 1, 2009, 

prescriptions for covered Part D drugs 

for Medicare beneficiaries that are 

transmitted electronically will have to 

comply with certain standards. The 

proposed rule describes the process that 

will be used to develop these standards, 

but the actual standards are not yet 

specified. Moreover, we are seeking 

comment on a set of approaches to 

speed the adoption and reduce the cost 

of more rapid adoption of electronic 

prescribing, and to maximize the 

benefits of electronic prescribing on 

reducing costs and inappropriate care 

involving the drug benefit. 

Consequently, at this time it is not 

possible to estimate the impact. An 

impact statement on the actual 

standards will be prepared separately. 

We also note that Section 104 of the 

MMA, which prohibits the sale of new 

Medigap policies with drug coverage or 

the renewal of existing Medigap policies 

that contain drug coverage for Medicare 

drug benefit enrollees, is not an 

unfunded mandate as defined by 

UMRA. This statutory Medigap 

prohibition does not result in the 

‘‘expenditure’’ of funds by the private 

sector, one part of the statutory test for 

an unfunded mandate. Moreover, the 

MMA itself directly restructures the role 

of Medigap insurance, and it is not the 

‘‘promulgation of any rule’’ on our part, 

the other factor in the statutory test for 

an unfunded mandate. For a discussion 

of the effect on Medigap insurers of the 

MMA prohibition, see section J of the 

impact analysis. 

2. States, Local and Tribal Governments 

While States will incur direct costs as 

a result of this proposed rule, as 

discussed in greater detail in section H 

on State impacts, States will achieve net 

savings under this proposed 

rulemaking, as now Medicare will be 

paying for prescription drug costs 

previously funded under Medicaid, 

State Pharmacy Assistance Programs 

(SPAPs), and State sponsored retiree 

health insurance, or will be providing 

subsidies for State sponsored qualified 

retiree prescription drug coverage. 

There are several sources of the direct 

costs States will incur. As described 

below, several of these, taken alone and 

without consideration of offsetting 

gains, would reach or exceed the 

threshold level in UMRA. 

In order to defray a portion of the 

Medicare drug expenditures for fullbenefit dual eligibles, States will be 

responsible for making monthly 

payments to the Federal government 

46772 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

beginning in January 2006. These 

payments are estimated to be $8.5 

billion in CY 2006, reaching $11.1 

billion by CY 2010. These payments 

represent the largest direct cost to 

States. States will also incur costs 

associated with assisting in eligibility 

determinations for the Medicare Part D 

low-income subsidies. In addition to 

giving responsibility for eligibility 

determinations to the Social Security 

Administration, the MMA also gives 

States, as a condition of receipt of any 

Federal financial assistance under Title 

XIX, responsibility for conducting 

determinations for eligibility for lowincome premium and cost-sharing 

subsidies under Part D, and as part of 

those determinations also make 

determinations related to medical 

assistance for Medicare cost-sharing 

under Medicare Parts A and B. Federal 

matching payments will be available to 

assist in paying for these administrative 

costs. Prior to enactment of the MMA, 

we roughly estimated that the State 

share of Medicaid administrative costs 

that might be associated with these lowincome eligibility determinations was 

approximately $100 million a year, 

beginning in FY 2005. However, we are 

undertaking new collaborations with the 

Social Security Administration, the 

State Health Insurance Assistance 

Programs (SHIPs), and other groups to 

assist in outreach and enrollment, and 

to help avoid any new administrative 

burdens for States. We plan to develop 

an updated estimate of State 

administrative costs for eligibility 

determination activities once the 

operational processes for the eligibility 

determinations are more fully 

developed. We also note that there are 

likely to be some additional costs to 

States arising from this activity, as 

discussed in section H of this impact 

analysis, due to the Medicare Part D 

low-income eligibility determinations 

process raising awareness of other 

benefits available to low-income 

Medicare beneficiaries through 

Medicaid and leading to higher 

enrollment in that program. As noted 

earlier, however, we believe that overall 

costs to the States will be reduced due 

to implementation of the new Medicare 

drug benefit. 

In addition, States will also have 

revenue losses associated with the 

MMA prohibition on States imposing 

taxes on premiums related to Part D 

coverage. As a result of the shift of 

beneficiaries from prescription drug 

coverage subject to State premium taxes 

to Part D coverage, we estimate that the 

loss in premium tax revenue to States 

will be about $111 million in CY 2006, 

and $129 million by CY 2010, totaling 

$598 million over this period. 

States will also incur direct costs 

attributable to required disclosure 

notices for creditable coverage. Similar 

to the requirement for private sector 

employers, State governments that offer 

retiree health insurance benefits with 

drug coverage will need to provide 

disclosure notices to Medicare 

beneficiaries enrolled in their employer 

sponsored plans related to that 

coverage. States will also need to 

provide disclosure notices to Medicare 

beneficiaries who receive drug coverage 

through State Medicaid programs, State 

Pharmacy Plus programs, and State 

Pharmacy Assistance Programs. As 

noted elsewhere in this document, the 

costs of providing such notices are small 

and are far more than offset by the 

savings achieved from receiving the 

Medicare retiree drug subsidy (because 

States may also qualify for this subsidy) 

or through the enrollment of 

beneficiaries in the Part D benefit. 

As discussed in the States section of 

the impact analysis, the direct and 

indirect costs and revenue losses to 

States are more than offset by savings 

States will achieve as a result of the 

implementation of the Medicare Part D 

prescription drug benefit. As noted in 

that section, the net savings to States 

increase over time, as the share of drug 

coverage costs for full-benefit dual 

eligibles for which States are required to 

compensate Medicare declines. 

Local governments that offer retiree 

health insurance benefits that include 

coverage for prescription drugs also will 

need to provide disclosure notices to 

Medicare beneficiaries enrolled in their 

employer sponsored plans related to 

that coverage. As noted previously, the 

costs of providing such notices are 

small, and are far more than offset by 

the savings achieved either from 

receiving the Medicare retiree drug 

subsidy (because local governments may 

also qualify for this subsidy) or through 

the enrollment of beneficiaries in the 

Part D benefit. 

We have determined that this 

proposed rule does not mandate any 

requirements for Tribal governments. 

C. 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 

costs on State and local governments, 

preempts State law, or otherwise has 

Federalism implications. 

As discussed previously, the MMA 

and this proposed rule have 

implications for States. In addition to 

the provisions addressed in the UMRA 

discussion, the statute includes specific 

provisions prohibiting State regulation 

of PDP plans, except for licensure and 

solvency, and permitting the Secretary 

to waive even State licensure and 

solvency requirements. The majority of 

these waivers, however, are temporary 

and may not exceed 36 months, except 

in the case of a State that does not have 

a licensing process for PDP sponsors. As 

specified in the MMA, we will consult 

with the National Association of 

Insurance Commissioners (NAIC) on 

establishing the financial solvency and 

capital adequacy standards that will be 

used in the waiver process. 

Because of the national nature of the 

Medicare Part D benefit, the statute 

includes provisions that supercede State 

law relative to the Secretary’s final 

electronic prescribing standards 

applicable to covered Part D drugs for 

Part D eligible individuals, and also 

prohibits States from limiting the 

amount that a PDP sponsor can recover 

from liable third parties under Medicare 

Secondary Payer provisions. 

CMS has started routine consultations 

with States regarding the numerous 

provisions related to the Medicare 

prescription drug benefit that have 

implications for States. Among these, 

CMS’ Center for Medicaid and State 

Operations has regular meetings with 

State Medicaid Directors and has used 

these opportunities to provide our State 

partners with information about MMA. 

For example, in March 2004, CMS held 

conference calls with State 

representatives to provide them with an 

overview of the MMA and information 

on what to expect during 

implementation, to discuss the 

provisions in the statute dealing with 

State payments to the Federal 

government under Section 103 of the 

MMA, and to allow States to raise issues 

about the implementation process. In 

April and May 2004, CMS held 

conference calls with State 

representatives to discuss the 

calculation of State phased-down 

contribution, definition of ‘‘full-benefit 

dual eligibles’’, excluded drugs, 

enhanced FMAP on family planning 

drugs, and related State payment issues. 

CMS is currently working with State 

Medicaid Directors, State 

Pharmaceutical Assistance Program 

staff, and State Health Insurance 

Assistance Program (SHIP) counseling 

staff to raise awareness of the Medicare 

prescription drug discount card 

program, and we expect to have similar 

efforts for the implementation of the 

Medicare Part D prescription drug 

benefit. We have also consulted with the 

NAIC on Medigap issues. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46773 

The Medicare retiree drug subsidy is 

an optional program that public or 

private employers may choose to 

participate in if they offer qualified 

retiree prescription drug coverage. Like 

other employers, State and local 

governments that offer qualified retiree 

prescription drug coverage and wish to 

receive Medicare retiree drug subsidy 

payments will need to comply with the 

reporting requirements of this proposed 

rule, such as attestation of actuarial 

equivalence and certain data reporting 

necessary for calculating the retiree drug 

subsidy payment amount. However, 

these are not requirements because no 

public or private employer need apply 

for Medicare retiree drug subsidy 

payments. Thus, we have determined 

that the retiree drug subsidy provisions 

of this proposed rule would not impose 

direct costs on State and local 

governments. As discussed earlier in the 

preamble, we intend to conduct 

outreach to prospective applicants for 

Medicare retiree drug subsidy 

payments, including State and local 

governments that sponsor retiree health 

plans, in an effort to better understand 

the needs of this segment of the 

employer community, share information 

about the Medicare retiree drug subsidy 

program, and solicit suggestions about 

how we can best implement the 

program. 

D. Limitations of the Analysis 

The following analyses present 

projected effects of this proposed rule 

on Medicare beneficiaries, the Federal 

budget, States, private sector 

organizations that provide drug 

coverage to Medicare beneficiaries, and 

small entities. These impact estimates 

are generally consistent with the 

President’s fiscal year 2005 budget. 

Unless otherwise noted, all estimates in 

this impact analysis are net budgetary 

spending based on calendar year data. 

Because 2006 will be the first year of 

the Medicare prescription drug benefit 

and retiree drug subsidy program, we do 

not have program experience from prior 

years. In estimating the impact of a 

completely new program, there are 

limited data and much greater 

uncertainty than would be the case with 

modifications to existing programs. 

Additionally, there are further policy 

and administrative issues under 

consideration in the context of the rule 

making process. We have explored a 

wide variety of potential approaches. 

We believe that these estimates provide 

a reasonable representation of the likely 

effects of the policies and potential 

options discussed. Our analysis 

generally reflects the broad range of 

options we have explored and 

represents a ‘‘mid-range’’ estimate of the 

projected possible impacts of the 

Medicare drug benefit and retiree drug 

subsidy. We are continuing to work to 

examine the effects of the issues under 

consideration and to refine our 

understanding of the impacts. We 

would welcome comments on any 

aspect of the approach, methodology, or 

assumptions used to develop the 

estimates presented in this impact 

analysis. 

In addition, we note that analyses in 

the 2004 Medicare Trustees Report can 

provide a sense of the range of 

uncertainty inherent in these types of 

estimates. Because the methodology 

used in our estimates is fairly similar to 

the one used by the Medicare Trustees, 

we believe that the Trustees Report 

provides relevant information on the 

potential range of uncertainty in these 

types of estimates (see the ‘‘2004 Annual 

Report of the Boards of the Federal 

Hospital Insurance and Federal 

Supplementary Medical Insurance Trust 

Funds’’ available on the CMS Web site). 

E. Enrollment Estimates 

1. Summary 

We estimate that in CY 2006 about 41 

million Medicare beneficiaries will 

receive drug coverage either through a 

Medicare Part D plan (that is, by 

enrolling in a PDP or MA-PD) or 

through an employer or union 

sponsored retiree plan that is eligible for 

the Medicare retiree drug subsidy. By 

CY 2010, as a result of growth in the 

overall Medicare population, we 

estimate that nearly 45 million Medicare 

beneficiaries will be receiving such 

coverage. 

As mentioned previously, Medicare 

Part D offers additional assistance with 

Medicare drug benefit cost-sharing and 

premiums to low-income beneficiaries 

who meet certain income and assets 

requirements. We estimate that about 

10.9 million beneficiaries would enroll 

in the Medicare Part D low-income 

subsidy program in CY 2006. Among 

low-income subsidy participants, we 

estimate that about 6.4 million would be 

full-benefit dual eligibles. 

2. Projection Assumptions 

We project that there will be 43.3 

million beneficiaries entitled to or 

enrolled in Medicare Part A or enrolled 

in Medicare Part B in 2006 who will be 

eligible for Medicare Part D. We 

estimate that roughly 95 percent of these 

beneficiaries, 41.2 million, will receive 

drug coverage either through a Medicare 

Part D plan (that is, a PDP or MA–PD) 

or through an employer sponsored 

retiree plan that is eligible for the 

Medicare retiree drug subsidy. 

First, we assume that Medicare 

beneficiaries who are active workers 

and who have employer-sponsored 

insurance as their primary payer with 

Medicare as a secondary payer (MSP), 

will not participate in Medicare Part D 

at this time. Since these beneficiaries 

are active workers, not retirees, they 

would be ineligible for the Medicare 

retiree drug subsidy. In addition, we 

believe that it is unlikely that these 

beneficiaries will enroll in the Medicare 

drug benefit at this time. These 

beneficiaries are likely to already have 

creditable drug coverage from their 

employer and that coverage would be 

the primary payer regardless of 

enrollment in the Medicare drug benefit. 

In the future, when Medicare becomes 

the primary payer for these 

beneficiaries, they will have an 

opportunity to enroll in Medicare Part D 

without a late enrollment penalty as 

long as they had creditable drug 

coverage from their previous primary 

insurer. 

Second, we assume that all 

beneficiaries who are full-benefit dual 

eligibles will enroll in the Medicare 

drug benefit. As discussed in the 

preamble, there will be automatic 

processes put in place to ensure that any 

beneficiary who is a full-benefit dual 

eligible who does not enroll in the 

Medicare drug benefit will be 

automatically enrolled in a Medicare 

Part D plan. 

Third, among all other eligible 

beneficiaries, we assume that roughly 99 

percent receive prescription drug 

coverage either through a Medicare Part 

D plan (that is, a PDP or MA–PD) or 

through an employer or union 

sponsored retiree plan that is eligible for 

the Medicare retiree drug subsidy. This 

assumption is based in part on the 

experience of high participation rates in 

Medicare Part B, but on other factors as 

well. The standard Medicare Part D 

benefit shares several similar features 

with Medicare Part B that encourage 

enrollment. Both are subsidized 

benefits, where the beneficiary premium 

is set at roughly 25 percent of the cost 

of the insurance, with the government 

providing a subsidy to cover the 

remaining 75 percent. 

In addition, under both Part B and 

Part D, beneficiaries face a late 

enrollment penalty or surcharge (in the 

form of higher premiums) unless they 

enroll within the initial enrollment 

period, have met creditable coverage 

requirements in the case of Medicare 

Part D, or have met certain other 

requirements that occur in a limited 

number of circumstances. We believe 

46774 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

that the late enrollment penalty is a 

strong incentive for beneficiary 

enrollment. The statute provides that 

the penalty is the greater of either 1 

percent of the base beneficiary premium 

for each month of late enrollment or an 

amount that CMS determines is 

actuarially sound for each month of late 

enrollment that is subject to the penalty 

(that is, when the beneficiary did not 

have other creditable coverage). As 

discussed elsewhere in the preamble, 

during the first several years of the 

program, we currently expect that we 

would specify a penalty amount of 1 

percent of the base beneficiary premium 

per month of late enrollment. In future 

years once we have sufficient data and 

experience under the program, we 

anticipate being able to determine the 

appropriate penalty amount (that is, 

either one percent or a greater amount 

that is actuarially sound). This late 

enrollment penalty begins after the close 

of the open enrollment period in May 

2006 for those beneficiaries without 

other creditable coverage. Prescription 

drug costs are a major concern for 

Medicare beneficiaries. There will be 

extensive educational and outreach 

efforts prior to implementation of 

Medicare Part D to educate beneficiaries 

about the coverage available to them 

through the Medicare drug benefit and 

about enrollment processes, including 

the presence of the late enrollment 

penalty. We think that beneficiaries’

concern about current prescription drug 

costs and the likelihood that as an 

elderly or disabled individual they will 

have even greater need for prescription 

drugs as they age, in combination with 

the substantial late enrollment penalty, 

will result in high initial enrollment in 

the Medicare drug benefit. 

We also note that we believe it is 

likely that some beneficiaries who have 

not enrolled in Medicare Part B will 

choose to enroll in the Medicare 

prescription drug benefit. Many 

beneficiaries who currently have not 

enrolled in Part B would face a late 

enrollment surcharge should they want 

to enroll in Part B at this time. These 

same beneficiaries would not face a late 

enrollment penalty if they chose to 

enroll in the Medicare Part D drug 

benefit during the initial enrollment 

period, and we believe their experience 

with the Part B late enrollment 

surcharge may influence their decisionmaking regarding Part D. 

Other features of the Medicare drug 

benefit are also likely to encourage high 

enrollment. In addition to the Federal 

subsidy of the beneficiary premium 

(which is a part of the standard benefit), 

a subset of beneficiaries, specifically 

those who meet certain income and 

assets requirements, are eligible for 

additional low-income subsidies. We 

expect that States over the next 18 

months will also be doing aggressive 

outreach particularly related to the 

lower income population. For example, 

many States have been working with 

CMS to facilitate enrollment (including 

for some States auto-enrollment 

arrangements) of beneficiaries 

participating in State Pharmaceutical 

Assistance Programs into the Medicare 

drug discount card program. In 

addition, as discussed elsewhere in the 

preamble, the MMA also provides for 

transitional grants to States with 

Pharmaceutical Assistance Programs in 

each of fiscal years 2005 and 2006, to 

among other things, help facilitate 

enrollment in Part D. 

Also, in the months preceding the 

implementation of the Part D benefit, 

the approximately 76 percent of 

beneficiaries who have drug coverage 

(based on 2001 Medicare Current 

Beneficiary Survey data) will receive 

separate specific disclosure notices from 

the entities from which they get that 

coverage regarding enrollment in the 

Medicare prescription drug benefit and 

the applicability of the late enrollment 

penalty. These notices from other 

sources are in addition to the extensive 

outreach efforts that CMS and SSA will 

conduct over the next 18 months. We 

also expect that Medicare Advantage 

plans will work with their members to 

facilitate enrollment into MA–PD plans. 

Another feature of the Medicare Part 

D program that factors into our 

expectations regarding participation is 

the availability of the Medicare retiree 

drug subsidy. The Medicare retiree drug 

subsidy lowers the cost of providing 

drug benefits for employers that sponsor 

qualified retiree plans, making it more 

affordable for employers to provide this 

coverage. We anticipate that most 

beneficiaries with employer or union 

sponsored retiree drug coverage will 

receive their prescription drug coverage 

through an employer or union plan that 

is eligible for the Medicare retiree drug 

subsidy. 

It is important to note, though, that in 

addition to the ability to obtain 

Medicare retiree drug subsidy 

payments, Medicare Part D also gives 

employers a variety of other options for 

providing their retirees with assistance 

with prescription drug costs. Employers 

can choose to provide enhanced drug 

coverage to their Medicare-eligible 

retirees through or in coordination with 

Part D by encouraging their retirees to 

enroll in Part D (with Medicare 

subsidizing the costs of their standard 

Part D benefits), and providing 

enhanced coverage over and above the 

standard Part D benefit. This can be 

achieved by either arranging for a PDP 

or MA–PD Part D plan to provide 

enhanced benefits to their retirees, 

choosing to become a Part D plan that 

offers enhanced benefits to their 

retirees, or providing separate 

supplemental drug coverage that wraps 

around a Part D plan (similar to policies 

that wrap around Medicare benefits 

under Parts A and B). Thus, some 

beneficiaries with employer sponsored 

drug coverage are likely to receive 

enhanced prescription drug benefits by 

enrolling in Part D and receiving 

employer sponsored enhanced Part D 

benefits or wraparound coverage and/or 

premium assistance. 

The advantages and disadvantages to 

employers of choosing among the 

various options for providing employer 

prescription drug assistance (for 

example, taking the Medicare retiree 

drug subsidy versus offering enhanced 

prescription drug benefits through a Part 

D plan) will in many cases be 

influenced by a number of factors, 

including current benefit design, 

employer and retiree contributions and 

other financial considerations, tax 

status, labor relations, and contractual 

agreements. Because of these factors and 

because employers have several options 

that are advantageous to their retirees 

and to them in terms of both costs and 

labor relations, it is difficult to 

accurately predict which specific 

choices they will make in many cases. 

We expect that some employers will 

choose to provide prescription drug 

assistance in the form of enhanced 

benefit packages through Part D plans or 

separate wraparound coverage. 

Employers commonly do this relative to 

Medicare Part A and Part B coverage, 

either through separate supplemental 

policies or through arrangements with 

Medicare Advantage plans. In fact, the 

Medicare retiree drug subsidy 

represents a new type of arrangement 

for employers relative to the interaction 

of their retiree coverage with Medicare. 

Thus, we expect that some employers 

may prefer to interface with the new 

Medicare prescription drug benefit in a 

manner similar to their supplementation 

of the basic Medicare Part A and Part B 

benefits. In addition, we anticipate that 

providing enhanced Part D benefits or 

separate wraparound coverage may be 

an attractive option to those employers 

that may not be eligible for the Medicare 

retiree drug subsidy because their 

retiree drug benefits, as currently 

structured, are not as generous as the 

standard Medicare Part D benefit. 

Regardless of whether employers seek 

the Medicare retiree drug subsidy or 

provide drug coverage to retirees by 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46775 

encouraging them to participate directly 

in the Medicare prescription drug 

benefit and providing enhanced benefits 

or wraparound coverage, Medicare Part 

D is estimated to significantly lower 

employers’ cost of providing drug 

coverage, thus making the provision of 

that coverage much more affordable and 

thus more likely. The variety of choices 

available to employers means that there 

is some uncertainty around specific 

choices on the part of employers. An 

example of the complexity of the issues 

surrounding employer decision making 

related to the Medicare retiree drug 

subsidy is the tax-advantaged status of 

the 28 percent subsidy. This provides a 

substantially different incentive to three 

groups of employers: (a) those for-profit 

employers paying 35 percent on the 

margin in corporate income tax rates, (b) 

those for-profit employers paying far 

lower rates for a variety of reasons 

(including not earning a profit), and (c) 

governmental and non-profit sponsors 

who do not pay corporate income taxes 

to begin with. These different 

incentives, in turn, could affect whether 

plan sponsors choose the alternative 

Medicare retiree drug subsidy or choose 

to enhance benefits provided through 

Part D. 

A fourth participation assumption 

concerns enrollment in the low-income 

subsidy portion of the program. We 

estimate that approximately 14.5 

million beneficiaries will be eligible for 

the low-income subsidy in 2006. We 

assume that a portion of beneficiaries 

who are eligible for the low-income 

subsidy (while receiving prescription 

drug coverage under Part D) will not 

take up the low-income assistance. 

While we assume 100 percent uptake 

among full-benefit dual eligibles (as 

discussed previously), we assume that 

roughly 56 percent of other beneficiaries 

who are eligible for the low-income 

subsidy will choose to enroll in it. We 

assume less than full uptake of the lowincome subsidy among these 

beneficiaries based on experience with 

other means tested programs such as 

Medicaid and Medicare Savings (QMB/ 

SLMB) programs, which suggests that 

full take up does not generally occur. 

There are several limitations inherent 

in the assumptions to predict the 

specific impacts of a major new program 

like the Medicare drug benefit. For 

example, it can be difficult to project 

enrollment rates in this entirely new 

program, and there is uncertainty about 

how employers will respond to the 

multiple approaches available to 

augment Medicare prescription drug 

coverage including the retiree drug 

subsidy. The assumptions discussed 

previously reflect our current best 

estimates, considering the structure of 

the program, the wide variety of new 

efforts to educate beneficiaries and 

facilitate enrollment, and information 

about participation rates in other types 

of similar programs where available. In 

addition, the estimates do not take into 

account the possibility that some 

beneficiaries may have creditable drug 

coverage through pre-standardized 

Medigap plans. To the extent that such 

situations exist and beneficiaries choose 

to remain in such coverage, our 

estimates for Medicare Part D may be 

slightly overstated. 

F. Anticipated Effect of Medicare Part D 

on Beneficiaries 

Included in the following section are 

discussions of: the anticipated positive 

effects of the Medicare prescription drug 

benefit on beneficiaries, a recap of the 

Medicare drug benefit’s structure, 

estimates of the average amount of drug 

spending covered by the Medicare drug 

benefit and average beneficiary 

premiums, and a discussion of the 

benefits of the Medicare retiree drug 

subsidy and the other opportunities 

Medicare Part D affords employers for 

providing continued prescription drug 

assistance to retirees. 

1. Qualitative Discussion of Positive 

Effects of the Medicare Drug Benefit 

The purpose of the Medicare 

prescription drug benefit is to provide 

all of the nation’s Medicare beneficiaries 

with the opportunity to enroll in a 

prescription drug benefit that is 

subsidized by the Medicare program. 

Outpatient prescription drugs have 

become an integral component in the 

delivery of comprehensive, high-quality 

health care services. Giving 

beneficiaries access to affordable drug 

coverage that helps them to pay for their 

outpatient prescription drugs and helps 

beneficiaries and their health 

professionals use prescription drugs 

more effectively as part of their overall 

health care, will enable beneficiaries to 

lead healthier, more productive lives, 

while improving the effectiveness of the 

Medicare program. 

a. Enhancement of the Medicare Benefit 

Package 

When the Medicare program was first 

enacted, outpatient prescription drug 

coverage was generally not included in 

private sector health benefit packages. 

However, over the last two decades, 

prescription drugs have played an 

increasingly critical role in health care 

delivery. For example, currently, at least 

one medication is ordered, provided, or 

continued in approximately 65 percent 

of all visits to office-based physicians by 

persons 65 years and over (2001 

National Ambulatory Medical Care 

Survey, National Center for Health 

Statistics). Prescription drugs have 

significantly improved the treatment 

and management of many major 

conditions—including life-threatening 

diseases such as stroke (anticoagulant or 

clot-blocking therapy), heart disease and 

coronary artery disease 

(antihypertensive medications, 

cholesterol-lowering drugs), and cancer 

(targeted biologics and other agents that 

modify the course of illness and can be 

taken orally), as well as disorders that 

have fundamental impacts on quality of 

life like psychiatric illnesses 

(antipsychotics and antidepressants), 

osteoporosis (bone-strengthening drugs), 

and arthritis (anti-inflammatory drugs 

and other disease-modifying agents)—

thereby contributing to longer and 

healthier lives as well as reductions in 

other types of medical expenditures 

such as inpatient admissions and 

lengths of stay (‘‘The Price of Progress: 

Prescription Drugs in the Health Care 

Market,’’ J.D. Kleinke, Health Affairs 

20:5, September/October 2001, available 

at http://www.healthaffairs.org). Many 

other significant diseases have seen 

improvements in treatment and 

management and thus in patient health 

as a result of new medications. 

Examples include: AIDS/HIV, complex 

infections, diabetes, asthma and chronic 

lung diseases, Parkinson’s disease, and 

many less common but serious 

disorders. With more new medicines in 

development than ever before, potential 

future health benefits from better drug 

therapies are even greater. Medicare Part 

D will augment the Medicare program 

benefit package by making drug 

coverage, which is currently offered in 

most private sector health plans, 

available to all beneficiaries. This 

represents an important step in 

modernizing the Medicare program to 

better meet beneficiaries’ needs and 

respond to changes in health care 

delivery. 

b. Access to Subsidized Prescription 

Drug Coverage 

The Medicare prescription drug 

benefit will make subsidized 

prescription drug coverage available to 

the estimated 24 percent of Medicare 

beneficiaries that currently do not have 

any prescription drug coverage at all 

(based on 2001 Medicare Current 

Beneficiary Survey data). Additionally, 

the Medicare prescription drug benefit 

will make subsidized coverage available 

to many other beneficiaries who may 

have less generous, costly drug 

coverage—including those who 

currently receive drug coverage through 

46776 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Medigap policies or through ‘‘accessonly’’ group health plans (group health 

plans that are available through their 

former employers which require retirees 

to pay the premiums for such coverage), 

and those retirees who may currently be 

paying a large share of the cost of their 

retiree coverage. 

By providing a substantial subsidy to 

defray the cost of Medicare drug 

coverage, including new subsidies for 

the retiree coverage and Medicare 

Advantage coverage that many 

beneficiaries receive today, the 

Medicare prescription drug benefit will 

make prescription drug coverage more 

accessible and affordable for many 

beneficiaries. As discussed in more 

detail elsewhere in the preamble, the 

Medicare program will make payments 

to PDPs and MA–PDs (through a direct 

subsidy and government reinsurance 

payments) that will amount to roughly 

75 percent of the total cost of the 

Medicare Part D prescription drug 

benefit for all beneficiaries. Medicare 

Part D will also offer low-income 

beneficiaries additional assistance by 

reducing or eliminating beneficiary 

premiums and by providing very low 

cost-sharing requirements. 

c. Improved Compliance With 

Treatment Regimens 

Available data suggest that not having 

drug coverage, combined with high drug 

expenses, may cause some beneficiaries 

to either not have their prescriptions 

filled or have them filled less often 

because they are not financially able to 

purchase outpatient prescription drugs. 

Because the Medicare prescription drug 

benefit will reduce affordability barriers 

associated with obtaining outpatient 

prescription drugs by reducing both the 

costs of drug treatment and 

beneficiaries’ payments, we believe it 

will help to improve beneficiaries’

compliance with their drug treatment 

regimens. 

There is evidence that some 

beneficiaries, particularly those without 

drug coverage, do not fill some 

prescriptions ordered by their 

physicians and skip doses to make their 

drugs last longer due to cost concerns. 

For example, a study of Medicare 

beneficiaries in eight States found that 

among those without drug coverage, 25 

percent reported not filling a 

prescription due to cost, while 27 

percent reported skipping doses to make 

drugs last longer. These rates of 

‘‘noncompliance’’ with physician 

prescribing orders were more than 

double the rates reported among 

beneficiaries with drug coverage (Dana 

G. Safran, et. al., ‘‘Prescription Drug 

Coverage And Seniors: How Well Are 

States Closing the Gap?’’ Health Affairs 

Web Exclusive W253, July 2002, http:// 

content.healthaffairs.org/cgi/reprint/ 

hlthaff.w2.253v1.pdf). 

Furthermore, analysis of data from the 

2001 Medicare Current Beneficiary 

Survey (MCBS), a nationally 

representative sample of Medicare 

beneficiaries shows that Medicare 

beneficiaries without drug coverage fill 

fewer prescriptions than those with 

drug coverage. Overall, beneficiaries 

without drug coverage, on average, selfreport filling 37 percent fewer 

prescriptions (18) than those with drug 

coverage (29). While some of this 

difference in utilization likely reflects 

differences in health status and other 

beneficiary characteristics, this 

phenomenon holds true even among 

groups of beneficiaries with large 

numbers of chronic conditions. For 

beneficiaries with five or more chronic 

conditions, those without drug coverage 

self-report, on average, filling 

approximately 38 prescriptions a year 

compared to beneficiaries with drug 

coverage, who self-report filling, on 

average, 50 prescriptions. 

Finally, a study in the December 2001 

issue of the Journal of General Internal 

Medicine found that certain 

characteristics, such as minority 

ethnicity, and low income (defined as 

income less than $10,000) significantly 

increase the risk that individuals 

without drug coverage will restrict their 

use of medications by, for example, 

skipping doses or avoiding taking 

medication altogether. For example, the 

odds of medication restriction in 

minority subjects were higher among 

those with no drug coverage than among 

those with full drug coverage. Similarly, 

the odds of medication restriction were 

higher in low-income subjects with no 

drug coverage than in those with full 

drug coverage. (Michael A. Steinman, et 

al., ‘‘Self-restriction of Medications Due 

to Cost in Seniors without Prescription 

Coverage,’’ 16 Journal of General 

Internal Medicine 793–799, Dec. 2001). 

Thus, comprehensive coverage is 

particularly likely to have an impact on 

prescription drug use among 

disadvantaged populations. 

d. Improved Health and Reduction of 

Adverse Health Effects 

Not filling prescriptions, skipping 

doses, or cutting pills in half are 

referred to in the medical literature as 

‘‘medication noncompliance,’’ and can 

have adverse health effects. We believe 

that by reducing financial barriers 

associated with obtaining outpatient 

prescription drugs and encouraging 

beneficiary compliance with their drug 

treatment regimens, the Medicare 

prescription drug benefit will reduce the 

occurrence of adverse health events and 

lead to overall improvements in 

beneficiaries’ health. 

Medication noncompliance can lead 

to worsening health problems and the 

need for additional health care services. 

For example, a study of prescription 

drug noncompliance among disabled 

adults found that about half of the 

individuals reporting medication 

noncompliance due to cost reported 

experiencing one or more health 

problems as a result, including pain, 

discomfort, disorientation, change in 

blood pressure or other vital signs, 

having to go to a doctor or emergency 

room, or being hospitalized. (Jae 

Kennedy and Christopher Erb, 

‘‘Prescription Noncompliance Due to 

Costs Among Adults with Disabilities in 

the United States,’’ American Journal of 

Public Health, July 2002). This same 

study cited other research indicating 

that medication noncompliance is a 

clinical problem, particularly related to 

chronic illnesses such as hypertension, 

and has been found to be a predictor of 

hospital admissions and emergency 

room visits in other studies. 

Similarly, another study found that 

limiting access to medications among 

low-income, elderly Medicaid patients 

increased rates of admission to nursing 

homes. The study analyzed Medicaid 

recipients aged 60 years or older who 

took three or more medications per 

month and at least one maintenance 

drug for chronic diseases. Limiting 

affordable access to prescription drugs 

for this population (through a 

reimbursement cap on medications) 

increased rates of admission to nursing 

homes. The authors concluded that for 

the sicker patients in the study, the 

limitation on medication more than 

‘‘double[d] the rate’’ of admission in 

comparison to a group whose 

medications were not limited. (Stephen 

B. Soumerai et al., ‘‘Effects of Medicaid 

Drug-Payment Limits on Admission to 

Hospitals and Nursing Homes,’’ 325 

New England Journal of Medicine 1072, 

1074, 1991). 

There is also evidence suggesting that 

the use of specific drugs may reduce 

adverse health events, utilization of 

other health care services, and related 

costs for certain groups of patients. For 

example, a recent study found that the 

use of statins in cholesterol-lowering 

drug therapy reduced the incidence of 

coronary disease-related deaths by 24 

percent in elderly men and women (ages 

70 to 82) with a history of, or risk factors 

for, vascular disease, and also reduced 

the incidence of non-fatal heart attacks 

and fatal or non-fatal strokes in these 

patients (‘‘Pravastatin in Elderly 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46777 

Individuals at Risk of Vascular Disease 

(PROSPER): A Randomised Controlled 

Trial,’’ Lancet 2002, 360:9346, 1623–

1630). 

Similarly, the Heart Outcomes 

Prevention Evaluation (HOPE) study has 

found that antihypertensive drug 

therapy reduced the combined risk of 

cardiovascular death, heart attack and 

stroke by 22 percent in approximately 

9,000 high-risk middle-aged and elderly 

patients (ages 55 and older), with 

$871,000 in net estimated savings over 

4 years, and also significantly reduced 

the risk of adverse cardiovascular 

outcomes by 25 to 30 percent in a broad 

range of high-risk middle-aged and 

elderly patients with diabetes mellitus 

(See ‘‘Drug Therapy and Heart Failure 

Prevention,’’ Editorial, Jennifer V. 

Linseman, PhD, and Michael R. Bristow, 

MD PhD, Circulation 107:1234, 

American Heart Association, 2003; 

‘‘Economic Impact of Ramipril on 

Hospitalization of High-Risk 

Cardiovascular Patients, Cathryn A. 

Carroll, PhD MA MBA BSPharm, The 

Annals of Pharmacotherapy, Volume 

37, No. 3, pp. 327–331; and ‘‘Effects of 

Ramipril on Cardiovascular and 

Microvascular Outcomes in People With 

Diabetes Mellitus: Results of the HOPE 

Study and MICRO-HOPE Substudy, 

Evaluation (HOPE) Study Investigators, 

Lancet 355 (9200):253–259, 2000). 

While there is evidence that the use 

of certain prescription drugs may be 

cost-effective for specific groups of 

patients (in the sense that they result in 

net health care cost savings or produce 

health improvements at relatively low 

cost), thus far it has been difficult to 

generalize the results of these drugspecific studies more broadly to 

estimate the potential health care cost 

savings or morbidity or mortality 

reductions in the context of an overall 

Medicare prescription drug benefit. 

First, the findings from available costeffectiveness analyses in the literature 

suggest that while some prescription 

drugs may lead to short-term or longterm reductions in net health care costs, 

other prescription drugs may lead to net 

increases in health costs. Second, the 

Medicare prescription drug benefit will 

improve access to prescription drugs for 

a broader patient population than is 

typically included in the available 

studies in the literature, which may 

affect the potential cost-effectiveness of 

certain drugs. For example, while the 

literature suggests that the use of statin 

drugs for lowering blood cholesterol 

levels in patients with existing heart 

disease is relatively cost-effective, using 

these drugs to preventively lower blood 

cholesterol levels in patients that do not 

have heart disease may be less costeffective (see ‘‘Are Pharmaceuticals 

Cost-Effective? A Review Of The 

Evidence,’’ Peter J. Neumann, Eileen A. 

Sandberg, Chaim M. Bell, Patricia W. 

Stone, and Richard H. Chapman, Health 

Affairs 19:2, November/December 2000; 

and ‘‘The Price of Progress: Prescription 

Drugs in the Health Care Market,’’ J. D. 

Kleinke, Health Affairs 20:5, September/ 

October 2001 available at http:// 

www.healthaffairs.org). 

In addition to the anticipated 

reductions in adverse health events 

associated with anticipated 

improvements in prescription drug 

compliance, we believe that many 

elements of the Medicare prescription 

drug benefit—including quality 

assurance, electronic prescribing, better 

beneficiary information on drug costs 

and ways to reduce drug costs (for 

example, through generic substitution), 

and medication therapy management 

which are designed to improve 

medication use and reduce the risk of 

adverse events, including adverse drug 

interactions—will also improve 

beneficiaries’ health outcomes. We 

believe that these improvements will 

occur through enhanced beneficiary 

education, health literacy and 

compliance programs; improved 

prescription drug-related quality and 

disease management efforts; and 

ongoing improvements in the 

information systems that are used to 

detect various kinds of prescribing 

errors—including duplicate 

prescriptions; drug-drug, drug-allergy 

and drug-food interactions; incorrect 

dosage calculations, and problems 

relating to coordination between 

pharmacies and health providers. We 

also believe that additional reductions 

in errors and additional improvements 

in prescription choices based on the 

latest available evidence will occur over 

time as the electronic prescribing 

provisions of the MMA are 

implemented (To Err is Human: 

Building A Safer Health System, 

Institute of Medicine of the National 

Academies, 1999, pp. 191–193, http:// 

www.iom.edu or http://www.nap.edu). 

Ultimately, we believe that the 

evidence supports our conclusion that 

making prescription drugs more 

available and affordable will help 

beneficiaries to live healthier, more 

productive lives. We also believe that 

expanding prescription drug coverage 

will reduce adverse health events and 

Medicare program spending on more 

costly services for some beneficiaries, 

and will be particularly important for 

beneficiaries with limited means who 

are more likely to forego beneficial 

prescription drugs when they do not 

have coverage. However, the effect on 

aggregate Medicare program spending 

across all beneficiaries is difficult to 

ascertain. At this time, there have not 

been studies that have found evidence 

that expansions of drug coverage across 

a large population, as will occur under 

the Medicare drug benefit, yields 

aggregate health care cost savings. 

Furthermore, there have been mixed 

results on the impact of coverage on the 

cost-effectiveness of care involving 

certain individual drugs in general, and 

in differing patient populations. Thus, 

the extent to which the Medicare drug 

benefit may lead to reductions in 

Medicare spending for other health care 

services in the aggregate across all 

beneficiaries is difficult to predict. 

Additional research will be needed to 

further examine and quantify these 

potential effects. For example, we are 

currently conducting a demonstration 

study on the extent to which coverage 

of oral medicines reduces the use of 

professionally-delivered medicines and 

the associated physician and health care 

services that are currently covered in 

Part B. We are very interested in 

developing further evidence on the best 

ways to encourage outcome 

improvements and overall health care 

cost reductions through drug coverage, 

and would welcome comments in this 

area and how this can be incorporated 

into the implementation of the drug 

benefit. For example, CMS is currently 

collaborating with AHRQ and other 

experts to identify priorities for 

developing better evidence and 

increasing value in the use of outpatient 

medications, and intends to develop 

further evidence as part of the 

implementation of the drug benefit. 

2. Recap of the Structure of the 

Medicare Part D Drug Benefit 

As discussed in more detail elsewhere 

in the preamble, standard prescription 

drug coverage under Medicare Part D for 

2006 consists of a $250 deductible, 25 

percent cost-sharing (or an actuarially 

equivalent cost-sharing structure) up to 

an initial coverage limit of $2,250, 100 

percent cost-sharing after the initial 

coverage limit until an out-of-pocket 

threshold of $3,600 is reached, and 

nominal cost-sharing for expenditures 

beyond the out-of-pocket threshold (that 

is, the greater of 5 percent coinsurance 

or a copayment of $2 for a generic or 

preferred multiple source drug and $5 

for any other drug in 2006, or an 

actuarial equivalent cost-sharing 

structure). For each year after 2006, the 

deductible, initial coverage limit, out-ofpocket threshold, and nominal 

copayment amounts are indexed to per 

capita growth in prescription drug 

expenditures for Part D enrollees, as 

46778 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

3We note that $1,437 reflects the average payout 

of the Medicare drug benefit for non-low-income 

beneficiaries in 2006. This is different from what 

the payout would be for a beneficiary with total 

drug spending equal to average total drug spending 

for all enrollees. For example, standard coverage 

under Medicare Part D would payout $1500 for a 

beneficiary with total spending of $2936. The 

difference between the average payout versus the 

payout for a beneficiary with average total drug 

spending is due to the interaction between the 

distribution of drug spending and the deductible 

and cost-sharing structure of the Medicare drug 

benefit. 

4Average drug spending for enrollees eligible for 

the low-income subsidy is higher than for enrollees 

not eligible for the subsidy because a substantial 

portion of those eligible for the low-income subsidy 

are full-benefit dual eligibles, who on average tend 

to be sicker. 

described in more detail in the 

preamble. 

While we model all of our impact 

estimates on the defined standard 

benefit structure, we note that PDP and 

MA–PD plans have the option of 

offering actuarially equivalent standard 

or alternative coverage. In addition, 

plans may offer enhanced alternative 

coverage where for an additional 

premium they offer supplemental drug 

coverage such as coverage for benefits 

above the initial coverage limit (that is, 

coverage of the so-called ‘‘doughnut 

hole’’), and we anticipate that some 

plans will offer this coverage. 

Beneficiaries who meet certain 

income and assets requirements qualify 

for low-income subsidy assistance with 

cost-sharing and premiums. While the 

out-of-pocket threshold level is the same 

for all enrollees, the beneficiary costsharing liability covered by the lowincome subsidy counts towards the Part 

D out-of-pocket threshold. Therefore, 

subsidy-eligible individuals will pay 

substantially less than all other 

enrollees before the catastrophic 

coverage begins. Institutionalized fullbenefit dual eligibles pay no costsharing. Other full-benefit dual eligibles 

with income not in excess of 100 

percent of the Federal Poverty Level 

(FPL) face no deductible, have nominal 

cost sharing of $1 for generic drugs or 

preferred multiple source drugs and $3 

for any other drug up to the out-ofpocket threshold, and receive full 

coverage for drug costs beyond the outof-pocket threshold. Other full-benefit 

dual eligibles with income above 100 

percent of FPL and beneficiaries who 

are not full benefit dual eligibles, but 

who have income less than 135 percent 

of FPL and assets up to $6,000 per 

individual (or $9,000 per couple) in 

2006, face no deductible, have nominal 

cost sharing of $2 and $5 for the 

respective drugs up to the out-of-pocket 

threshold, and receive full coverage for 

costs beyond the out-of-pocket 

threshold. For other beneficiaries with 

income less than 150 percent of FPL and 

assets up to $10,000 per individual (or 

$20,000 per couple) in 2006, there is a 

reduced deductible of $50, cost-sharing 

of 15 percent for costs up to the out-ofpocket threshold, and nominal cost 

sharing of $2 and $5 for the respective 

drugs for costs beyond the out-of-pocket 

threshold. For years after 2006, all 

aspects of the benefit structure related to 

the low-income subsidy are indexed to 

growth in per capita drug spending, 

except for the nominal copayment 

amounts for full-benefit dual eligibles 

with income not in excess of 100 

percent of FPL and the low-incomes 

assets tests, which are indexed to the 

Consumer Price Index. 

The low-income subsidy also offers 

beneficiaries substantial help with 

premiums. Many beneficiaries who 

receive the low-income subsidy will pay 

no premium for Medicare drug 

coverage. Full-benefit dual eligibles and 

beneficiaries who have incomes up to 

135 percent of FPL and who meet the 

assets test receive a full Federal subsidy 

of the beneficiary premium—that is, 

beneficiaries pay no premium as long as 

they select a PDP or MA–PD that has a 

premium that does not exceed the 

greater of the low-income benchmark 

premium or the lowest PDP premium 

for basic coverage for the region and as 

long as they sign up for Medicare Part 

D within the initial enrollment period or 

have met creditable coverage 

requirements. Other beneficiaries 

receiving a low-income subsidy—those 

with income between 135 percent and 

150 percent of FPL and meeting asset 

requirements—would face a sliding 

scale premium based on income. 

Medicare Part D also has implications 

for beneficiaries enrolled in the Program 

of All Inclusive Care for the Elderly 

(PACE). PACE programs already provide 

a comprehensive drug benefit to dual 

eligible enrollees and to enrollees who 

only have Medicare coverage. For the 

dual eligible enrollees, PACE programs 

will now be receiving funding for 

prescription drugs through Medicare 

Part D instead of through the State 

Medicaid program. PACE enrollees who 

only have Medicare coverage are today 

paying the full cost of their drug 

coverage. As a result of the Federal 

subsidization of Part D coverage, they 

will receive substantial premium relief. 

This lowering of premiums for 

beneficiaries who only have Medicare 

coverage may lead to an increase in 

enrollment in PACE organizations. 

3. Estimated Total Drug Spending, 

Spending Paid by the Medicare Drug 

Benefit, and Premiums 

a. Summary 

Table V–1 presents estimates for 

Medicare Part D enrollees of average 

total drug spending, average drug 

spending paid for by the Medicare drug 

benefit, and the average premium 

associated with Medicare Part D drug 

coverage. Since beneficiaries who are 

eligible for the low-income subsidy 

receive additional assistance with costsharing and premiums, we present 

estimates separately for beneficiaries 

who do and do not receive the lowincome subsidy. 

For Medicare Part D enrollees who do 

not receive the low-income subsidy, we 

estimate that average per capita drug 

spending in CY 2006 would be $2,936. 

This projection of drug spending 

includes cost-management savings 

discussed in the next subsection, such 

as price concessions and generic 

substitution, or utilization effects 

resulting from the Medicare drug 

benefit. The Medicare drug benefit 

would be expected to pay for on average 

about $1,437 of prescription drug costs, 

or on average nearly half of total 

beneficiary drug spending in CY 2006.3

Beneficiary premiums for defined 

standard coverage will vary across PDPs 

and MA–PDs. We estimate that the 

beneficiary premium to obtain defined 

standard coverage would be on average 

about $428 per year in CY 2006. Thus, 

we estimate that the average monthly 

premiums would be in the range of 

about $35. A beneficiary may pay more 

or less depending upon which PDP or 

MA–PD the beneficiary selects. For 

these non-low-income beneficiaries, the 

government is estimated to contribute 

$1,231 of the $1,659 total cost of the 

standard Medicare Part D benefit 

(including PDP and MA–PD 

administrative costs). In CY 2010, drug 

spending for Part D enrollees who do 

not receive the low-income subsidy is 

projected to be $3,852 on average, with 

the Medicare drug benefit paying for on 

average $1,890 of prescription drug 

costs. The average premium in CY 2010 

for these beneficiaries is projected to be 

$564 per year or roughly $47 per month 

for defined standard coverage. 

For enrollees who receive the lowincome subsidy, we estimate that 

average per capita drug spending in 

2006 would be $3,649.4 We estimate 

that on average the Medicare drug 

benefit would be expected to pay for 

about $3,476 of prescription drug costs, 

or approximately 95 percent of total 

drug spending. In 2010, these 

beneficiaries would be expected to 

spend on average $4,794 per capita on 

prescription drugs, with the Medicare 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46779 

5We note that to estimate the average sliding 

scale premium we assume a uniform distribution of 

income between 135 percent and 150 percent of 

FPL. If the income distribution is not uniform, the 

average sliding scale premium could differ 

somewhat from our estimates. 

drug benefit paying for on average about 

$4,518 of those drug costs. As discussed 

in the preamble, the low-income costsharing amounts vary depending upon a 

beneficiary’s income and assets. 

Consequently, the share of drug 

spending paid for by the Medicare drug 

benefit would vary by subsidy eligibility 

category, ranging from an average of 

about 85 percent for the highestresource subsidy eligibility category 

(that is, those beneficiaries who qualify 

for the subsidy under the criteria that 

they have income less than 150 percent 

of FPL and assets up to $10,000 per 

individual (or $20,000 per couple) in CY 

2006) to more than 95 percent for the 

most generous subsidy category (that is, 

full-benefit dual eligibles with income 

not in excess of 100 percent of FPL). As 

discussed in the following methodology 

section, these estimates do not take into 

account the waiver of cost sharing for 

institutionalized full-benefit dual 

eligibles, which further enhances the 

drug subsidy for this category of 

beneficiaries. 

As noted previously, many 

beneficiaries who receive the lowincome subsidy receive a full Federal 

subsidy of the beneficiary premium 

(that is, the beneficiary pays no 

premium at all), as long as they enroll 

in a PDP or MA–PD with a premium 

that does not exceed the greater of the 

low-income benchmark premium or the 

lowest PDP premium for basic coverage 

for the region and as long as they enroll 

during the initial enrollment period or 

have met creditable coverage 

requirements. For low-income enrollees 

with income between 135 percent and 

150 percent of FPL who face a sliding 

scale premium based on income, we 

estimate that the premium will average 

$214 per year or roughly $18 per month 

in 2006, and $282 per year or roughly 

$24 per month in 2010.5 The 

government contribution to the cost of 

Medicare Part D prescription drug 

coverage for low-income subsidy 

enrollees is estimated to average almost 

$3,500 in CY 2006. 

b. Methodology and Assumptions 

Underlying Estimates 

To estimate beneficiary drug spending 

for the period CY 2006–2010, we use 

drug spending data from the Medicare 

Current Beneficiary Survey (MCBS) 

adjusted for underreporting and trended 

forward based on projected growth in 

per capita drug spending based on the 

National Health Expenditures 

projections. 

In projecting drug spending for 

enrollees in Medicare Part D, we assume 

that PDPs and MA–PDs will achieve a 

certain level of savings due to cost 

management activities such as 

negotiation of manufacturer rebates and 

discounts and other price concessions, 

and promotion of generic substitution. 

We assume discounts and costmanagement savings of 15 percent in 

2006, 17 percent in 2007, 19 percent in 

2008, 21 percent in 2009, and 23 

percent in 2010. To take into account 

that some enrollees in the Medicare Part 

D drug benefit are likely to have had 

previous drug coverage from other 

sources and received some level of 

discounts and cost-management savings 

through that coverage, we adjusted the 

MCBS spending data upward to reflect 

the full retail price by backing out any 

assumed discounts and cost 

management savings and then applied 

the Part D savings factor. We note that 

some beneficiaries without drug 

coverage are currently receiving 

discounts through the Medicareapproved drug card program. 

Conceptually, those discounts should 

also be backed out of drug spending 

before applying the Part D savings 

factor; however, because the drug 

spending data on which our projections 

are based predate the Medicareapproved drug card program, such an 

adjustment was not necessary. 

Our assumptions related to the cost 

management savings take into account 

several factors. Insured products 

generally obtain lower drug prices than 

those available to cash paying 

customers. For example, an April 2000 

study prepared by HHS entitled, ‘‘A 

Report to the President: Prescription 

Drug Coverage, Spending, Utilization 

and Prices,’’ indicated a significant 

price differential between individuals 

paying cash for prescriptions at a retail 

pharmacy versus individuals with 

insurance. This difference held 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. 

Such price concessions are envisioned 

to be an important part of the Medicare 

drug benefit, as the statute specifically 

requires PDPs and MA–PDs to provide 

beneficiaries with access to negotiated 

prices, which would reflect 

manufacturer rebates and discounts and 

other price concessions. Besides these 

types of price concessions, we also 

anticipate that PDPs and MA–PDs will 

achieve savings as a result of other cost 

management activities such as 

promotion of generic substitution, 

which Medicare will help support as 

well through providing information on 

opportunities for cost savings to 

beneficiaries and their health providers. 

As discussed elsewhere in the preamble, 

the statute requires PDPs and MA–PDs 

to put in place a cost-effective drug 

utilization management program that 

would include incentives to reduce 

costs when medically appropriate. We 

believe that these various efforts are 

likely to increase use of generics relative 

to brand-name drugs among Medicare 

Part D enrollees. 

Furthermore, in developing our cost 

management savings assumptions, we 

also considered the nature of the drug 

price negotiations occurring under the 

Medicare prescription drug benefit. We 

expect that the private price 

negotiations between PDP sponsors and 

drug manufacturers would achieve 

comparable or better savings than direct 

price negotiation between the 

government and manufacturers, as well 

as coverage options that better reflect 

beneficiary preferences. This 

expectation reflects the strong 

incentives to obtain low prices and pass 

on the savings to beneficiaries resulting 

from competition, relevant price and 

quality information, Medicare oversight, 

and beneficiary assistance in choosing a 

drug plan that meets their needs. This 

is similar to the conclusion of other 

analyses, for example, CBO’s recent 

statement that ‘‘Most single-source drugs 

face competition from other drugs that 

are therapeutic alternatives. CBO 

believes that there is little, if any, 

potential savings from negotiations 

involving those single-source drugs. We 

expect that risk-bearing private plans 

will have strong incentives to negotiate 

price discounts for such drugs and that 

the Secretary would not be able to 

negotiate prices that further reduce 

federal spending to a significant 

degree.’’ It also reflects Medicare’s 

recent experience with drug price 

regulation for currently-covered drugs, 

in which regulated prices for many 

drugs have significantly exceeded 

market averages. 

In addition, our drug spending 

projections assume that changes in 

beneficiary out-of-pocket costs resulting 

from the Medicare drug benefit would 

affect beneficiaries’ utilization of drugs. 

For example, as discussed previously, 

beneficiaries without drug coverage fill 

fewer prescriptions and spend less in 

total on prescription drugs than 

beneficiaries with drug coverage. Under 

46780 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the Medicare drug benefit, we would 

expect that drug utilization and 

spending would increase for 

beneficiaries without prior drug 

coverage. Our estimates assume that 

aggregate beneficiary drug spending 

(that is, total drug spending for all 

beneficiaries including those with and 

without drug coverage prior to 2006) 

would be 10.6 percent greater in CY 

2006 than it otherwise would be, due to 

reduced out-of-pocket costs resulting 

from the Medicare drug benefit. 

Using our estimates of projected drug 

spending for enrollees in Medicare Part 

D, we estimate the amount of drug 

spending that would be paid for by the 

Medicare drug benefit, separately for 

enrollees who would and would not 

receive the low-income subsidy. For 

enrollees who receive the low-income 

subsidy, these estimates take into 

account the differential cost-sharing by 

income and assets within the lowincome group. However, due to data 

limitations, our estimates do not take 

into account the fact that beneficiary 

cost-sharing is waived entirely for 

institutionalized full-benefit dual 

eligibles. 

For the purposes of this impact 

analysis, those beneficiaries who are 

assumed to enroll in Medicare Part D 

are assumed to do so within their initial 

enrollment period and face no late 

enrollment penalty. We also assume that 

all low-income beneficiaries with 

income under 135 percent of FPL select 

PDP and MA–PD plans with a premium 

that does not exceed the greater of the 

low-income benchmark premium or the 

lowest PDP premium for basic coverage 

for the region, and thus face no 

beneficiary premium. 

TABLE V–1.—ESTIMATED AVERAGE ENROLLEE TOTAL DRUG SPENDING, DRUG SPENDING PAID FOR BY MEDICARE DRUG

BENEFIT, AND DRUG BENEFIT PREMIUM, CY 2006 AND CY 2010 

Estimated average annual 

drug spending 

Estimated average annual 

drug spending 

paid for by the 

medicare drug 

benefit* 

Estimated average annual premium 

2006: 

Enrollees Not Receiving Low-Income Subsidy ................................................................. $2,936 $1,437 $428. 

Enrollees Receiving Low-Income Subsidy ........................................................................ 3,649 3,476 0 or $214**. 

2010: 

Enrollees Not Receiving Low-Income Subsidy ................................................................. 3,852 1,890 $564. 

Enrollees Receiving Low-Income Subsidy ........................................................................ 4,794 4,518 0 or $282**. 

* Average annual drug spending paid for by the Medicare drug benefit reflects on average how much the Medicare drug benefit will payout per 

beneficiary. This is different from the amount of drug costs the Medicare drug benefit would payout for a beneficiary with average total drug 

spending, due to the interaction between the distribution of drug spending and the deductible and cost-sharing structure of the Medicare drug 

benefit. We also note that the average drug spending paid for by the Medicare Part D plan reflects drug costs reimbursed by the plan and does 

not include PDP or MA–PD administrative costs. 

** Low-income subsidy enrollees with income between 135 percent and 150 percent of FPL face a sliding scale premium based on income, 

which is estimated to average $214 per year in 2006 ($282 in 2010). Other enrollees in the low-income subsidy pay no beneficiary premium at 

all, as long as they select a PDP or MA–PD with a premium that does not exceed the greater of the low-income benchmark premium or the lowest PDP premium for basic coverage for the region and as long as they enroll within the initial enrollment period or have met creditable coverage 

requirements. 

4. Positive Effects of the Medicare 

Retiree Drug Subsidy and Other 

Employer Options for Providing 

Prescription Drug Assistance 

The Medicare prescription drug 

benefit and retiree drug subsidy 

represent additional funding sources 

that can help employers and unions 

continue to provide high quality drug 

coverage for their retirees. We anticipate 

that these new sources of support will 

have many important positive benefits 

for the quality and security of drug 

coverage for retirees. In this section, we 

describe the Medicare retiree drug 

subsidy and several other ways that 

Medicare Part D offers financial 

assistance with retiree prescription drug 

costs to employers and unions. 

a. Overview of the Medicare Retiree 

Drug Subsidy 

The positive benefits for retiree 

coverage from the new retiree drug 

subsidy are the result of the subsidy 

itself, the special tax-favored status of 

the subsidy payments to the qualified 

retiree health plans, and the flexibility 

in using the subsidy to support retiree 

coverage. The retiree drug subsidy 

program has highly flexible rules and 

stands as an additional option that 

permits employers and unions to 

continue providing drug coverage to 

their Medicare-eligible retirees while 

retaining their current plan designs that 

are at least equivalent to the standard 

Part D benefit, and receiving a Federal 

subsidy that reduces the cost of 

providing this coverage. Employers 

retain the option of delivering regular 

supplementation to Medicare Part A and 

Part B benefits through arrangements 

with Medicare Advantage organizations 

offering a MA only plan without the 

Part D benefit, but then still participate 

in the retiree drug subsidy program and 

through a separate private contract with 

the MA organization arrange for an 

employer-sponsored retiree drug 

benefit. 

The intent of the Medicare retiree 

drug subsidy is to offer qualified retiree 

prescription drug plans financial 

assistance with a portion of their 

prescription drug costs and thereby 

‘‘help employers [to] retain and enhance 

their prescription drug coverage so that 

the current erosion in coverage would 

plateau or even improve’’ (Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 Conference 

Report, p. 53). By making a tax-free 

subsidy for 28 percent of allowable 

prescription drug costs (that is, drug 

spending between $250 and $5,000 for 

2006) available to qualified retiree 

prescription drug plans, the Medicare 

retiree drug subsidy significantly 

reduces financial liabilities associated 

with employers’ retiree drug coverage 

and encourages employers to continue 

assisting their retirees with prescription 

drug coverage. 

To provide a rough estimate of the per 

capita retiree drug subsidy, we used 

MCBS data on prescription drug 

spending for retirees with employersponsored coverage, adjusted for underreporting, and trended these data 

forward based on the projected growth 

rate in prescription drug spending from 

the National Health Expenditures 

projections. We then applied 28 percent 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46781 

to annual allowable costs between the 

cost threshold and cost limit ($250 and 

$5,000, respectively, in 2006). This 

calculation yielded an estimated per 

capita retiree drug subsidy amount of 

$611 in 2006. The per capita subsidy 

amount was calculated across all 

beneficiaries in qualified retiree 

prescription drug plans, including both 

those who do and do not have spending 

high enough to qualify for a Medicare 

retiree drug subsidy payment. We are 

aware that there are other sources of 

information on the value of current and 

projected retiree coverage, and we seek 

comment on the completeness and 

accuracy of our MCBS-based projections 

for valuing the retiree subsidy. 

The Medicare retiree drug subsidy is 

excluded from the taxable income of the 

employer (just as the Medicare subsidy 

provided to beneficiaries through the 

Medicare prescription drug benefit is 

excluded from the taxable income of the 

beneficiary). The tax-free nature of the 

Medicare retiree drug subsidy generally 

increases its value to employers. As 

indicators of the value of this tax 

subsidy, we provide some estimates of 

the equivalent values of a taxable 

subsidy for employers at several 

corporate income tax rates. For 

corporations with taxable incomes, 

marginal tax rates generally range from 

15 percent to 35 percent. According to 

estimates by the Congressional Research 

Service, the weighted average effective 

tax rate for corporations that pay taxes 

is approximately 28.5 percent. 

Combining this tax rate and the 

estimated $611 average per capita 

subsidy amount for 2006, we estimate 

that the $611 tax-free retiree drug 

subsidy amount would be equivalent to 

a taxable subsidy of $855 for employers 

subject to taxation. The equivalent 

taxable subsidy for any particular 

employer with taxable income would, of 

course, vary depending on its specific 

marginal tax rate. For example, the taxfree $611 average retiree drug subsidy 

amount would be equivalent to about 

$815 of taxable income for employers 

with a marginal tax rate of 25 percent 

and about $940 of taxable income for 

employers with a marginal tax rate of 35 

percent. We request comments on the 

effect of the tax-favored treatment of the 

subsidy payments for employers and 

retirees, including further evidence on 

the distribution of marginal tax rates 

among employers offering or likely to 

offer retiree coverage. 

Another important factor in whether 

employers or unions will use the retiree 

subsidy is whether their contribution to 

the retiree coverage is sufficient to 

qualify for coverage, and if it is not 

currently sufficient, whether they will 

increase the generosity of their 

contribution in order to receive the cash 

and tax value of the subsidy. As we note 

below, we intend to implement the 

retiree drug subsidy in a manner that 

avoids ‘‘windfalls’’ to employers that are 

not making contributions to retiree 

coverage that reflect the value of the 

retiree subsidy. Because some 

employers appear to contribute less than 

the value of the retiree subsidy to the 

coverage they provide now, we seek 

comment on the current levels and 

trends of such limited employer 

contributions, and on how the new 

Medicare payments may affect decisions 

by firms to increase the generosity of 

their retiree health contributions. Such 

increased contributions are likely to be 

in the financial interest of some 

employers, because they could qualify 

for the value of the full subsidy by 

making an additional incremental 

contribution of less than the full value 

of the subsidy, thereby achieving net 

savings. 

b. Additional Options Available to 

Employers Through Medicare Part D 

As indicated earlier, in addition to the 

ability to obtain Medicare retiree drug 

subsidy payments for sufficiently 

generous drug coverage, Medicare Part 

D also gives employers a variety of other 

options for continuing to assist their 

Medicare-eligible retirees in obtaining 

more generous drug coverage. For 

example, employers that are supporting 

retiree coverage now could also choose 

to provide enhanced drug coverage by 

using the new Medicare Part D subsidy 

directly (that is, encouraging their 

retirees to enroll in an enhanced 

Medicare Part D plan which includes a 

75 percent government subsidy for the 

standard benefit) and employers 

providing enhanced coverage over and 

above the standard Part D benefit that 

maintains or exceeds the generosity of 

their current benefit designs. This can 

be achieved by either arranging for a 

PDP or MA–PD Part D plan to provide 

enhanced benefits to their retirees, 

choosing to become a Part D plan that 

offers enhanced benefits to their 

retirees, or providing separate 

supplemental drug coverage that wraps 

around a Part D plan (similar to the 

typical employer and union policies 

that wrap around Medicare benefits 

under Part A and Part B). 

Based on published employer 

surveys, reports from employers and 

benefit consultants, and other sources of 

evidence including the fact that some 

employers are not making contributions 

to coverage sufficient to qualify for the 

retiree drug subsidy, we expect that 

some employers will choose to provide 

prescription drug assistance to their 

Medicare-eligible retirees in the form of 

enhanced benefit packages through Part 

D plans or separate wraparound 

coverage. In both cases, the employer 

contributions would augment the 

Medicare’s subsidized coverage under 

Part D. Employers currently do this 

relative to Medicare Part A and Part B 

coverage, either through separate 

supplemental policies or through 

arrangements with Medicare Advantage 

plans. In fact, the Medicare retiree drug 

subsidy represents a new type of 

arrangement for employers relative to 

the interaction of their retiree coverage 

with Medicare. Thus, some employers 

may prefer to interface with the new 

Medicare prescription drug benefit in a 

manner similar to their supplementation 

of the basic Medicare Part A and Part B 

benefits. In addition, we anticipate that 

providing enhanced Part D benefits or 

separate wraparound coverage may be 

an attractive option to those employers 

that may not be eligible for the Medicare 

retiree drug subsidy because their 

retiree drug benefits, as currently 

structured, are not actuarially 

equivalent to the standard Medicare Part 

D drug benefit. We also expect that 

many of the employers and unions that 

choose to provide drug coverage 

through or in coordination with Part D 

will also choose to pay some or all of 

their retirees’ Part D premiums. Since 

the Medicare Part D drug benefit 

includes a direct Federal subsidy, these 

approaches would allow employers to 

continue to provide a benefit package of 

similar or greater generosity compared 

to their existing arrangements while 

potentially lowering their prescription 

drug costs. 

Although the Medicare prescription 

drug benefit and retiree drug subsidy 

represent additional funding sources for 

employer-sponsored retiree drug 

coverage that can help employers to 

retain drug coverage for their retirees, 

there are also a number of economic 

forces unrelated to Medicare that play a 

role in employers’ decision making 

regarding both the availability and the 

generosity of employer-sponsored 

retiree health coverage. Many of the 

economic forces behind the ongoing 

erosion of retiree health benefits that are 

discussed subsequently in this impact 

analysis may continue to give employers 

a financial incentive to reduce the costs 

associated with providing retiree health 

coverage. The Employee Benefit 

Research Institute (EBRI) has estimated 

that additional declines in retiree drug 

coverage could potentially continue to 

occur, particularly for future retirees, 

‘‘due to existing business, accounting, 

46782 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

and cost trends,’’ regardless of changes 

in the Medicare program (‘‘EBRI Special 

Analysis: How Many Medicare 

Beneficiaries Will Lose EmploymentBased Retiree Health Benefits if 

Medicare Covers Outpatient 

Prescription Drugs?’’ Dallas L. Salisbury 

and Paul Fronstin, Employee Benefit 

Research Institute, July 18, 2003, 

available at http://www.ebri.org). 

c. Anticipated Effects of the Medicare 

Retiree Drug Subsidy Program and 

Part D Assistance for Retirees 

While there is considerable 

uncertainty about the choices that 

employers will make regarding the form 

of prescription drug assistance that they 

may choose to provide for their 

Medicare-eligible retirees, we believe 

that employers will generally continue 

to provide prescription drug assistance 

to their retirees and that Medicare Part 

D will make it more affordable for them 

to do so. 

First, with the decline over the years 

in the number of employers offering 

retiree health insurance coverage, the 

remaining employers who continue to 

offer such coverage directly are likely 

those employers who have a contractual 

commitment or other interest in 

maintaining that coverage. 

Second, although employers’

responses to Medicare Part D and the 

retiree drug subsidy are expected to play 

out over the next few years, initial 

signals suggest that there has been a 

positive response to the Medicare retiree 

drug subsidy. Several major employer 

associations, including the Employers’

Coalition on Medicare, American 

Benefits Council, and the U.S. Chamber 

of Commerce, have praised the MMA for 

giving businesses flexibility in deciding 

how their retiree health plans will 

interact with the Medicare prescription 

drug benefit, and for offering employers 

a 28 percent Medicare retiree drug 

subsidy payment that would not be 

taxed for employers who continue to 

provide high-quality retiree coverage 

(‘‘ECOM Applauds Historic Passage of 

Medicare Reform Legislation,’’

Employers’ Coalition on Medicare press 

release, November 25, 2003, http:// 

www.employersandmedicare.org; 

‘‘Senate Passes Medicare, Prescription 

Drug Reform Bill,’’ press release, 

American Benefits Council, November 

25, 2003, http:// 

www.americanbenefitscouncil.org, 

‘‘Chamber Praises Congressional Action 

on Medicare Reforms,’’ U.S. Chamber of 

Commerce, November 25, 2003, http:// 

www.uschamber.com). 

Additionally, several major 

corporations have recently issued 2003 

annual reports that include estimates of 

the reduction in their accumulated 

benefits obligation that will occur over 

time due to the Medicare subsidy 

payments they anticipate receiving 

under the Medicare retiree drug subsidy 

program. Eighteen companies have 

estimated that they would collectively 

save $11.8 billion in long-term 

postretirement benefit costs, which are 

expected to be amortized over the full 

working life of the employees that are 

eligible for these benefits (‘‘Expected 

Cost Savings From Medicare Act May 

Top $11.8 Billion’’, Lingling Wei, Dow 

Jones Newswires, The Wall Street 

Journal, March 22, 2004, available at 

http://www.wsj.com). However, we are 

aware that some of these companies 

may need to revise their initial estimates 

to reflect: (1) The Financial Accounting 

Standards Board’s (FASB) recentlyissued Final Staff Position on 

accounting for the effects of the 

Medicare retiree drug subsidy 

payments, which is effective for 

financial statements for periods 

beginning after June 15, 2004 (‘‘FASB 

Staff Position Number FAS 106–2, 

Accounting and Disclosure 

Requirements Related to the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003,’’ posted 

May 19, 2004, available at http:// 

www.fasb.org/fasb_staff_positions/ 

fsp_fas106-2.pdf), and (2) the 

regulations for the retiree drug subsidy. 

Although most publicly traded 

companies have chosen to defer 

recognizing the effects of the Medicare 

retiree drug subsidy payments pending 

receipt of additional accounting and 

regulatory guidance, these sources 

suggest that numerous large companies 

that offer employment-based retiree 

prescription drug coverage anticipate 

continuing to provide this coverage and 

accepting the Medicare retiree drug 

subsidy payments. However, some 

employers have not yet decided whether 

they will apply for the Medicare retiree 

drug subsidy, and are considering the 

various other options that are available 

for providing prescription drug 

assistance to their Medicare-eligible 

retirees (See Press Releases and 

Statements, Press Room of the 

Employers’ Coalition on Medicare, 

available at http:// 

www.employersandmedicare.org). 

Overall, we believe that the 

implementation of Medicare Part D, 

including the Medicare retiree drug 

subsidy and the other opportunities it 

affords employers for providing 

continued prescription drug assistance 

to their Medicare retirees, will result in 

combined aggregate payments by 

employers and Medicare for drug 

coverage on behalf of retirees generally 

being greater—and frequently 

significantly greater—than they 

otherwise would have been without the 

enactment of the MMA. Furthermore, 

we believe that the Medicare 

prescription drug benefit and retiree 

drug subsidy represent a particularly 

important strengthening of health care 

coverage for future Medicare-eligible 

retirees, given the erosion in the 

availability and generosity of employersponsored retiree coverage for future 

Medicare beneficiaries that has already 

been taking place. In addition to 

comments on how employers are likely 

to view each choice of coverage, we also 

seek comment on how the several 

options available to employers to 

continue or increase the generosity of 

their retiree coverage can be designed 

together to maximize the increase in 

availability of high-quality drug benefits 

for retirees. This includes a request for 

comments on modeling not just the 

choice by employers and unions of 

retiree drug subsidy, wrapping around 

Part D coverage, qualifying as an 

enhanced Part D plan directly, or using 

an enhanced PDP or MA plan, but also 

the impact of these choices on premium 

reductions and additional drug benefits 

for retirees and thus the impact on 

reducing retirees’ net payments for 

drugs and other health services. 

d. Historical Trends in the Availability 

and Generosity of Retiree Drug Coverage 

As additional background, we provide 

a discussion of trends in the availability 

and generosity of employer-sponsored 

retiree drug coverage, based on data 

from several different sources. We note 

that there are a limited number of data 

sources relating to retiree coverage, and 

some of these data sources may not be 

directly comparable to one another due 

to differences in the scope of analysis 

(for example, overall retiree health 

benefits versus specific information on 

retiree drug coverage), unit of analysis 

(for example, retirees versus firms, or 

firms versus establishments), as well as 

differences in the age groups, types of 

retirees (current versus future), and 

employer sizes that are being analyzed. 

For these reasons, caution should be 

exercised in making comparisons across 

the various data sources that are cited in 

this section. 

As noted previously, employersponsored insurance has been an 

important source of drug coverage for 

many Medicare beneficiaries. However, 

for well over a decade, the availability 

and generosity of employer-sponsored 

retiree health coverage has been 

eroding, particularly for future retirees. 

The level of employer-sponsored retiree 

health coverage has been relatively 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46783 

stable for the nation’s current retirees 

during recent years. However, the 

apparent stability of benefits has been 

changing for future retirees. 

For example, the trend in retiree 

health coverage for older Medicare 

beneficiaries (ages 70 and older) was 

essentially flat between 1996 and 2000 

(‘‘Employer-Sponsored Health Insurance 

and Prescription Drug Coverage for New 

Retirees: Dramatic Declines in Five 

Years,’’ Bruce Stuart et al, Health 

Affairs, July 23, 2003, available at http:// 

www.healthaffairs.org). 

From 1988 to 1991, the percentage of 

firms with 200 or more workers offering 

health benefits to active workers that 

also offered retiree health benefits 

declined substantially from 66 percent 

to 46 percent (KPMG Survey of 

Employer-Sponsored Health Benefits: 

1988, 1991, cited in Kaiser/HRET 2003 

Annual Survey of Employer-Sponsored 

Health Benefits, available at http:// 

www.kff.org) due to the implementation 

of Financial Accounting Statement No. 

106 (FAS 106) as well as increasing 

costs. FAS 106, which was published in 

December 1990, required companies to 

make significant changes in the way that 

they accounted for future retiree health 

benefits on their balance sheets for fiscal 

years ending after December 15, 1992 

(‘‘Retiree Health Benefits: Trends and 

Outlook,’’ Paul Fronstin, Employee 

Benefit Research Institute (EBRI) Issue 

Brief No. 236, August 2001; ‘‘Statement 

of Financial Accounting Standards No. 

106: Employers’ Accounting for 

Postretirement Benefits Other Than 

Pensions,’’ Financial Accounting 

Standards Board, December 1990, 

available at http://www.fasb.org/pdf/ 

fas106.pdf). The percentage of large 

employers offering retiree health 

coverage has continued to decline 

during the past decade (General 

Accounting Office (GAO), ‘‘Retiree 

Health Benefits: Employer-Sponsored 

Benefits May Be Vulnerable To Further 

Erosion,’’ May 2001, available at http:// 

www.gao.gov). However, the recent 

declines have been more gradual than 

what occurred during the early 1990s, 

with slightly less than 40 percent of the 

nation’s large firms with 200 or more 

workers that offer health benefits to 

active workers also offering retiree 

health benefits in 2003 (Kaiser/HRET 

2003 Annual Survey of EmployerSponsored Health Benefits, available at 

http://www.kff.org). 

Many of the changes in availability of 

retiree health coverage in the past 

decade have primarily affected future 

retirees, rather than current retirees. 

(Fronstin, August 2001). For example, 

the percentage of large employers with 

500 or more employees offering retiree 

health benefits to new Medicare-age 

(that is, ages 65 and older) retirees 

decreased from 40 percent in 1993 to 21 

percent in 2003 (data from the National 

Survey of Employer-Sponsored Health 

Plans, 2003 cited in a press release 

entitled ‘‘Surprise slow-down in U.S. 

health benefit cost increase,’’ Mercer 

Human Resource Consulting, December 

8, 2003, available at http:// 

www.mercerhr.com). As a result, new 

retirees are less likely to have employersponsored retiree drug coverage than 

current retirees. 

Availability of retiree health coverage 

varies depending on the type of 

employer. Employers with union 

workers are more likely to offer retiree 

coverage than employers without union 

workers. Similarly, public sector 

employers are more likely to offer 

coverage to retirees than private sector 

employers. (Kaiser/HRET 2003 Annual 

Survey of Employer-Sponsored Health 

Benefits, available at http://www.kff.org; 

‘‘How States Are Responding to the 

Challenge of Financing Health Care for 

Retirees,’’ Jack Hoadley, Henry J. Kaiser 

Family Foundation, September 2003, 

available at http://www.kff.org.) 

Availability of retiree health coverage 

also varies according to the size of the 

employer. Larger employers are more 

likely to offer retiree health coverage 

than smaller employers. For example, in 

2003, 38 percent of the nation’s private 

sector firms with 200 or more workers 

that offered health benefits to active 

workers also offered retiree health 

coverage to pre-age 65 and/or Medicareage retirees (Kaiser/HRET, 2003). 

However, very few smaller employers 

offer retiree health insurance. Recent 

surveys have found that only 3 to 10 

percent of the nation’s smaller private 

sector firms (3 to 199 workers) that offer 

health benefits to active workers also 

offer retiree health coverage (Kaiser/ 

HRET 2001, 2002 and 2003 Annual 

Surveys of Employer-Sponsored Health 

Benefits, available at http:// 

www.kff.org). 

Larger employers account for the 

majority of the beneficiaries with 

employer-sponsored retiree coverage. In 

2001, data from the Medical 

Expenditures Panel Survey indicate that 

less than 1 percent of the nation’s 

smallest private establishments (those 

with a ‘‘firm size,’’ or total number of 

employees for the entire firm, of less 

than 50 employees) offered health 

insurance to Medicare-age retirees, 

compared with 37 percent of the 

nation’s largest private sector 

establishments (those with a firm size of 

1,000 or more employees). As a result, 

within the private sector, the largest 

firms (1,000 or more employees) 

covered approximately 90 percent of the 

Medicare-age retirees who had 

employer-sponsored retiree coverage, 

while smaller firms (fewer than 1,000 

employees) covered only 10 percent of 

these retirees. 

In an effort to control costs, many 

employers have been changing their 

benefit packages (for example, reducing 

the benefit that is offered and/or 

increasing the amount that the retiree 

has to pay), resulting in gradual erosion 

in the generosity of this coverage over 

time. For example, since the mid-1990s, 

some employers have made changes in 

eligibility for retiree health coverage (for 

example, age and service requirements), 

reduced their subsidization of retiree 

health costs (by increasing retirees’

share of premiums and increasing 

retirees’ co-payments and deductibles), 

placed caps on the employer 

contribution to retiree health costs 

(aggregate or per beneficiary), or moved 

to offering a defined contribution health 

benefit (Fronstin, August 2001; GAO, 

May 2001). Because many employers 

have identified prescription drug costs 

as a major contributor to rising retiree 

health benefit costs, they have adopted 

cost control measures in an effort to 

manage their retiree prescription drug 

costs (Kaiser/HRET, 2003). 

The intent of Medicare Part D and the 

retiree drug subsidy is to provide 

employers and unions with a set of 

highly flexible options that are designed 

to make it more affordable for them to 

continue providing high-quality 

prescription drug assistance to their 

Medicare-eligible retirees. As discussed 

earlier, the MMA Conference Report 

indicates that by lowering the cost of 

providing retiree drug benefits and 

providing financial incentives for 

employers to maintain this coverage for 

their Medicare-eligible retirees through 

Medicare Part D and the retiree drug 

subsidy, it is hoped that the erosion in 

the availability of employer-sponsored 

retiree drug coverage will plateau or 

even improve. 

Overall, we expect that the 

implementation of Medicare Part D, 

including the Medicare retiree drug 

subsidy and the other opportunities it 

affords employers for providing 

continued prescription drug assistance 

to their Medicare retirees, will result in 

combined aggregate payments by 

employers and Medicare for drug 

coverage on behalf of retirees generally 

being greater—and frequently 

significantly greater—than they 

otherwise would have been without the 

enactment of the MMA. Furthermore, 

the Medicare prescription drug benefit 

and alternative retiree drug subsidy 

represent a particularly important 

46784 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

6We note that the estimated net Federal 

budgetary effect of Medicare subsidy payments 

excludes changes to governmental receipts (that is, 

tax collections) because we do not have sufficient 

data to estimate these effects at this time. 

7For the purposes of this impact analysis, we do 

not assume any additional Medicare costs or 

savings related to risk corridors. We also do not 

assume any savings on Part A and Part B benefits. 

strengthening of health care coverage for 

future Medicare-eligible retirees, given 

the erosion in the availability and 

generosity of employer-sponsored 

retiree coverage for future Medicare 

beneficiaries that has been taking place. 

G. Anticipated Effect on the Federal 

Budget 

The following section presents 

estimates of the effect of Medicare Part 

D on net Federal budgetary spending. 

As indicated previously there is a great 

deal of uncertainty related to making 

these estimates, including the 

implications of outstanding policy and 

administrative issues that are the subject 

of this rule making. These represent our 

current best mid-range estimates of the 

net Federal budgetary effects. We have 

explored various potential approaches. 

We believe that these estimates provide 

a reasonable representation of the likely 

effects of a variety of proposed policies 

and potential options. 

We expect that the Medicare drug 

benefit will affect several components of 

the Federal budget. Specifically, we 

anticipate that it will increase Federal 

spending on Medicare benefits and 

decrease Federal spending on Medicaid 

benefits (as dual eligibles’ drug coverage 

is shifted from Medicaid to Medicare). 

The net effect of these changes on 

Federal spending is estimated to be 

about $48 billion in CY 2006 and $67 

billion in CY 2010, with the total effect 

estimated to be about $287 billion over 

the period from 2006–2010. Table V–2 

provides year-by-year estimates of the 

net Federal budgetary effects 6 of 

Medicare and Medicaid benefit 

spending. We discuss these effects 

subsequently, as well as the expected 

impacts of the Medicare drug benefit on 

Federal administrative costs for 

Medicare, Medicaid, and the Social 

Security Administration. 

1. Federal Medicare Spending 

We estimate that the net Federal 

budgetary effect of Medicare benefit 

spending related to Medicare Part D, 

including the Medicare retiree drug 

subsidy program, will be nearly $59 

billion in CY 2006 and $353 billion over 

the five-year period from CY 2006–2010. 

The estimated $353 billion in additional 

net Federal spending over the five-year 

period is made up of approximately 

$401 billion in net Federal spending on 

direct government subsidies, 

government reinsurance payments, lowincome subsidies, and retiree drug 

subsidies, with an offset of nearly $49 

billion in additional Medicare revenues 

received from States to partially 

compensate for Medicare coverage of 

dual eligibles’ drug costs (overall, we 

estimate States will save due to reduced 

Medicaid spending, as is explained 

subsequently).7

In addition, CMS expects to incur 

administrative expenses related to the 

Medicare drug benefit. Implementing a 

new program of the size and scope of 

the Medicare drug benefit requires 

substantial implementation expenses, 

including extensive computer and other 

systems changes. We are in the process 

of developing estimates of these 

administrative costs as the policies and 

operational framework for the program 

are developed through the rulemaking 

process and other efforts. 

2. Federal Medicaid Spending 

As a result of Medicare Part D, there 

is expected to be a reduction in net 

Federal spending on Medicaid benefits 

for the period CY 2006–2010, with the 

reduction estimated to be about $10 

billion in CY 2006 and about $66 billion 

over the five-year period from CY 2006–

2010. 

With the Medicare program providing 

drug coverage to dual eligibles who had 

previously received drug coverage 

through Medicaid, State Medicaid 

spending on prescription drugs will be 

reduced, and as a result Federal 

spending on Medicaid matching 

payments will also be reduced. We 

estimate reduced Federal Medicaid 

spending on prescription drugs for fullbenefit dual eligibles of about $12 

billion in CY 2006 and about $76 billion 

during the five-year period from CY 

2006–2010. 

The reduction in Federal spending for 

Medicaid prescription drug benefits will 

be partially offset by an increase in 

Federal Medicaid spending for newly 

enrolled dual eligibles. As discussed in 

more detail in the State impacts section, 

the additional benefits available to lowincome beneficiaries through Medicare 

Part D and our outreach activities are 

likely to raise awareness of other 

benefits available to such individuals 

through Medicaid, including Medicare 

Savings (QMB/SLMB) programs, and 

lead to higher enrollment in these 

programs. We assume that 1.1 million 

more Medicare beneficiaries will enroll 

in Medicaid, including Medicare 

Savings (QMB/SLMB) programs, in CY 

2006 as a result of the Medicare drug 

benefit. As discussed later in the State 

impacts section, we estimate that a 

larger share of these beneficiaries will 

receive benefits as QMB/SLMB 

individuals than will receive full 

Medicaid benefits. Among beneficiaries 

that are eligible for, but not enrolled in 

Medicaid, we assume a smaller 

Medicaid uptake rate among those 

beneficiaries that are eligible for full 

Medicaid benefits, because we believe 

that if these beneficiaries were likely to 

sign up for the richer full Medicaid 

benefit package, most would have done 

so already. We assume a somewhat 

higher uptake rate for those 

beneficiaries that are eligible for QMB/ 

SLMB benefits. We estimate Federal 

matching payments for State Medicaid 

expenditures for these beneficiaries will 

be about $1.7 billion in CY 2006, and 

total about $10 billion during the fiveyear period from CY 2006–2010. 

In addition, the Medicare drug benefit 

has implications for Federal spending 

on Medicaid administrative costs. The 

statute gives responsibility to State 

Medicaid programs as well as the Social 

Security Administration for conducting 

eligibility determinations for lowincome benefits under Part D. In 

addition, States are required to provide 

CMS with data for the purposes of 

calculating the amounts States are 

required to pay Medicare to compensate 

for a portion of full-benefit dual 

eligibles’ drug costs. These activities 

will generate State administrative costs. 

Just prior to enactment of the MMA, the 

State share of costs for these 

determinations was estimated at roughly 

$100 million per year beginning in FY 

2005. The Federal share of costs would 

be expected to be roughly the same in 

any year, and we have projected about 

$106 million in Federal matching 

payments for these State administrative 

activities in the FY 2005 budget. We 

plan to develop an updated estimate of 

State administrative costs for eligibility 

determination activities once the 

operational processes for the eligibility 

determinations are more fully 

developed, including accounting for any 

efficiency gains resulting from SSA 

participation. 

3. SSA Administrative Costs 

As noted previously, the Social 

Security Administration (SSA) is one of 

the entities given responsibility by the 

MMA for making eligibility 

determinations for low-income benefits 

under Part D as well as conducting 

outreach activities. In addition, SSA 

will be involved in premium collection 

via withholds from Social Security 

checks. SSA’s administrative costs 

associated with these functions will be 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46785 

paid out of the Medicare trust funds. 

Estimates of these administrative costs 

will be developed as the policies and 

operational framework for the program 

are formulated through the rulemaking 

process and other efforts. 

TABLE V–2.—ESTIMATED NET FEDERAL BUDGETARY EFFECTS OF MEDICARE AND MEDICAID BENEFIT SPENDING, CY 

2006–2010 

[billions of dollars] 

2006 2007 2008 2009 2010 2006–2010 

Net Effect of Medicare Benefit Spending Related to 

Medicare Part D 

Federal Spending Related to Medicare Part D, including the Retiree Drug Subsidy ......................... 67.2 73.1 79.7 86.8 94.7 401.4 

State Payments to Partially Offset Medicare Drug 

Costs for Dual Eligibles ......................................... ¥8.5 ¥9.1 ¥9.7 ¥10.4 ¥11.1 ¥48.7 

Subtotal .............................................................. 58.7 64.0 70.0 76.4 83.6 352.6 

Net Effect of Medicaid Benefit Spending 

Additional Federal Matching Payments for Newly 

Enrolled Dual Eligibles .......................................... 1.7 1.9 2.1 2.2 2.4 10.4 

Reduction in Federal Matching Payments for Medicaid Drug Expenditures for Dual Eligibles ........... ¥12.0 ¥13.5 ¥15.1 ¥16.9 ¥18.9 ¥76.3 

Subtotal .............................................................. ¥10.2 ¥11.6 ¥13.0 ¥14.6 ¥16.4 ¥65.9 

Net Federal Budgetary Effects of Medicare and Medicaid Benefit Spending ................................................. 48.4 52.4 56.9 61.8 67.1 286.7 

NOTE: Positive numbers denote increased spending; negative numbers denote reduced spending (that is, savings). Numbers may not sum to 

totals due to rounding and exclude effects on Federal revenues. 

H. States 

1. Overall State Budgetary Impacts 

We estimate that, as a result of 

Medicare Part D, States will realize net 

savings of $8.2 billion over the CY 

2006–2010 period. Estimated State 

savings range from approximately $500 

million in CY 2006, increasing each year 

during the five-year period, to reach 

about $3 billion by CY 2010. The 

estimated $8.2 billion in net State 

savings over the five-year period are 

made up of $65.3 billion in State 

savings related to Medicare Part D that 

are partially offset by $57.1 billion in 

State costs related to Medicare Part D. 

We estimate that States will save 

approximately $65 billion as the 

Medicare Part D drug benefit and 

Medicare retiree drug subsidy provide 

financial support for prescription drug 

costs of full-benefit dual eligibles, State 

retirees, and participants in State 

prescription drug assistance programs. 

The vast majority of these State savings 

are the result of Medicare Part D 

replacing drug coverage for full benefit 

dual eligibles that would otherwise be 

paid for by Medicaid. States will also 

achieve savings due to Medicare retiree 

drug subsidies that will be available to 

State governments that provide 

qualified prescription drug coverage for 

their retirees. States that operate 

prescription drug assistance programs, 

as well as states with Pharmacy Plus 

programs, will also realize additional 

savings as Medicare Part D displaces a 

portion of their spending on 

prescription drug coverage for enrollees. 

Savings for State prescription drug 

programs are discussed in more detail in 

a separate section later in this analysis. 

The estimated $65 billion in State 

savings, discussed previously, will be 

partially offset by approximately $57 

billion in State costs related to Medicare 

Part D over the period CY 2006–2010. 

Those costs include State payments to 

the Federal government to partially 

offset Medicare Part D costs for fullbenefit dual eligibles, additional 

Medicaid benefit spending resulting 

from an anticipated increase in 

Medicaid enrollment, and reduced State 

premium tax revenues as some 

beneficiaries shift from drug coverage 

that is subject to State taxation to 

Medicare Part D which is exempt from 

taxation. 

The largest component of these costs 

are State payments to the Federal 

government to defray a portion of the 

Medicare drug expenditures for fullbenefit dual eligibles, estimated at about 

$48.7 billion from CY 2006–2010. As 

discussed in the preamble, the States 

and the District of Columbia are 

required to make these monthly 

payments beginning January 1, 2006. It 

is important to note that the data 

sources and methodology used to 

estimate these State payments for the 

purposes of this impact analysis differ 

somewhat from those that will be used, 

as stipulated by statute and described in 

more detail in Subpart S of the 

preamble, to calculate the actual State 

payment amounts for 2006. The 

expenditure data that will be used to 

calculate the actual State payment 

amounts are not yet available, and thus 

for the purposes of this impact analysis 

we relied on MCBS as the data source 

to produce an estimate of aggregate State 

payments. 

Another component of these costs is 

increased State Medicaid spending due 

to increased Medicaid enrollment. We 

anticipate that in the process of 

outreach and applying for the Part D 

low-income subsidy, some beneficiaries 

will learn of their eligibility for other 

low-income assistance such as Medicaid 

or Medicare Savings (QMB/SLMB) 

programs and choose to enroll in these 

programs. We estimate that about 1.1 

million additional beneficiaries will 

enroll in Medicaid or the Medicare 

Savings programs in CY 2006; with 23 

percent of those beneficiaries estimated 

to receive full Medicaid, 19 percent to 

receive QMB benefits, and 58 percent to 

receive SLMB benefits. We estimate that 

State Medicaid spending on benefits for 

these individuals will be about $7.8 

billion over the five-year period from 

CY 2006–2010. 

Also included in our estimate of State 

costs is the effect of the MMA’s 

prohibition on States imposing taxes on 

premiums related to Part D coverage. As 

a result of this prohibition, we estimate 

that States will realize reduced 

premium tax revenues of approximately 

$535 million over the period CY 2006–

2010. 

In addition, the statute gives 

responsibility to State Medicaid 

46786 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

programs as well as the Social Security 

Administration for conducting 

eligibility determinations for lowincome benefits under Part D. We have 

not included these costs in our above 

estimates of net State savings. However, 

prior to enactment of the MMA, we 

roughly estimated the State share of 

costs for these determinations at 

approximately $100 million a year, 

beginning in FY 2005. We plan to 

develop an updated estimate of these 

costs once the operational processes for 

the eligibility determinations are more 

fully developed. Given that our net 

savings estimate averages $1.5 billion 

per calendar year and exceed $500 

million in every year, we do not believe 

that these administrative costs 

significantly affect the level of savings 

States will realize from implementation 

of Medicare Part D. 

We also note that States are generally 

responsible for issuing licenses to health 

insurers. While some new PDP plans 

will require new licenses, the States 

charge fees for licensing and the States 

already have the mechanisms in place to 

handle these new license applications. 

Furthermore, licensing would not affect 

current insurers that want to become 

PDPs if these insurers are already 

licensed as insurers in a given State; the 

PDP would simply be a new line of 

business for these insurers. Thus, we do 

not estimate any cost implications for 

the States associated with licensing 

insurers. 

2. State Prescription Drug Assistance 

Programs 

As mentioned previously, one of the 

components of our estimate of net State 

savings resulting from Medicare Part D 

is savings on State Pharmaceutical 

Assistance Programs (SPAPs). We 

estimate that SPAPs spend roughly 

$1.45 billion of State only resources on 

prescription drug assistance for 1.2 

million individuals, based largely on FY 

2002 data. Five States account for 

approximately 87 percent of the SPAP 

spending, and have approximately 77 

percent of the enrollment. For Medicare 

beneficiaries who have income less than 

135 percent of the Federal Poverty Level 

(FPL) and assets valued up to $6,000 per 

individual (or $9,000 per couple), Part 

D offers comprehensive drug coverage 

with a full Federal subsidy for the 

beneficiary premium and only nominal 

cost-sharing. Thus, SPAP expenditures 

on this group of Medicare beneficiaries 

will be mostly displaced by the 

Medicare prescription drug benefit. We 

estimate that the savings that will 

accrue to States as a result of Medicare 

Part D displacing SPAP expenditures for 

low-income beneficiaries will be 

approximately $600 million per year, or 

about $3 billion over the five-year 

period from CY 2006–2010. 

States with SPAPs have shown a 

commitment to assisting their lowincome residents with drug costs. As of 

Spring 2004, nineteen States were 

operating SPAPs that provide 

subsidized drug coverage to individuals 

who will be eligible for Medicare Part D. 

CMS anticipates that many of these 

States will choose to continue providing 

financial assistance with drug 

expenditures, because they can achieve 

the same or greater level of assistance 

for their beneficiaries at a lower cost to 

the States. Part D provides States with 

a number of options for continuing their 

provision of prescription drug 

assistance to Medicare beneficiaries, if 

they choose to do so. States, for 

example, have the flexibility to 

restructure their SPAP programs to wrap 

around the Part D benefit and pay 

deductibles and cost sharing for 

beneficiaries with the State’s assistance 

counting toward the Medicare Part D 

annual out-of-pocket threshold 

triggering protection against 

catastrophic drug costs. States can also 

provide assistance by paying for Part D 

premiums for beneficiaries. As part of 

their SPAPs, States also have the 

flexibility to make arrangements with 

PDPs and MA–PDs to provide enhanced 

Part D benefits. 

We believe that we are presenting a 

conservative estimate of the 

displacement of SPAP expenditures, 

because our assessment does not 

include any potential State savings for 

SPAP enrollees at income levels above 

135 percent of FPL. States that choose 

to restructure their programs to 

complement Medicare Part D can still 

achieve savings because of the 

substantial Medicare displacement of 

SPAP spending for low-income 

beneficiaries as well as for individuals 

who enroll in Part D and do not qualify 

for the low-income subsidy. 

We also note that, as discussed 

elsewhere in the preamble, Section 

1860D–23(d) of the Act provides for the 

payment of transitional grants to States 

with Pharmaceutical Assistance 

Programs of up to $62.5 million in each 

of fiscal years 2005 and 2006. In 

addition, the statute provides the 

authority (Section 1860D–23(a) of the 

Act) for the Secretary to establish 

requirements for effective coordination 

between Part D plans and SPAPs. For 

further discussion related to 

coordination of benefits see the section 

on coordination of benefits under 

Administrative Costs. 

To estimate potential SPAP savings 

resulting from Medicare Part D 

expenditures, we focus our analysis on 

SPAP expenditures that may be spent 

on individuals with income below 135 

percent of FPL. We are primarily relying 

on State-published data that describe 

SPAPS and their eligibility standards 

(sources such as State government 

websites, program annual reports, and 

Governor’s budget documents). Our 

ongoing work with States also provides 

us with certain information regarding 

enrollment and expenditures under 

SPAPs. Unless we have adequately 

detailed State-published data on SPAP 

expenditures for enrollees by income, 

we use the Census Bureau’s Current 

Population Survey (CPS) data to help us 

estimate SPAP spending on 

beneficiaries with income under 135 

percent of FPL. 

We recognize that our methodology 

has significant limitations and that our 

estimates are imprecise. For example, 

our analysis does not take into account 

the effect of the Medicare Part D assets 

test and does not include an estimate of 

potential savings for SPAP enrollees 

with income greater than 135 percent of 

FPL. We believe that States, with their 

own internal data and resources, are in 

the best position to project individual 

State-level impacts. Therefore, we invite 

States to provide specific enrollment 

and expenditure data by FPL for their 

State and any State-specific savings 

estimates they may have developed, as 

well as comments on improvements in 

our methodology. 

3. Pharmacy Plus Waiver Programs 

Four States under Medicaid section 

1115 waivers operate Pharmacy Plus 

demonstration programs that provide 

assistance to Medicare beneficiaries 

with the cost of prescription drugs. 

Expenditures for these services receive 

Federal matching payments in the same 

manner as do services for full benefit 

Medicaid beneficiaries. Similar to the 

impact on State only funded SPAPs, we 

expect that the new Medicare drug 

benefit will be assuming a large share of 

the costs for prescription drugs 

previously financed through Pharmacy 

Plus waiver programs and consequently 

we believe States will achieve savings as 

a result. To be conservative, State 

savings estimates for these four 

Pharmacy Plus programs have not been 

included in our estimates of overall 

State savings, and would be in addition 

to net State savings presented in this 

analysis. 

As noted elsewhere in the preamble 

the statute affords State only funded 

SPAP expenditures special treatment 

relative to the application of the TrOOP, 

in that the SPAP expenditures can be 

counted toward the out-of-pocket 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46787 

protection threshold. However, as 

previously discussed, Pharmacy Plus 

waiver programs are not considered to 

be SPAPs. Due to the special treatment 

SPAPs receive relative to the TrOOP, 

our analysis of the States with Pharmacy 

Plus waivers indicates that States that 

operate Pharmacy Plus programs and 

beneficiaries enrolled in those programs 

could benefit financially by States 

restructuring their Pharmacy Plus 

programs to use a State only SPAP 

design to wrap around Medicare Part D. 

Under such an approach, we believe 

that generally States could realize 

savings relative to their current 

Pharmacy Plus spending levels and that 

program participants would face lower 

out-of-pocket costs due to the generous 

Medicare Part D catastrophic coverage. 

We welcome comments on this, and as 

indicated previously we would 

welcome further data and analyses from 

States. 

I. Administrative Costs 

There are four major areas of 

administrative costs associated with 

Medicare Part D that will be incurred by 

the private and public sector that merit 

separate discussion. These areas include 

the costs for PDPs and MA–PDs for 

administering the Medicare prescription 

drug benefit, the cost of creditable 

coverage disclosure notices that the 

MMA requires be provided to Medicare 

beneficiaries, the administrative costs 

associated with certain coordination of 

benefits as required by the MMA, and 

the administrative costs associated with 

obtaining the Medicare retiree drug 

subsidy. The following provides a 

detailed discussion of each of these 

areas. 

1. Prescription Drug Plans and MA–PD 

Plans 

The administrative cost estimates are 

based on taking into account the normal 

fixed costs associated with 

administering a prescription drug 

benefit, for example, such functions as 

claims processing, responding to 

customer inquiries, information 

dissemination, appeals processes, 

pharmacy network negotiations and 

contracting, and drug manufacturer 

negotiations and contracting. In 

addition, we assume ‘‘risk-premium’’

costs associated with risk-based 

insurance products that require 

companies to maintain certain levels of 

financial reserves. The other factor 

taken into account when developing our 

estimate is that PDPs and MA–PDs will 

likely incur slightly higher 

administrative costs during the initial 

few years of the Part D benefit due to 

start-up costs related to implementation 

and initial operations for a new benefit, 

for example more marketing and 

enrollment activities. We also assume 

that entities that will participate as 

PDPs will have already made the 

necessary changes to be HIPAA 

compliant because of the other business 

arrangements they will have been 

functioning in prior to choosing to 

participate as a PDP under the Medicare 

drug benefit program. 

As is typically done with insurance 

products, we express the average 

administrative costs as a percentage 

relative to net standard benefit 

expenses. This percentage is commonly 

referred to as the ‘‘administrative load.’’

We estimate that the average 

administrative load will be 12.7 percent 

in CY 2006, with this declining slightly 

over time, and reaching 11.5 percent in 

CY 2010. The administrative load is 

expected to decline slightly over the 

period for two reasons: (1) 

administrative costs are expected to 

grow at a somewhat slower rate than 

PDP and MA–PD plans’ prescription 

drug costs and (2) initial administrative 

start-up costs associated with 

implementation are expected to phase 

out in the first few years of operations. 

Our estimates for administrative costs 

are similar to those seen in the general 

insurance market. Our administrative 

load of 12.7 percent in 2006 translates 

into administrative costs being about 

11.2 of total Part D plan expenditures 

(including both benefits and 

administrative costs). This is similar to 

the share of total health plan spending 

accounted for by administrative costs in 

the private sector. For example, as CMS 

reported in its ‘‘Health Care Industry 

Market Update on Managed Care’’ Blue 

Cross Blue Shield health plans had 

average sales, general and 

administrative (SG&A) expenses ranging 

from 12 percent in 1999, 11.7 percent in 

2000, 11.3 percent in 2001, and 10.9 

percent in the first half of 2002. 

Similarly, in examining our Medicare 

Advantage plans data we see variation 

in administrative costs, for example 

newer plans (less than 5 years) seem to 

have higher administrative costs (11 

percent) than older plans (7 percent). 

The MMA also requires PDPs and 

MA–PDs to pay a user fee to help offset 

ongoing beneficiary education and 

enrollment costs relating to the 

Medicare prescription drug benefit, 

which represents an expansion of the 

user fees that are currently required of 

MA plans. As discussed earlier in this 

preamble, the MMA authorizes up to 

$200 million for beneficiary education 

and enrollment activities in FY 2006 

and thereafter, reduced by the fees that 

will be collected from MA organizations 

and PDP sponsors in that fiscal year. 

Our rough estimates of the user fees for 

beneficiary education and enrollment 

costs in CY 2006 are approximately $22 

million for PDPs and $50 million for 

MA organizations, with the remainder 

(approximately $128 million) being the 

government’s share. While the user fees 

will actually be collected on a fiscal 

year basis, we believe that these 

estimates, which are based on calendar 

year data, provide a reasonable estimate 

of what the magnitude of these user fees 

will be during a given fiscal year. We 

assume that the cost of these user fees 

will be built into the administrative cost 

structure of the PDPs and MA–PDs, and 

will therefore be reflected in bids. We 

note that these user fees represent a 

minuscule percentage of the estimated 

total payments to MA organizations and 

PDP sponsors under the Medicare 

program. 

2. Disclosure Notice Requirements 

A number of entities that provide 

prescription drug coverage to Medicare 

beneficiaries—Medigap plans, private 

and public sector employer or union 

sponsored plans that provide drug 

coverage to Medicare beneficiaries who 

are retired or who are active workers, 

State Medicaid programs including 

State Pharmacy Plus programs, and 

State Pharmacy Assistance programs 

(SPAPs)—are required to provide at 

certain times disclosure notices to 

beneficiaries on whether the coverage 

provided equals or exceeds the actuarial 

value of standard coverage. The largest 

cost for providing these notices is 

expected to occur in the months 

preceding the implementation of the 

drug benefit in January 2006. Thereafter, 

notices will generally only need to be 

provided by these entities if there is a 

change in creditable coverage status. 

Also, firms that provide drug coverage 

to active workers will have to provide 

disclosure notices in the future to those 

active workers who become new 

Medicare beneficiaries. 

With the exception of Medigap 

insurers and group health plans that 

provide drug coverage only to Medicare 

beneficiaries who are active workers 

(and not retirees), implementation of the 

Medicare prescription drug benefit and 

the retiree drug subsidy is expected to 

produce net savings to public and 

private sector entities that provide drug 

coverage to Medicare beneficiaries. For 

State Medicaid programs, SPAPs, State 

Pharmacy Plus programs, and private 

and public sector employer sponsored 

plans that provide retiree drug coverage, 

we estimate that the cost of disclosure 

notices will be about $29 million in 

2005, with anticipated savings from the 

46788 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

implementation of Medicare Part D 

expected to far exceed the disclosure 

notice costs for each of these entities. 

For Medigap insurers and group 

health plans that offer coverage only to 

beneficiaries who are active workers, 

not retirees, the cost of providing 

disclosure notices is estimated to be 

approximately $69 million in 2005 

(which translates into an average of 

roughly $154 per employer that offers 

drug coverage to Medicare beneficiaries 

who are active workers and about 

$11,050 per Medigap insurer). 

We anticipate that disclosure notice 

costs in years after 2005 will generally 

be minimal. However, employer 

sponsored health plans that provide 

drug coverage to active workers are 

likely to expend some time in future 

years for disclosure notices for the more 

limited number of new beneficiaries 

who age into the Medicare program. 

These employer plans would also incur 

costs in the event that their plan has a 

substantial change in its benefit 

structure that makes a reconfirmation of 

their creditable coverage status 

appropriate. We estimate administrative 

costs of roughly $5 million to $6 million 

per year for these employers during the 

period 2006–2010. 

In brief, we take the following 

approach to estimate the cost of 

disclosure notices. For the various 

entities that are required to provide 

disclosure notices, the circumstances of 

these different types of coverage and 

how they will relate to the new 

Medicare prescription drug benefit 

differ. Consequently the nature of the 

disclosure notice and any associated 

actuarial valuation will vary. Beyond 

the cost of the actuarial valuation are 

the costs of preparing and mailing the 

notices. We generally base our cost 

estimates on 2005 wage data for an 

actuary and administrative personnel 

loaded for compensation, overhead, 

general administration, and fee. 

In terms of the basic costs of 

preparing and mailing the disclosure 

notice, we assume that each entity 

required to provide these notices 

expends 8 hours for developing the 

notice (with one exception), 1 hour per 

60 notices for producing and 

disseminating the notices to 

beneficiaries, and 1 hour for providing 

a copy of the notice to CMS. The one 

exception to this is group health plans 

that provide drug coverage only to 

Medicare beneficiaries who are active 

workers, not retirees. We assume these 

entities expend less time developing the 

notice (2 hours) because we expect that 

this service is likely to be provided to 

them by insurers or health plan 

administrators who we anticipate will 

spread the cost of this service across 

many employers. 

In terms of the time involved in 

performing the actuarial valuation that 

forms the basis of the disclosure notices, 

we anticipate that it will vary somewhat 

by the type of entity providing the 

notice. In the case of Medicaid, we 

assume that the actuarial valuation costs 

will be negligible as Medicare Part D 

will be assuming primary responsibility 

for drug coverage for full benefit dual 

eligibles and we assume that any 

supplemental coverage States may 

provide (for example, coverage for drugs 

not covered under Medicare Part D) 

would not be creditable. With respect to 

SPAPs and State Pharmacy Plus 

programs, we expect that the actuarial 

assessment is not likely to be complex, 

and that the disclosure notice will likely 

focus on how the State program will 

work with the new Medicare drug 

benefit. We assume that each SPAP and 

State Pharmacy Plus program would 

expend on average 2 hours for actuarial 

work. 

The notice requirement related to 

Medigap drug policies we believe will 

be relatively straightforward. In 

accordance with section 104 of the 

MMA, CMS is developing a model 

disclosure notice for Medigap insurers 

in consultation with the NAIC. For 

standardized Medigap plans, we 

anticipate that the actuarial work 

involved in developing these notices 

will be negligible. As discussed 

elsewhere in the preamble, we believe 

that standard Medigap plans H and I are 

not creditable and that it is very 

unlikely that plan J would be creditable. 

In the case of the pre-standardized 

policies the nature of the actuarial 

valuation and the level of effort 

involved will likely vary with the nature 

of the benefit package. For the purposes 

of this analysis, we assume that on 

average an actuarial valuation for an 

insurer offering pre-standardized 

Medigap policies would involve 6 hours 

of an actuary’s time. For the three 

Medigap waiver states, we assume that 

the actuarial valuation would be fairly 

straightforward since these States have 

generally prescribed a fixed benefits 

structure for Medigap drug coverage. 

Consequently, we have assumed an 

average of 3 hours of an actuary’s time 

per insurer serving the waiver States. 

Employer sponsored retiree health 

plans that apply for the Medicare retiree 

subsidy will have to perform an 

actuarial valuation for the purposes of 

their application. We assume that those 

plans will simply use the actuarial 

valuation developed for the subsidy 

application also for the disclosure 

notices. Thus, we assume negligible 

costs for the actuarial valuation related 

to the disclosure notices. Estimates of 

the administrative costs related to 

applying for the Medicare retiree 

subsidy, including the actuarial 

valuation, are discussed elsewhere in 

this document. 

Disclosure notices are also required of 

group health plans that provide drug 

coverage to active workers who are 

Medicare beneficiaries (that is, 

beneficiaries where Medicare is the 

secondary payer). It is very difficult to 

know how many firms that provide 

health insurance to their active workers 

have a Medicare beneficiary in their 

workforce. We have estimated roughly 

as an upper bound that there may be as 

many as 440,000 firms that provide drug 

coverage to at least one Medicare 

beneficiary who is an active worker. We 

emphasize that this is a very rough 

estimate that extrapolates from data 

from a number of sources (including an 

IRS, SSA, CMS data match, Census data, 

BLS data, and a Kaiser survey). 

We anticipate that many of these 

employers are purchasing standard 

health insurance products from insurers 

that sell these plans to numerous 

purchasers and that the cost of the 

actuarial valuation will be spread across 

a relatively large number of employers 

or third party purchasers. While selfinsured employers may have more 

distinct health plan benefit structures, 

we believe that it is likely that their 

health plan administrators would be 

able to achieve economies of scale by 

building actuarial models that can serve 

a number of clients. In addition, the cost 

of the valuation for those employers that 

also offer retiree drug coverage could be 

incorporated into the costs required to 

do an actuarial valuation for both types 

of coverage and thus there may be some 

economies of scale. For these reasons, 

we assume that each of these employers 

will on average incur expenses for onequarter of an hour of actuarial time. This 

relatively low number reflects our 

assumption that insurers will spread the 

cost of these valuations across a large 

number of purchasers. 

In years after 2005, employers that 

provide drug coverage to Medicare 

beneficiaries who are active workers are 

likely to expend some additional time 

related to disclosure notices, but we 

anticipate this time will be substantially 

less than in 2005. In subsequent years, 

we anticipate that these employers will 

provide disclosure notices to their 

workers who age into the Medicare 

program and continue working. In 

addition, it is possible that a portion of 

employers may alter their drug benefit 

design to such an extent that a 

reconfirmation of their creditable 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46789 

coverage status may be appropriate. We 

assume that those active workers who 

become new Medicare beneficiaries 

each year require notices, that about 25 

percent of firms per year obtain a new 

actuarial valuation on their benefit 

design, and that about 1 percent of firms 

per year have a change in creditable 

coverage status that requires a notice. 

As discussed previously, we 

anticipate that the disclosure notice cost 

per employer that offers drug coverage 

to Medicare beneficiaries who are active 

workers (and not retirees) will be 

relatively small—$154 per employer on 

average in 2005 and substantially less in 

future years. However, we are 

concerned about these expenditures in 

relation to their benefits to employers 

and Medicare beneficiaries who are 

active workers and the number of firms 

that could potentially be affected. We 

seek comment on ways to minimize 

burden on these employers and whether 

other approaches could lower these 

costs. 

3. Coordination of Benefits Under 

Employer-Sponsored Plans and SPAPs 

CMS is required under the statute to 

establish requirements for coordination 

of benefits between Medicare PDPs and 

MA–PDs and other insurers including 

SPAPs, Medicaid programs, group 

health plans, FEHBP, military coverage 

including TRICARE, and other coverage 

CMS may specify. Ensuring accurate 

and timely coordination of benefits is 

important for tracking the true out-ofpocket limit, a cornerstone of the benefit 

design. This will necessitate that an 

efficient and effective operational 

framework be established to track 

beneficiary out-of-pocket expenditures. 

As discussed elsewhere in the preamble, 

CMS is considering and seeking 

comment on a wide range of options 

related to coordination of benefits. For 

example, one of the fundamental issues 

is who should have responsibility for 

developing the systems infrastructure 

needed to track beneficiary out-ofpocket expenditures—PDPs and MA–

PDs or the government. If the 

government were to develop a system to 

facilitate tracking beneficiary out-ofpocket expenditures, there is the 

additional question of how this system 

should be set up operationally and how 

data flow should be structured into and 

out of the system from pharmacies, 

supplemental insurers, and Part D 

plans. Given that such a wide range of 

approaches is under consideration for 

coordination of benefits, it is not 

possible to estimate the administrative 

costs associated with coordination of 

benefits at this time. We seek comment 

on the cost implications of various 

options discussed in the preamble and 

will be working to develop a cost 

estimate of coordination of benefits 

activities for the final rule. 

4. Estimated Administrative Costs in 

Applying for Retiree Drug Subsidy 

Qualified retiree prescription drug 

plans that choose to accept the Medicare 

retiree subsidy will incur some 

administrative costs associated with 

obtaining the subsidy. As discussed 

earlier in the preamble, sponsors will 

have to submit to CMS an application 

for the Medicare retiree drug subsidy, 

including an attestation that the 

actuarial value of the prescription drug 

coverage under their retiree plan or 

plans is at least equal to the actuarial 

value of standard prescription drug 

coverage under Medicare Part D, which 

must be signed by the plan sponsor (or 

a plan administrator designated by the 

sponsor). As part of this application, 

employers are also required to provide 

other information including data about 

the eligible covered Medicare retirees in 

their plan or plans. In addition, entities 

accepting the Medicare retiree drug 

subsidy payments will have to comply 

with certain reporting requirements and 

maintain records for purposes of audit 

and oversight by CMS. We also note that 

employer and union sponsored health 

plans that provide drug coverage to 

beneficiaries are required to provide, at 

certain times, creditable coverage 

disclosure notices to beneficiaries. 

These notices are required regardless of 

whether the plan sponsor applies for a 

subsidy, and consequently the costs of 

these notices are discussed in the 

section of this analysis on disclosure 

notices. 

In developing the proposed rule, we 

have tried to minimize the 

administrative burden associated with 

the operation of the retiree subsidy 

program, and we seek comments 

regarding our proposed administrative 

approaches and reporting requirements. 

We want to establish an efficient 

administrative structure that provides 

maximum flexibility for qualified retiree 

prescription drug plans, while at the 

same time providing for an appropriate 

level of financial accountability that 

assures the accuracy of payments and 

safeguards the interests of beneficiaries, 

consistent with our fiduciary 

responsibility. Thus, we are seeking 

public comment on appropriate 

approaches for achieving this objective. 

For purposes of the ‘‘Collection of 

Information Requirements’’ section and 

the accounting statement in this 

proposed rule, we have developed an 

estimate of the time and aggregate 

employer costs involved in the various 

administrative functions associated with 

employers obtaining the Medicare 

retiree subsidy including: subsidy 

application requirements, including 

performing the actuarial valuation; 

preparing the plan(s)’ enrollment files to 

identify the eligible Medicare retiree 

population and other relevant 

information; assembling the application; 

and record retention. We base our cost 

estimates on 2005 wage data for an 

actuary and administrative personnel 

loaded for compensation, overhead, 

general administration, and fee. 

a. Application for Retiree Drug Subsidy 

Including Actuarial Attestation 

In applying for the subsidy, sponsors 

of qualified retiree prescription drug 

plans are required to provide to CMS an 

attestation that the actuarial value of the 

prescription drug coverage in each such 

plan is at least equal to the actuarial 

value of standard Medicare Part D 

prescription drug coverage. Sponsors of 

qualified retiree prescription drug plans 

will need to submit this attestation on 

an annual basis, and submit an updated 

attestation if there is a change during 

the year that materially affects actuarial 

value of their drug coverage. As 

discussed earlier in the preamble, a 

material change means any change that 

potentially causes a plan to no longer 

meet the actuarial equivalence test 

(these submissions would not be 

required when non-material changes are 

made to the coverage). 

We are aware that many employers 

purchase retiree health coverage by 

paying premiums to insurance 

companies. Thus, one insurance 

company may be offering the same 

prescription drug benefit design to 

numerous employers, and consequently 

be able to spread the cost of the 

actuarial valuation across a number of 

purchasers. Similarly, many employers 

use pharmacy benefit managers (PBMs) 

to administer their prescription drug 

benefits, and again the same benefit 

design may be used by multiple 

employer plans, generating economies 

of scale. 

We are also aware that any given 

sponsor may be offering more than one 

qualified retiree prescription drug plan 

in which Medicare beneficiaries are 

enrolled and for which Medicare retiree 

drug subsidy payments are sought. 

Another factor in the cost of actuarial 

attestations, however, is that employers 

can potentially use one actuarial model 

to analyze multiple plans’ benefit 

designs that, for example, are similar in 

design but use different co-payments. 

Thus, there may also be economies of 

scale in conducting the analyses for 

employers that have multiple plans. 

46790 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Because of these factors, the total time 

involved in preparing the actuarial 

valuation is likely to vary across 

qualified retiree plans. To develop 

assumptions, we had discussions with 

actuaries in CMS’ Office of the Actuary 

and other industry experts. From these 

discussions, we developed a range of 

time estimates for preparing actuarial 

models, taking into consideration: The 

use of actual plan data if it is available 

and credible, the time to conduct the 

analyses, the issue of economies of scale 

in the use of one model to analyze 

multiple plans, and the time involved in 

preparing the written attestation report. 

Based on these discussions, our 

preliminary estimate is that total time 

involved in developing one actuarial 

model and preparing an analysis and 

report on one plan could range from 6 

to 40 hours. For the purposes of this 

analysis, we assume that average time 

involved in the actuarial valuation per 

firm ranges from one-third of an hour 

for very small firms (where the actuarial 

valuation is performed by an insurance 

company and its cost is spread across a 

large number of purchasers) to 100 

hours for very large firms that offer 

multiple plans. Based on these 

assumptions and taking into account the 

time involved for firms of different 

sizes, we estimate that the cost of the 

actuarial valuation would on average be 

in the range of about 1.8 percent of the 

value of the retiree subsidy. 

In addition to the actuarial valuation, 

plans sponsors applying for the retiree 

subsidy will need to prepare the 

application and related enrollment data 

and information on retirees, and 

ultimately sign the agreement if 

approved to receive the subsidy. We 

anticipate that the time involved in 

preparing the application and required 

enrollment information will vary by 

firm size, with the average time ranging 

from 5 hours for the smallest firms with 

6 retirees on average to 382 hours for the 

largest firms with more than 1,500 

retirees on average. As discussed 

elsewhere, some of the information 

needed on eligible beneficiaries may not 

be routinely available to plan sponsors 

and consequently for initial start-up 

some level of effort may be needed to 

obtain this information. We have been 

conservative in our assumptions to 

reflect this possibility. It is important to 

note that a significant portion of the 

time involved would be a one-time 

expense. In addition, we estimate that 

each firm will expend one-half hour 

signing and submitting the final 

agreement. Based on these assumptions, 

we estimate that on average across large 

and small firms, the cost involved in 

preparing the application and related 

enrollment information (excluding the 

actuarial work) and ultimately signing 

the agreement would be in the range of 

about 3.2 percent of the value of the 

subsidy. It is important to note that after 

the first year, we believe these costs will 

decline as the initial work associated 

with identifying the eligible population 

will have been accomplished and as 

employers and their agents gain more 

experience with the program. 

b. Reporting 

In order to obtain the subsidy, 

sponsors of qualified retiree 

prescription drug plans will need to 

submit certain data to CMS and 

maintain certain records. This proposed 

rule outlines a number of different 

options we are considering in terms of 

data reporting. At this time, we have not 

determined which option is the most 

efficient and effective method of 

obtaining the data and information 

necessary for administering this 

program and we seek public comment 

on the various options. 

As discussed in detail in the preamble 

and the alternatives considered section, 

the options that we are considering 

related to data reporting vary in terms 

of their scope, level of detail, and 

frequency of data reporting activities. 

Consequently, at this time it is not 

possible to estimate the administrative 

costs of reporting requirements under 

this proposed rule. However, we 

anticipate that the administrative costs 

associated with the data reporting will 

be small relative to the Medicare retiree 

drug subsidy payments received by 

employers. Because prescription drug 

data and records are highly automated, 

there are significant economies of scale 

related to reporting and audit 

requirements. In addition, one of our 

primary objectives in establishing the 

data reporting requirements will be to 

do so in as cost effective a manner as 

possible while upholding our fiduciary 

responsibilities. We seek public 

comment on the administrative costs 

associated with any of the data reporting 

options under consideration in this rule, 

as well as any other approaches for 

minimizing such costs. 

In addition to data reporting, 

employers that receive the subsidy will 

also be required to retain data and 

records for six years. For the purposes 

of this analysis, we assume that the time 

involved in record retention would vary 

by firm size, with the average time 

ranging from 4 hours for the smallest 

firms to 20 hours for the largest firms. 

Based on these assumptions and taking 

into account the varied time involved 

across firms of different sizes, we 

estimate that on average the record 

retention would be in the range of about 

0.5 percent of the value of the subsidy. 

c. Conclusion 

Based on our analyses, we estimate 

that the administrative costs associated 

with obtaining the retiree subsidy 

(excluding the data reporting 

requirements not yet determined) will 

represent on average in the range of 

about 5.5 percent of the value of the 

subsidy in 2006 and are expected to 

decline significantly in subsequent 

years. After the first year, we believe 

these costs will decline as the initial 

work associated with identifying the 

eligible population will have been 

accomplished and as employers and 

their agents gain more experience with 

the program. 

J. Medigap Provisions 

The MMA prohibits Medigap insurers 

from selling new Medigap policies that 

cover prescription drugs after December 

31, 2005 and prohibits the renewal of 

existing Medigap policies with drug 

coverage for beneficiaries who enroll in 

Medicare Part D. Part D enrollees with 

current Medigap drug coverage have the 

choice of renewing their existing 

Medigap policy without drug coverage 

or buying certain other Medigap plans 

that do not have drug coverage if they 

enroll in a Part D plan in the initial 

enrollment period. We emphasize that 

the MMA itself directly restructures the 

role of Medigap insurance, and that it is 

not the result of this rulemaking. 

We estimate that about 1.9 million 

beneficiaries would be enrolled in 

Medigap plans with drug coverage in 

2006, absent the law change. As 

discussed elsewhere in this analysis, we 

assumed nearly all of these beneficiaries 

will enroll in Medicare Part D. As a 

result of the statutory prohibition on the 

sale of Medigap policies with drug 

coverage to Part D enrollees, we expect 

these beneficiaries will move from 

Medigap policies that contain 

prescription drug coverage to Medigap 

policies that do not contain such 

coverage. We expect that the policies 

without drug coverage will have lower 

premiums. If all beneficiaries with 

Medigap drug coverage enrolled in the 

Medicare drug benefit, we estimate that 

the reduction in Medigap insurers 

revenues associated with MMA 

prohibition on the sale or renewal of 

policies with drug coverage would be 

approximately $2.5 billion in 2006, $2.6 

billion in 2007, $2.8 billion in 2008, 

$3.0 billion in 2009, and $3.2 billion in 

2010. We note, however, that some 

Medigap insurers may choose to enter 

the PDP or MA–PD market and offer 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46791 

those products. This market entry might 

mitigate the revenue impacts on these 

insurers, and could even possibly 

produce a revenue gain for these 

insurers, as the Medicare prescription 

drug benefit would be subsidized and 

likely attract more enrollees. In 

addition, we believe that the movement 

of beneficiaries from Medigap drug 

coverage to Medicare Part D will 

generate substantial savings for these 

beneficiaries on prescription drug costs. 

The standard Medicare Part D benefit 

provides a 75 percent subsidized 

benefit, catastrophic coverage, and cost 

savings from discounts and other cost 

management activities. It also is not 

likely to suffer from the substantial 

adverse selection, and resulting 

increased premiums, that are seen in 

Medigap plans with drug coverage. 

Our estimates of Medigap enrollment 

in policies with drug coverage and the 

premiums associated with that drug 

coverage were developed using data 

from NAIC on standardized Medigap 

plans, and information gathered by a 

CMS contractor on pre-standardized 

Medigap plans and waiver State plans. 

While our estimates do not take into 

account standalone Medigap drug 

policies, these policies represent 

substantially less than 1 percent of the 

Medigap market and would not affect 

the estimates. 

K. Small Business Analysis 

The Regulatory Flexibility Act (RFA) 

requires agencies to determine whether 

a proposed rule will have a ‘‘significant 

economic impact on a substantial 

number of small entities.’’

If a rule is expected to have a 

significant economic impact on a 

substantial number of small entities the 

RFA requires that an Initial Regulatory 

Flexibility Analysis (IRFA) be 

performed. Under the RFA, a ‘‘small 

entity’’ is defined as a small business (as 

determined by the Small Business 

Administration (SBA)), a non-profit 

entity of any size that is not dominant 

in its field, or a small government 

jurisdiction. 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. 

With respect to the Medicare 

prescription drug benefit and retiree 

drug subsidy, there are three areas that 

we believe merit discussion related to 

small business impacts: (1) Pharmacies, 

(2) insurers and PBMs, and (3) 

employers. We anticipate that the 

pharmacy industry, which is comprised 

of both chains and a large number of 

independent pharmacies, will play a 

critical role in the Medicare drug benefit 

as it furnishes prescription medicines 

and pharmacy services to beneficiaries 

enrolled in Medicare Part D. While the 

Medicare prescription drug benefit is 

expected to have several effects on 

pharmacy revenues, both positive and 

negative, our estimate is that the impact 

on the overall pharmacy industry, 

including small pharmacies, will be 

positive. 

Since PDPs and MA–PDs are the 

principal vehicles through which the 

Medicare prescription drug benefit is 

administered, we also examine whether 

there are any small business impacts on 

the types of businesses expected to 

apply to be prescription drug plans—

that is, insurers and PBMs. Our analysis 

suggests that while the statutorily 

created Medicare Part D program would 

increase drug utilization and thus be 

favorable to insurers and PBMs, this 

proposed rule as such will have little 

overall effect on the insurance and PBM 

industry, and certainly not a significant 

adverse impact. 

In the case of the small employers 

who continue to provide qualified 

prescription drug coverage for their 

retirees, we estimate that savings 

obtained from the Medicare retiree drug 

subsidy will greatly exceed the 

employer’s administrative costs 

associated with obtaining the subsidy, 

and thus the result of the retiree drug 

subsidy provision is a net positive 

impact. We would like to make 

participation in the retiree drug subsidy 

program as simple as possible for small 

entities. 

While we believe that we could 

certify that this proposed rule will not 

have a significant economic impact on 

a substantial number of small entities, 

we provide an Initial Regulatory 

Flexibility Analysis (IRFA) and request 

comment on this conclusion as well as 

any aspects of the rule that might 

adversely affect small businesses, or that 

could be modified to increase positive 

impacts. 

In addition, in accordance with 

Section 1102(b) of the Social Security 

Act, we also address whether this rule 

will have an impact on the operations 

of small rural hospitals. 

1. Pharmacies 

The RFA requires us to determine 

whether this rule will have a significant 

economic impact on a substantial 

number of small pharmacies. SBA 

considers pharmacies with firm 

revenues of less than $6 million to be 

small businesses. The 1997 Economic 

Census (the latest available detailed 

data) indicates that there were about 

21,000 firms operating about 41,000 

retail pharmacies and drug store 

establishments (NAICS code 44661) 

continuously through 1997. Of these 

firms, about 20,000 had revenues under 

$5 million (which was the small 

business size standard in 1997) and 

operated a total of about 21,000 

establishments. Since over 95 percent of 

pharmacy firms are small businesses (as 

defined by the SBA size standards), we 

do expect that the statutorily-created 

Medicare prescription drug benefit will 

have some effect on a substantial 

number of small pharmacies. However, 

we estimate that overall the revenue 

effect on the retail pharmacy industry, 

including small pharmacies, will be 

positive. Furthermore, we emphasize 

that this effect is really a result of the 

statutorily-created Medicare 

prescription drug benefit, and not this 

rulemaking. 

We anticipate that, although the 

Medicare prescription drug benefit will 

lead to both revenue increases and 

decreases for pharmacies, the increase 

in revenues is estimated to more than 

offset the decrease in revenues. First, we 

expect that the vast majority of 

beneficiaries currently without 

prescription drug coverage will choose 

to enroll in Medicare Part D. The 

extension of drug coverage to these 

individuals, and the resulting lower outof-pocket costs they face when 

purchasing prescription drugs, is 

expected to lead to higher drug 

utilization and total expenditures, and 

consequently higher revenues for 

pharmacies. At the same time, some of 

these beneficiaries without prior drug 

coverage, as well as some beneficiaries 

with Medigap drug coverage, would be 

expected to realize new pharmacy 

discounts under Medicare Part D that 

they otherwise would not obtain. We 

note that the Medicare prescription drug 

benefit would not lead to any additional 

pharmacy discounts for the majority of 

beneficiaries who currently have drug 

coverage as they already obtain 

pharmacy discounts through their 

current insurers (for example, employersponsored health plans, Medicare 

Advantage plans, and State plans). In 

addition, we have examined the 

potential for increased use of mail order 

pharmacies among some beneficiaries, 

and its potential impact on retail 

pharmacies. As described in more detail 

subsequently, we estimate that the 

countervailing effects of increased 

utilization and new pharmacy discounts 

and possibly new use of mail order 

pharmacies among some beneficiaries 

would result in a net increase in retail 

pharmacy revenues ranging from a 

lower bound of 1.7 percent to an upper 

bound of 3.0 percent. 

46792 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Second, since State Medicaid 

programs typically pay higher 

reimbursement rates to pharmacies than 

private sector insurers. We expect that 

pharmacies would experience some 

reduction in revenues due to the 

movement of full-benefit dual eligibles 

from Medicaid drug coverage to 

Medicare drug coverage (through PDPs 

and MA–PDs). As discussed in more 

detail subsequently, our upper bound 

estimate of the average reduction in 

pharmacy revenues that could result 

from full-benefit dual eligibles receiving 

drug coverage from Medicare is 1.1 

percent. We believe this is an 

overestimate of the revenue reduction 

because it does not take into account the 

effect of the Federal Upper Payment 

Limit on reducing Medicaid 

reimbursement rates for many multisource drugs. Also, to the extent that a 

State Medicaid program has adopted 

managed care arrangements to lower the 

cost of drugs for dual eligibles, our 

estimate of the revenue impact of 

pharmacy reimbursement changes for 

full-benefit dual eligibles would be 

overstated. 

Considering together the effect of 

increased utilization, new pharmacy 

discounts and possibly new use of mail 

order pharmacies among some 

beneficiaries, and reimbursement 

changes for full-benefit dual eligibles, 

we estimate that retail pharmacy 

revenues would experience a net 

increase ranging from 0.6 percent to 1.9 

percent, as a result of the Medicare 

prescription drug benefit. Furthermore, 

while we are not able to provide a 

quantitative estimate at this time, we 

expect that pharmacies may realize 

additional revenues from the MMA 

requirement that PDPs and MA–PDs 

offer medication therapy management 

programs to targeted enrollees, which 

may be furnished by pharmacists. Our 

estimates also do not take into account 

that increased use of prescription drugs 

resulting from the Medicare drug benefit 

may lead to increased foot traffic in 

pharmacies and increased sales for 

pharmacies’ other goods in addition to 

prescription medicines. 

We note that our estimate of the 

overall impact on small pharmacies 

represents the average effect. We 

recognize that the effect on any specific 

pharmacy will likely vary to some 

extent around the average. While we 

have estimated that the average effect on 

small pharmacies would range from 0.6 

percent to 1.9 percent, it is possible that 

some individual pharmacies could 

experience smaller positive effects and 

even in some cases negative revenue 

effects. While it is possible that a 

specific pharmacy because of unique 

circumstances could experience a 

negative revenue impact, we believe 

that this will be uncommon. For 

example, it is likely that pharmacies 

that serve a large population of fullbenefit dual eligibles (for which 

pharmacies would experience a revenue 

decrease) would tend to be located in 

low-income areas that also serve a large 

population of beneficiaries without drug 

coverage (for which pharmacies would 

experience a revenue increase). This 

would suggest that pharmacies that 

experience larger than average revenue 

reductions for full-benefit dual eligibles 

would also tend to be those that 

experience larger than average revenue 

increases for beneficiaries without prior 

drug coverage. However, lack of data 

makes estimating the distributional 

effects among small pharmacies 

speculative. We seek comments and 

data that can help inform this issue. 

a. Expansion of Drug Coverage and 

Increased Access to Pharmacy Discounts 

Among Beneficiaries Previously Lacking 

Such Coverage or Discounts 

A substantial portion of beneficiaries 

(about 24 percent as of 2001) lack drug 

coverage. As discussed in Section E, we 

project that nearly all beneficiaries 

without drug coverage will enroll in the 

Medicare drug benefit. The expansion of 

drug coverage to these individuals is 

likely to have countervailing effects on 

pharmacy revenues. First, it is likely to 

lead to increased drug utilization and 

spending among beneficiaries without 

prior drug coverage, and thus increased 

pharmacy revenues. Second, it is likely 

to lead to increased access to pharmacy 

discounts for some beneficiaries who 

previously did not receive such 

discounts (specifically, many 

beneficiaries without drug coverage and 

beneficiaries with Medigap drug 

coverage), and thus decreased revenues 

for pharmacies. Because many 

beneficiaries that currently have 

prescription drug coverage (for example, 

those in employer sponsored retiree 

health plans or Medicare Advantage 

plans) already receive pharmacy 

discounts through those insurers, we do 

not expect the Medicare prescription 

drug benefit to generate any new 

pharmacy discounts for these 

beneficiaries. In addition, it is possible 

that the Medicare drug benefit may lead 

to new use of mail order pharmacies 

among beneficiaries without prior drug 

coverage and beneficiaries with 

Medigap drug coverage, potentially 

having some effect on retail pharmacy 

revenues. Overall, we estimate that 

increased utilization for beneficiaries 

without prior drug coverage and new 

pharmacy discounts and possibly new 

use of mail order pharmacies among 

some beneficiaries will result in a net 

positive revenue impact for retail 

pharmacies. 

Medicare beneficiaries without prior 

drug coverage who enroll in the 

Medicare drug benefit will face a 

substantial reduction in out-of-pocket 

costs for prescription medicines, and 

consequently we expect that their drug 

utilization and expenditures will 

increase. Beneficiaries with drug 

coverage fill more prescriptions and 

have higher total drug spending than 

beneficiaries without drug coverage. 

Based on 2001 MCBS data, beneficiaries 

with drug coverage have average total 

drug spending that is 109 percent 

greater than beneficiaries without drug 

coverage. These spending differences 

hold true even among beneficiaries with 

similar numbers of chronic conditions. 

For example, average spending for 

beneficiaries with drug coverage was 

higher than for beneficiaries without 

drug coverage among beneficiaries with 

no chronic conditions (247 percent 

higher), 1–2 chronic conditions (107 

percent higher), 3–4 chronic conditions 

(76 percent higher), and 5 or more 

chronic conditions (53 percent higher). 

Thus, we expect that the expansion of 

drug coverage to beneficiaries who 

previously did not have such coverage 

will lead to increased drug utilization 

and spending, and thus higher 

pharmacy revenues. For the purposes of 

this analysis, we assume that 

beneficiaries without prior drug 

coverage who enroll in the Medicare 

drug benefit will experience a 76 

percent increase in total drug spending. 

We base this assumption on the fact that 

most beneficiaries without drug 

coverage fall into the category of having 

1–2 chronic conditions or 3–4 chronic 

conditions, and we have chosen the 

more modest use difference seen in the 

3–4 chronic condition group. 

Furthermore, we believe that this is a 

conservative assumption because the 

average difference across the population 

in drug spending for beneficiaries with 

and without coverage is 109 percent. 

Since beneficiaries without drug 

coverage account for about 13 percent of 

all drug spending by Medicare 

beneficiaries (based on 2001 MCBS 

data), if we assume that all of these 

previously uninsured beneficiaries 

enroll in the Medicare drug benefit and 

experience a 76 percent increase in drug 

expenditures due to a use effect, this 

would represent about a 9.9 percent 

increase in total drug spending by 

Medicare beneficiaries. 

At the same time, to the extent that 

beneficiaries without drug coverage did 

not receive pharmacy discounts prior to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46793 

Medicare Part D, we would expect that 

pharmacy discounts negotiated by PDPs 

and MA–PDs could result in some 

reduction in pharmacy revenues. While 

the vast majority of beneficiaries who 

currently have drug coverage are likely 

to already be receiving pharmacy 

discounts, and thus the Medicare drug 

benefit would not result in any change 

in pharmacy discounts for these 

beneficiaries, this may not be the case 

for beneficiaries without drug coverage. 

As mentioned previously, the April 

2000 HHS Report ‘‘Prescription Drug 

Coverage, Spending, Utilization, and 

Prices’’ found that on average 

individuals with drug coverage paid a 

15 percent lower price for prescription 

drugs at the point of sale than 

individuals without drug coverage. The 

discount insured individuals receive at 

the point of sale reflects a combination 

of pharmacy and manufacturer 

discounts. However, to take a 

conservative approach, we assume that 

Medicare Part D enrollees without prior 

drug coverage realize 15 percent price 

discounts at the point of sale, all of 

which reflect pharmacy discounts. This 

assumption is conservative not only 

because it assumes that the entire 15 

percent discount comes from 

pharmacies, but also because some of 

these beneficiaries are likely to have 

received pharmacy discounts previously 

through the Medicare drug discount 

card, which began offering discounts in 

June 2004 and which includes 

substantial discounts from drug 

manufacturers, and through senior 

pharmacy discounts previously offered 

by many pharmacies. Thus, our 

assumption that all Part D enrollees 

without prior drug coverage would 

receive new pharmacy discounts of 15 

percent under Medicare Part D 

overstates the negative revenue impact 

on pharmacies. With these beneficiaries 

accounting for about 13 percent of all 

drug spending by Medicare 

beneficiaries, we estimate that 

extending a 15 percent discount to these 

beneficiaries would result in about a 2 

percent decrease in total drug spending 

by Medicare beneficiaries. 

Another group of beneficiaries who 

we believe may obtain new pharmacy 

discounts under Medicare Part D are 

beneficiaries with Medigap drug 

coverage. Some Medigap plans do not 

actively negotiate prescription drug 

discounts for enrollees. As a result, 

these beneficiaries who enroll in 

Medicare Part D may also realize new 

pharmacy discounts. As discussed 

elsewhere in this impact analysis, we 

estimate that 1.9 million beneficiaries 

would have Medigap drug coverage in 

2006, absent the law change. To be 

conservative, we assume that all of these 

beneficiaries with Medigap drug 

coverage obtain new pharmacy 

discounts under the Medicare drug 

benefit. With these beneficiaries 

accounting for about 4 percent of 

prescription drug spending by all 

beneficiaries, we estimate that 

extending pharmacy discounts to these 

beneficiaries could result in about a 0.6 

percent decline in total Medicare drug 

spending by beneficiaries. 

It is also possible that the Medicare 

prescription drug benefit may result in 

new use of mail order pharmacies by 

some beneficiaries. We believe that the 

new Medicare benefit is unlikely to 

affect the use of mail order pharmacies 

among beneficiaries currently with 

employer sponsored or Medicare 

Advantage drug coverage as mail order 

is an option currently available to these 

beneficiaries and the implementation of 

Medicare Part D makes no changes in 

this regard. We also believe that there is 

likely to be no effect on mail order use 

by beneficiaries who qualify for the lowincome subsidy because nominal cost 

sharing exists regardless of where the 

beneficiary purchases the prescriptions 

(and as noted above, for those without 

prior drug coverage or less generous 

prior drug coverage, we expect that 

these beneficiaries will fill significantly 

more prescriptions). The two groups 

where it is possible that mail order 

usage may increase are beneficiaries 

without prior drug coverage and 

beneficiaries with Medigap drug 

coverage. The effect of Medicare Part D 

on mail order use by these beneficiaries, 

however, is uncertain. For example, 

Medicare Part D includes a provision 

that allows retail pharmacies (subject to 

state pharmacy laws) to provide a 90- 

day supply, putting them on equal 

footing with mail order pharmacies in 

this regard. 

To estimate the potential effect of new 

mail order use among beneficiaries 

without prior drug coverage and 

beneficiaries with prior Medigap drug 

coverage, we take the approach of 

making estimates based on two alternate 

assumptions. As a lower bound, we 

assume that there is no additional mail 

order use. As an upper bound, we 

assume that the percent of beneficiaries 

using mail order pharmacies among 

these two groups of beneficiaries 

increases to be similar to the rate of use 

among beneficiaries with private 

employer-based drug coverage. There is 

limited publicly available data related to 

mail order utilization. To supplement 

publicly available data we tried to 

obtain information from proprietary 

sources to help inform our upper bound 

estimates. For our upper bound 

assumptions, we use data from the 

Medical Expenditure Panel Survey 

(MEPS) to assign higher rates of mail 

order use (that is, the percentage of 

population that fills at least one 

prescription through mail order) to the 

population that gains drug coverage and 

to beneficiaries with prior Medigap drug 

coverage. We also tried to obtain data on 

the share of drug spending through mail 

order pharmacies that occurs among 

individuals who use these pharmacies. 

However, we were unable to obtain this 

type of information. We were able to 

obtain some proprietary information 

regarding the share of total plan 

spending occurring through mail order 

and retail pharmacies for a 

commercially insured over 65 

population. Using this information in 

combination with the recognition that a 

number of prescriptions are unlikely to 

be filled through mail order (for 

example such as antibiotics and pain 

medication used to treat acute 

conditions, or newly prescribed 

medications), we developed an upper 

bound assumption that as much as 50 

percent of drug spending among new 

users of mail order might occur through 

mail order pharmacies. We do not 

expect mail order use to approach this 

level; we use it simply for purposes of 

estimating the maximum potential 

impact. Under this upper bound 

assumption, we estimate that as a result 

of mail order effects, aggregate Medicare 

drug spending in retail pharmacies 

could decrease by as much as 1.9 

percent. Thus, based on our lower 

bound and upper bound assumptions, 

we estimate that possible new use of 

mail order pharmacies among some 

beneficiaries could result in a decrease 

in retail pharmacy revenues of 

somewhere between 0 to 1.9 percent. If 

a shift in mail order use were to occur, 

our prior estimates of utilization and 

discount effects would be altered 

slightly since they are based on the 

assumption of no change in mail order 

use. We estimate that under our upper 

bound assumptions related to mail 

order, our previous estimates of the 

combined effect of utilization increases 

and new pharmacy discounts for some 

beneficiaries would need to be adjusted 

downward by as much as 1.2 percentage 

points. We note that even with these 

adjustments based on a very high upper 

bound assumption, the net effect for 

retail pharmacies remains positive. We 

welcome additional data that could help 

inform our assumptions and analysis 

related to new mail order use by 

beneficiaries who previously did not 

have drug coverage. 

46794 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

8These unpublished Express Scripts estimates of 

average AWP for brand and generic drugs in 2002 

reflect the average AWP for a 30-day equivalent 

weighted by the number of scripts, based on 

utilization data from a commercially insured 

population age 65 and older, with employer 

sponsored insurance and with an integrated benefit 

(network and mail prescription coverage). 

Taken together, we estimate that the 

effect of expanding access to 

prescription drug coverage among 

beneficiaries without prior drug 

coverage and the effect of new 

pharmacy discounts and possibly new 

use of mail order pharmacies by some 

beneficiaries will result in a net increase 

in total prescription drug spending by 

Medicare beneficiaries at retail 

pharmacies of between 4.1 percent and 

7.3 percent. We estimate that this would 

represent an average increase in retail 

pharmacy revenues of between 1.7 

percent and 3.0 percent, as Medicare 

beneficiaries account for about 40.5 

percent of outpatient prescription drug 

spending for the non-institutionalized 

population according to 1999 MEPS 

data (Stagnitti MN et al., AHRQ, 

‘‘Outpatient Prescription Drug Expenses, 

1999’’, 2003). Furthermore, while not 

quantifiable at this time, we expect that 

pharmacies may realize additional 

revenues from the MMA requirement 

that PDPs and MA–PDs offer medication 

therapy management programs to 

targeted enrollees, which may be 

furnished by pharmacists. In addition, it 

is likely that increased use of 

prescription drugs by Medicare 

beneficiaries will lead to increased foot 

traffic in pharmacies and increased 

pharmacy revenues from nonpharmaceutical products as well. 

b. Medicare’s Assumption of Drug 

Coverage for Full-Benefit Dual Eligibles 

Because State Medicaid programs 

typically pay higher reimbursement 

rates to pharmacies than private sector 

insurers, the movement of full-benefit 

dual eligibles from Medicaid drug 

coverage to Medicare drug coverage 

(through PDPs and MA–PDs) has 

potential implications for pharmacy 

revenues. Our upper bound estimate of 

the average reduction in pharmacy 

revenues that could result from fullbenefit dual eligibles receiving drug 

coverage from Medicare is 1.1 percent. 

We believe that this is an overestimate 

because it does not take into account the 

effect the Federal Upper Payment Limit 

has in reducing Medicaid 

reimbursement rates for multi-source 

drugs with at least three generic 

equivalents. Also, to the extent that a 

State Medicaid program has adopted 

managed care arrangements to lower the 

cost of drugs for dual eligibles, our 

estimate of the revenue impact of 

pharmacy reimbursement changes for 

full-benefit dual eligibles would be 

overstated. 

We conducted the following analysis 

to estimate how the transfer of dualeligibles’ drug coverage from Medicaid 

to Medicare would affect pharmacy 

revenues. First, we developed an 

estimate of the average Medicaid drug 

reimbursement rate across States. To 

begin, we considered how Medicaid 

reimburses pharmacies for drugs. 

Medicaid reimburses pharmacies for 

drugs based on the estimated 

acquisition costs (EAC) plus a 

dispensing fee. There is variation across 

States in how they define and the level 

at which they set EAC and the 

dispensing fee. The vast majority of 

States define EAC as the average 

wholesale price (AWP) less a certain 

percentage discount, while a small 

number define it as wholesale 

acquisition cost (WAC) plus a certain 

percentage or the lower of an AWPbased or WAC-based payment amount. 

Dispensing fees also vary by State and 

typically range from $3 to $5. Some 

States use the same reimbursement 

formula for brand and generic drugs, 

while others institute a greater discount 

off of AWP for generic drugs or a higher 

dispensing fee for generic drugs, and in 

some cases both. In addition, Medicaid 

reimbursement rates for multi-source 

drugs with 3 or more generic 

equivalents are generally capped by the 

Federal Upper Payment Limit. 

Based on information on the Medicaid 

EAC and dispensing fee for each State 

for brand and generic drugs as of 

January 2004, we estimated the overall 

drug reimbursement rate (EAC plus 

dispensing fee) as a percent of AWP 

separately for brand and generic drugs. 

We did this by estimating the 

dispensing fee as a percent of the 

average AWP, using unpublished 

Express Scripts data on the average 

AWP for brand drugs ($77.42) and 

generic drugs ($32.57) in 2002.8 (It 

should be noted that under this 

methodology the total reimbursement 

rate for generic drugs (including the 

ingredient cost and the dispensing fee) 

as a percent of AWP is much greater 

than the reimbursement rate as a 

percent of AWP for the ingredient cost 

alone, because the dispensing fee 

represents a fairly high percentage of 

AWP for low cost generic drugs.) For 

States that set EAC based on WAC 

rather than AWP, we express their 

reimbursement formula in AWP terms 

by assuming that WAC is equivalent to 

roughly 20 percent of AWP, based on 

information about the typical 

relationship between WAC and AWP in 

the 2000 HHS Prescription Drug study. 

After estimating an overall Medicaid 

reimbursement amount for brand and 

generic drugs for each State, we estimate 

the weighted average reimbursement 

rate across States, using the number of 

full-benefit dual eligibles with drug 

coverage in each State for weights. 

Based on this method, we estimate that 

average Medicaid reimbursement to 

pharmacies (for ingredient cost and 

dispensing fee combined) is roughly 

equivalent to AWP minus 7 percent for 

brand drugs and AWP for generic drugs. 

It should be noted that this likely 

overstates the Medicaid reimbursement 

rate for generic drugs because it does 

not take into account that Medicaid 

reimbursement for multi-source drugs 

with 3 or more generic equivalents is 

generally capped by the Federal upper 

payment limit. 

We then estimated an average 

Medicaid reimbursement rate across all 

drugs (brand and generic) by weighting 

the average reimbursement estimates for 

brand and generic drugs by the percent 

of Medicaid expenditures we assume 

they comprise. According to a survey of 

State Medicaid programs by the Kaiser 

Family Foundation, States estimate that 

80 percent of State Medicaid drug 

expenditures are on brand drugs and 20 

percent on generics. Using these figures 

for weights, we estimate an overall 

average Medicaid drug reimbursement 

rate (including dispensing fee) of 

roughly 5 percent off of AWP. 

Second, for the purposes of this 

analysis, we make assumptions about 

the average pharmacy reimbursement 

rate for brand and generic drugs under 

PDPs and MA–PDs. We base these 

assumptions on available literature 

about typical pharmacy reimbursement 

rates under private sector insured 

products. It must be noted that these 

assumptions are not meant to convey 

our expectation of the actual pharmacy 

reimbursement rates negotiated by PDPs 

and MA–PDs with pharmacies under 

the Medicare drug. Instead, they are 

assumptions made solely for this 

regulatory flexibility analysis. 

According to a survey sponsored by 

Takeda Lilly of employer sponsored 

insurance plans covering more than 17 

million lives, the average 

reimbursement for ingredient cost for a 

brand drug in 2002 was about 14 

percent off of AWP (Takeda, ‘‘The 

Prescription Drug Benefit Cost and Plan 

Design Survey Report,’’ 2003). In 

addition, according to a report by 

Express Scripts, there tends to be about 

a three times greater discount off of 

AWP for generic drug ingredient cost 

than for brand drug ingredient cost 

(Express Scripts, ‘‘Drug Trends 2002 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46795 

9The 8.1 percent figure is computed by 

multiplying our estimate of drug spending for dual 

eligibles as a percent of NHE (9.1 percent) by our 

estimate of pharmacy reimbursement rates typical 

of private sector insurers (AWP—16 percent, or 84 

percent of AWP) and dividing by our estimate of 

average Medicaid pharmacy reimbursement (AWP–

5 percent, or 95 percent of AWP). 

10The 1.1 percent decrease does not equal 9.1 

percent –8.1 percent due to rounding. 

Report,’’ June 2003). Based on these 

studies, we assume reimbursement for 

ingredient costs of 14 percent off of 

AWP for brand drugs and 42 percent off 

of AWP for generic drugs. In terms of 

dispensing fees, the Novartis Pharmacy 

Benefit Reports, which is a survey of 

HMO plans, finds an average dispensing 

fee of $1.79 for brand drugs and $2.08 

for generic drugs as of 2002 (Novartis, 

‘‘Pharmacy Benefit Report: Facts and 

Figures,’’ 2003). The Takeda Lilly 

survey of employer-sponsored plans 

indicates an average dispensing fee of 

$2.13 for brand and $2.22 for generic 

drugs. For the purposes of this analysis, 

we average the findings from the two 

studies and assume a dispensing fee of 

$1.96 for brand drugs and $2.11 for 

generic. Similar to the Medicaid 

reimbursement analysis, we estimate 

these dispensing fees as a percent of 

average AWP for brand and generic 

drugs and then add them to our 

ingredient cost reimbursement 

assumptions to arrive at average 

reimbursement estimates—11 percent 

off of AWP for brand drugs and 35 

percent off of AWP for generic drugs. 

We then weight the average 

reimbursement estimates for brand and 

generic drugs by the percent of 

expenditures they are assumed to 

comprise to arrive at an overall average 

reimbursement estimate (including 

dispensing fee) of 16 percent off AWP 

for all drugs. 

Third, we estimated the share of 

national retail prescription drug 

spending accounted for by Medicaid 

drug expenditures on dual eligibles. 

According to a special analysis by the 

Kaiser Commission on Medicaid and the 

Uninsured, Medicaid prescription drug 

spending on dual eligibles was $9.5 

billion in 2000, including fee-for-service 

and managed care and netting out 

manufacturer rebates (Kaiser 

Commission on Medicaid and the 

Uninsured, ‘‘The Proposed Medicare 

Prescription Drug Benefit: A Detailed 

Review of Implications for Dual 

Eligibles and Other Low-Income 

Medicare Beneficiaries,’’ September 

2003). In addition, national retail 

prescription drug spending, net of 

manufacturer rebates, was $121.5 billion 

in 2000 according to National Health 

Expenditures projections by our Office 

of the Actuary. (http:// 

www.cms.hhs.gov/statistics/nhe/ 

projections-2003/t11.asp). Based on the 

above figures, we estimate Medicaid 

drug spending on dual eligibles 

comprised about 7.8 percent of total 

national retail prescription drug 

spending net of rebates in 2000. While 

this estimate is based on drug spending 

adjusted for rebates, drug spending 

without adjustments for rebates would 

be a better measure of the actual amount 

of revenues flowing through 

pharmacies. Manufacturer rebates 

typically occur on the back end between 

manufacturers and third party insurers 

and do not impact pharmacy revenues. 

Therefore, we adjust our estimate to prerebate levels of drug spending using the 

following method. We take national 

retail prescription drug spending net of 

rebates and inflate it based on our Office 

of the Actuary’s estimate that national 

retail prescription drug spending in 

2000 would be 6 percent higher without 

the adjustments for rebates. We also take 

our estimate of Medicaid prescription 

drug spending for dual eligibles and 

inflate it based on information from the 

Kaiser Study, which indicates that 

rebates reduced Medicaid fee-for-service 

drug spending in 2000 by an average of 

about 19 percent. Absent information on 

the percent of Medicaid drug spending 

for dual eligibles that is under fee-forservice versus managed care, we take an 

extremely conservative approach and 

inflate Medicaid drug spending to prerebate as though all spending had been 

fee-for-service. It should be noted that 

we strongly believe this overstates the 

amount of Medicaid drug spending on 

dual eligibles, and thus overstates any 

negative revenue impact on pharmacies. 

Based on the above, we estimate that 

Medicaid drug spending on dual 

eligibles is about 9.1 percent of total 

national retail prescription drug 

spending. Finally, we estimate the 

potential impact on pharmacy revenues 

of transferring responsibility for drug 

coverage of full benefit dual eligibles 

from Medicaid to Medicare. 

Based on our previous estimates of 

average pharmacy drug reimbursement 

rates under Medicaid and private 

insurers, we estimate that prescription 

drug spending on dual eligibles would 

account for about 8.1 percent of national 

retail prescription drug spending if 

drugs were reimbursed at rates typical 

of private sector insurer rates rather 

than Medicaid.9 Thus, our upper bound 

estimate of the average reduction in 

pharmacy revenues that could result 

from full-benefit dual eligibles receiving 

drug coverage from Medicare is about 

1.1 percent.10 As mentioned previously, 

we believe that this is an overestimate 

of the impact on pharmacies because it 

does not take into account existing 

policies that reduce Medicaid 

reimbursement rates such as the Federal 

Upper Payment limit for multi-source 

drugs with at least three generic 

equivalents. 

c. Conclusion 

Considering together the effect of 

increased utilization, new pharmacy 

discounts and possibly new use of mail 

order pharmacies among some 

beneficiaries, and reimbursement 

changes for full-benefit dual eligibles, 

we estimate that retail pharmacy 

revenues would increase on average by 

between 0.6 percent and 1.9 percent as 

a result of the Medicare prescription 

drug benefit. This is the result of an 

increase in prescription drug revenues 

ranging from 1.7 percent to 3.0 percent 

due to the net effect of increased 

utilization, new pharmacy discounts, 

and possibly new use of mail order 

pharmacies among some beneficiaries, 

and a 1.1 percent decrease in pharmacy 

revenues (upper bound estimate) due to 

drug coverage for full-benefit dual 

eligibles shifting from Medicaid to 

Medicare. 

In addition, we believe that these 

estimates understate the degree to 

which pharmacy revenues increase as a 

result of the Medicare prescription drug 

benefit for several reasons. Our estimate 

of the revenue reduction resulting from 

the transfer of drug coverage for full 

benefit dual eligibles from Medicaid to 

Medicare is likely to be overstated 

because it does not take into account the 

effect of the Medicaid upper payment 

limit on reducing Medicaid 

reimbursement rates for some multisource drugs. In addition to revenue 

effects we have estimated, the Medicare 

prescription drug benefit is likely to 

provide other sources of revenue 

increases for pharmacies; for example, 

through targeted medication therapy 

management programs under Medicare 

Part D which may be furnished by 

pharmacists, or through increased foot 

traffic in pharmacies leading to 

increased pharmacy sales of other goods 

in addition to prescription medicines. 

For these reasons, we estimate that the 

Medicare prescription drug benefit will 

have a positive revenue impact on the 

pharmacy industry overall. 

We believe that the program’s effect 

on small pharmacies specifically will 

also be positive. We expect that small 

pharmacies will participate in the 

networks of Medicare Part D plans and 

consequently will share in the positive 

revenue impacts. We believe that given 

the current industry practice of broad 

46796 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

pharmacy networks, together with the 

special any willing provider provision 

for pharmacies under Medicare Part D, 

all pharmacies that wish to participate 

in the program will be able to do so. As 

shown previously, over 95 percent of 

pharmacy firms are small businesses, 

and these firms operate about half of all 

retail pharmacies. The general practice 

of PBM companies is to build large 

networks that encompass both chains 

and independents in an area. According 

to a study by PricewaterhouseCoopers, 

the average PBM has 42,000 pharmacies 

in its network and the two largest PBM 

networks contain approximately 57,000 

pharmacies, 98 percent of all 

pharmacies in the United States 

(PricewaterhouseCoopers report ‘‘Study 

of Pharmaceutical Benefit Management’’

at http://www.cms.hhs.gov/researchers/ 

reports/2001/cms.pdf). Furthermore, a 

survey by the Pharmaceutical Care 

Management Association of five 

Medicare drug discount card programs 

found that on average the card program 

networks contained about 80 percent of 

pharmacies, with one of the five 

programs surveyed including nearly 95 

percent of pharmacies. While broad 

pharmacy networks are typical of 

current industry practice, the MMA 

includes a special ‘‘any willing 

provider’’ provision that further 

promotes inclusiveness in pharmacy 

networks under the Medicare drug 

benefit. The MMA requires that a PDP 

or MA–PD must accept a pharmacy into 

its network if the pharmacy is willing to 

agree to contractual terms offered by the 

sponsor. This type of arrangement is not 

typical of standard industry practice, 

and was not required in the Medicare 

Drug Discount Card program. We 

believe that it helps ensure that all 

pharmacies that wish to do so have the 

ability to participate in the Medicare 

prescription drug benefit. Finally, 

according to the 

PricewaterhouseCoopers study, 

independent pharmacies also have the 

ability to participate in pharmacy 

networks through a Pharmacy Services 

Administrative Organization, which 

gives them group purchasing leverage 

and the ability to secure PBM 

reimbursement rates that are 

comparable to those attained by chains. 

For these reasons, we would expect the 

great majority of small business 

pharmacies to share in the increased 

business created by the Part D drug 

benefit. 

Although we believe that the revenue 

effects on small pharmacies will be 

positive, we seek comments on this 

conclusion and on any aspect of this 

proposed rule that may adversely affect 

pharmacies of any size. 

2. Insurers and Pharmacy Benefit 

Managers (PBMs) 

This proposed rule sets forth the 

terms and conditions that must be met 

by firms to be approved to offer the 

Medicare prescription drug benefit. 

Organizations sponsoring the Medicare 

prescription drug benefit can be either 

stand alone Prescription Drug Plans 

(PDPs) or Medicare Advantage 

Prescription Drug Plans (MA–PDs). The 

requirements for Medicare Advantage 

are discussed in our separate proposed 

rule. That proposed rule includes an 

IRFA specific to the Medicare 

Advantage program. Consequently the 

discussion here will focus on PDP 

sponsors. As discussed previously in 

the preamble, in order to be approved to 

offer the Medicare prescription drug 

benefit as a PDP an entity must be 

organized and licensed under State law 

as a risk bearing entity eligible to offer 

health insurance or health benefits 

coverage in each State in which it offers 

a prescription drug plan, or have 

secured a time-limited Federal waiver. 

The SBA size standard for ‘‘small entity’’

health insurance firms is annual 

revenue of $6 million or less. 

Our IRFA for the Medicare Advantage 

proposed rule includes an extensive 

discussion related to insurance firms 

that might potentially be eligible to be 

MA plans. That analysis is also 

applicable to insurance firms that might 

be interested in being a PDP. As noted 

for the MA market and equally 

applicable to the PDP market, 

essentially all of the insurance firms 

affected by the statute and our proposed 

rule exceed size standards for ‘‘small 

entities’’ within the meaning of the RFA 

and implementing SBA guidelines, 

which state that an insurance firm is 

‘‘small’’ only if its revenues are below $6 

million annually. Standalone drug 

insurance policies are not a typical 

product in the insurance market today. 

Thus, the range of insurance companies 

that may choose to enter this market is 

uncertain. However, we anticipate that 

a portion of the insurance firms that 

might be interested in being a PDP and 

thus affected by these proposed rules 

are ‘‘small entities’’ by virtue of their 

non-profit status. 

PDP eligibility provisions in the MMA 

rely on the Medicare Advantage 

enrollment provision (continued 

unchanged from prior law) that no 

health insurance plan is normally 

eligible to participate unless it already 

serves at least 5,000 enrollees. Section 

1860D–12(b)(3) of the Act provides that 

this minimum shall be waived during 

the first contract year in a region, since 

PDPs in the context of Part D are new 

entities. While there is also a 1,500 

minimum standard enrollment for plans 

that predominantly serve rural 

populations, in the context of PDP 

services areas designed on a regional 

basis, we do not believe a 

predominantly rural situation would 

occur. Consequently, we have not 

considered this level of enrollment in 

our analysis. We welcome comment on 

this issue. At the 5,000-enrollee level, 

no insurance plan would fall below the 

SBA revenue cutoff assuming estimated 

average per enrollee revenue of 

approximately $1,675 in 2006, a 

revenue level similar to that of 

prescription drug plans under the 

standard Medicare Part D benefit. 

Therefore, the statutory limits generally 

prevent any insurance firm defined as 

‘‘small’’ pursuant to the RFA’s size 

standards from participating in the 

program. It is also important to note that 

PDPs will only operate on a regional 

basis. The MMA specifically states that 

there will be no fewer than 10 regions 

and no more than 50 regions, not 

including the territories. Thus, the 

statute itself envisions risk-bearing 

entities that are operating on a fairly 

large-scale basis. 

In our IRFA for the Medicare 

Advantage program, we include a 

detailed analysis on regional Medicare 

Advantage market and small entities. 

That discussion is applicable to the PDP 

market, and therefore we are not 

repeating that same discussion here. 

That analysis also reviews the local 

Medicare Advantage market. As is noted 

in that analysis the option to be a local 

MA–PD plan provides opportunity for 

health insurance entities of all types and 

sizes (but probably not below the 

‘‘small’’ insurance entity cutoff level 

defined by the SBA, which is lower than 

appears viable for a Part D risk-bearing 

insurance plan) to participate in offering 

the Medicare prescription drug benefit, 

albeit as part of a comprehensive benefit 

offered on a local basis. We point out 

that many HMOs are non-profit entities, 

as are several dozen Blue Cross and 

Blue Shield plans, and conclude that on 

balance Medicare Advantage provide 

favorable opportunities for them, 

although regional boundaries may pose 

problems for some. We note that a 

number of HMOs and other insurers 

including a number of Blue Cross plans 

are sponsoring Medicare-endorsed drug 

discount cards under that new program, 

which suggests their future ability to 

participate as PDP or MA–PD 

participants, regardless of profit status. 

While this proposed rule extends 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46797 

certain requirements related to the 

provision of Part D benefits to Medicare 

Advantage plans (for example, network 

adequacy standards and any willing 

pharmacy provisions), we believe that 

these requirements will not result in 

consequential additional costs for MA–

PD plans. We believe that any welldesigned plan would already meet or 

readily be able to accommodate these 

standards. For example, we believe that 

competition among plans for enrollees 

will necessitate that they have a 

pharmacy network that is at least as 

broad as those stipulated by our 

network adequacy standards. 

The other organizations that we think 

potentially may be interested in being 

PDP sponsors, or most certainly working 

closely with PDP and MA–PD sponsors 

to administer all or part of their drug 

programs, are pharmacy benefit 

managers (PBMs). PBMs are a relatively 

new player in the health care market. A 

major limitation on PBMs being PDP 

sponsors, however, is the statutory 

requirement for State licensure as a risk 

bearing entity, a status PBMs have not 

historically achieved. As discussed in 

section C (Federalism) of this Regulatory 

Impact Analysis, the MMA provides for 

a time-limited waiver to obtain State 

licensure, during which an organization 

can be approved by CMS to be a PDP 

sponsor. Since the Part D benefit is new, 

we do not currently have information on 

whether PBMs are considering 

becoming PDP sponsors, and would 

welcome comment regarding this issue. 

There are basically two types of PBMs 

in the market today. Some are 

subsidiaries of health plans (that is, 

managed care organizations or 

insurance companies), and others are 

independent PBMs. PBMs have evolved 

over time in the nature of services they 

provide. In the late 1970s and early 

1980s they offered claims processing 

services. In the late 1980s and early 

1990s their services evolved to include 

pharmacy network design and 

management, formulary design and 

manufacturer rebate negotiations, mail 

order pharmacy services, drug 

utilization review, and enrollee services 

(for example, call centers). During the 

1990s, PBMs generally expanded to 

become managers of a wide array of 

pharmacy services as plan sponsors 

sought to control drug costs. For 

example, some PBMs now also provide 

clinical services such as disease 

management, and physician and patient 

education. 

Under the ‘‘carve-out’’ trend by which 

pharmacy benefits are administered 

separately from medical benefits in 

employer-sponsored insurance, PBMs 

are now believed to administer roughly 

half of all pharmacy benefits for 

employer health plans, and this share is 

rising rapidly. The primary reasons are 

analyzed in a 2003 General Accounting 

Office report (‘‘Federal Employees 

Health Benefits: Effects of Using 

Pharmacy Benefit Managers on Health 

Plans, Enrollees, and Pharmacies’’

available at http://www.gao.gov; see also 

the CMS study on PBMs cited above). 

These reports and others conclude that 

PBMs help insurance plans achieve 

significant savings in their drug 

coverage, for example, through use of 

discounts and rebates to lower prices, 

through drug utilization review, and 

through shifting sales from name brands 

to generics. Obviously, insurance plans 

can do these things for themselves, but 

most find that PBMs substantially 

improve their ability to achieve savings. 

Because PBMs rely heavily on 

computerized systems to manage 

pharmacy records, they also provide 

safeguards against many kinds of 

medication errors through drug 

utilization review. Which services a 

PBM provides to a particular plan 

sponsor is negotiated between the PBM 

and the sponsor. Selection of a PBM 

(usually one, but sometimes two, one for 

mail order and one for retail) by plan 

sponsors is strongly influenced by the 

expected cost of drug benefits, with 

PBMs gaining a competitive advantage 

in contractual negotiations by offering 

lower average costs per prescription. 

There are believed to be about one 

hundred PBM firms. Some are 

standalone companies, but most are 

subsidiaries of health insurance firms 

(for example, Wellpoint and Anthem) or 

owned by drug store chains (for 

example, Walgreens). Although a 

handful of particularly large firms 

account for most of the ‘‘covered lives’’

and industry revenue, the industry is 

regarded by analysts as highly 

competitive. We have no information on 

the size of the smaller firms in the 

industry, but it is likely that none of 

them, or at most a very small number, 

would fall below the $6 million annual 

revenue threshold used by the SBA for 

defining ‘‘small entities’’ in the 

insurance industry. (The smallest 

companies are in any event most likely 

to be subsidiaries or components of 

health insurance companies and other 

large firms). This is an industry in 

which there appear to be marked 

advantages to larger size, through both 

economies of scale and bargaining 

power. Nor do we believe that a 

substantial number, if any, are nonprofit entities. We do, however, request 

additional information on the 

characteristics of this industry and its 

firms. 

The MMA will expand PBM business 

in two ways. First, assuming that all or 

most PDPs and many MA–PDs will use 

PBMs, and that nearly all beneficiaries 

without drug coverage will enroll in a 

plan providing drug coverage, we 

anticipate that millions of beneficiaries 

will start purchasing their drugs using 

PBM-managed benefits. Second, all or 

most of those currently enrolled in 

plans that cover drug purchases on an 

indemnity basis (rather than through 

PBMs), and who sign up for PDP or 

MA–PD plans, will start using PBM 

services. This latter group includes most 

of the 1.9 million persons we estimate 

are currently enrolled in Medigap plans 

that offer drug coverage. Thus, drug 

insurance plans using PBMs are likely 

to enroll millions of new covered lives. 

Because these enrollees are on average 

much higher utilizers of drugs than 

most covered lives in the private sector, 

this will create positive and significant 

economic impact on the future volume 

of business for these firms. 

Obviously, the scope, timing, and 

nature of additional PBM business will 

depend on the future decisions of PDP 

and MA–PD sponsors, and the PBMs 

themselves, and ultimately on the 

decisions of Medicare beneficiaries as 

they make choices among their various 

insurance options. Nothing in this rule 

directly regulates PBMs, positively or 

negatively, or directly encourages or 

discourages their use over alternative 

methods of managing drug benefits. 

Furthermore, there are many other 

influences on the role of PBMs and on 

the amount of drug spending that they 

manage. Chief among these is the 

continuing growth in spending on 

prescription drugs and the incentives 

this creates to control costs. 

It is possible that decisions on 

regional boundaries (not part of this 

proposed rule) may affect the ability of 

some PBM firms to compete for PDP and 

MA–PD contracts, but we believe that 

most if not all PBMs that are not planspecific will compete in broad regions 

or the entire nation. We welcome 

information on any possible problems 

that regional boundary decisions could 

create. 

For all the reasons given above, we 

conclude that while the statutorilycreated Part D and Medicare Advantage 

programs will be largely favorable to 

PBMs, this proposed rule as such will 

have little or no direct effect on the PBM 

industry, and certainly not a 

significantly adverse effect on a 

substantial number of small entity 

PBMs. However, we request comments 

on this conclusion and on any 

provisions that might adversely affect 

such firms. 

46798 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

3. Small Employers 

In the case of the small employers, 

public and private, who provide 

qualified prescription drug coverage for 

their retirees, we estimate that savings 

obtained from the Medicare retiree drug 

subsidy will exceed by several-fold the 

employer’s administrative costs 

associated with obtaining the subsidy, 

and thus the result of the retiree drug 

subsidy provision is a net positive 

impact. We would like to make 

participation in the retiree drug subsidy 

program as simple as possible for small 

entities. Accordingly, we request 

comments on any provisions of this 

proposed rule that may be particularly 

difficult for small entities, and on any 

alternatives that might lessen such 

burdens. 

As noted earlier, we estimate that the 

administrative costs associated with 

obtaining the Medicare retiree drug 

subsidy (excluding data reporting costs, 

which are not yet quantifiable) will 

represent on average about 5.5 percent 

of the Medicare retiree drug subsidy 

payments in 2006 (declining in 

subsequent years after initial start-up 

costs), and that the bulk of these costs 

will be associated with preparing the 

actuarial valuation, retiree drug subsidy 

application, and related enrollment 

information. It is important to note that 

this estimate reflects an average across 

all employers. While administrative 

costs for small employers as a percent 

of retiree subsidy dollars are likely to be 

somewhat higher than the average, we 

believe that subsidy payments to small 

employers are still likely to exceed the 

administrative costs of obtaining the 

subsidy by more than several-fold. 

Although smaller employers will spread 

their administrative costs across fewer 

qualifying retirees for whom they will 

be receiving Medicare retiree drug 

subsidy payments than larger 

employers, they are expected to have 

lower costs associated with identifying 

their Medicare retirees and related 

enrollment information than large 

employers. Additionally, we expect that 

small employers that purchase retiree 

coverage from insurance companies are 

likely to have lower direct costs 

associated with the actuarial valuation 

due to the spreading of these costs 

across many employers that are 

purchasing the same insurance product. 

Alternatively, as discussed elsewhere in 

this document, employers (both small 

and large) may decide to restructure 

their prescription drug coverage to 

provide continued coverage by 

providing enhanced benefits or 

providing supplemental wraparound 

coverage, and thus will be positively 

impacted as a result of beneficiaries 

now receiving contributions to their 

drug coverage from Medicare. 

We believe that affected small 

businesses are unlikely to experience 

increased revenues of the magnitude 

that would approach 3 to 5 percent of 

revenues due to the Medicare retiree 

drug subsidy payments. We arrive at 

this conclusion as follows. First, we 

estimate the number of covered lives per 

firm offering retiree coverage. To make 

this estimate, we use 2001 data from the 

Medical Expenditure Panel Survey 

(MEPS) on the number of 

establishments (by firm size), with 

retiree coverage for the over 65 

population, and the number of retirees 

covered by these establishments. As a 

conservative approach, we assume two 

covered lives per retiree to estimate the 

number of covered lives in these 

establishments. This assumption 

overstates the number of covered lives 

as not all Medicare beneficiaries will be 

married, or are married to an individual 

who is also a Medicare beneficiary. 

Second, we convert the number of 

establishments offering age 65 and over 

retiree coverage to a firm based count 

using the ratio of the number of 

establishments to the number of firms, 

based on the U.S. Census Bureau’s 

Statistics on U.S. Businesses for 2001 

(see http://www.census.gov/epcd/www/ 

smallbus.htm#EmpSize). Using this firm 

based count we then estimate the 

average number of age 65 and over 

covered lives per firm. For firms with 

fewer than 100 employees our estimated 

average number of 65 and older covered 

lives was 6.15; the corresponding figure 

for firms with a firm size of 100 to 999 

employees was 44.7. Data for 2001 on 

the overall number of establishments, 

the overall estimated number of firms, 

the number of estimated firms with 

retiree coverage for retirees aged 65 and 

over, the number of covered retirees, 

and the estimated number of retirees 

and covered lives per firm, are shown in 

Table V–3. 

As an extreme example, we assume 

the absolute maximum subsidy per 

person that an employer can receive in 

2006 is $1,330 (that is, 28 percent of the 

difference between $250 and $5,000, 

and assuming no further adjustment 

related to netting out discounts, 

chargebacks or rebates). As discussed 

earlier, we estimated an average per 

capita Medicare retiree drug subsidy 

amount at $611 in 2006 (which, for 

example, would be equivalent to about 

$815 of taxable income for employers 

with a marginal tax rate of 25 percent 

and about $940 of taxable income for 

employers with a marginal tax rate of 35 

percent). Using the $1,330 value, the 

retiree drug subsidy payments would be 

about $8,178 per firm with less than 100 

employees and $59,456 for firms with 

100 to 999 employees. These amounts 

almost certainly are overstated because 

they assume that every qualifying 

covered retiree would have annual 

allowable prescription drug costs of at 

least $5,000 in 2006, and that each firm 

would thus receive the maximum retiree 

drug subsidy payment for every covered 

individual, which is unlikely. 

We compare these estimates with 

revenues for firms of these respective 

sizes. We trend forward 1997 revenue 

data by firm size, from the U.S. Census, 

to 2001 based on the annual change in 

the average Consumer Price Index (CPI). 

While revenues would likely grow at a 

faster rate than the CPI due to increases 

in the quantity of items and/or services 

sold, we take a conservative approach 

by only accounting for increases in 

prices from 1997 to 2001 via the annual 

changes in the average CPI. The most 

recent year that data on revenues are 

available is for 1997. We used U.S. 

Census Bureau data for 2001 for 

estimating the number of firms. The 

estimated per firm average revenues for 

2001 are about $1.2 million for firms 

with a firm size of less than 100 

employees and $28 million for firms 

with a firm size of 100 to 499 

employees. 

The Medicare retiree drug subsidy 

payments, therefore, represent only 0.7 

percent of total revenues for firms with 

a firm size of less than 100 employees, 

and 0.2 percent for firms with a firm 

size of 100 to 999 employees. Because 

revenue data are not available for firms 

with 100 to 999 employees, we 

conservatively use the per-firm revenues 

for firms with a firm size of 100 to 499 

employees to represent the per firm 

revenues for firms with a firm size of 

100 to 999 employees. For further 

illustrative purposes, Table V–4 shows 

by different firm sizes the revenue 

impacts using the maximum assumption 

on retiree drug subsidy payments. Even 

for the smallest firms, the revenue 

impacts of the subsidy would be less 

than 2 percent. The table shows that, as 

the firm size increases, the percentage of 

the revenues accounted for by the 

subsidy decreases. We therefore 

conclude that this proposed rule will 

not have a significant economic impact 

on a substantial number of small 

employers. This conclusion applies 

equally to non-profit employers and 

small local government employers, 

though we do not have detailed data on 

these groups (had we the data, the 

comparison would have been on a cost 

rather than revenue basis, but the 

relationships of retirees to active 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46799 

11We used the following alternative size 

standards for the purpose of this RFA: less than 150 

employees (NAICS codes 42 and 44), less than 500 

employees (NAICS codes 11, 23, 56, 71, 72, and 81), 

and less than 1,500 employees (NAICS codes 21, 22, 

31, 48, 51, 52, 53, 54, 55, 61, and 62). 

employees would have been similar.) 

Because of the likely interest in the 

Medicare retiree drug subsidy program, 

however, we present some additional 

background information related to the 

number of small entities that might 

potentially be eligible to receive the 

Medicare retiree drug subsidy 

payments. 

To estimate the number of potentially 

eligible small businesses for RFA 

purposes, we need to determine the 

appropriate standards for identifying a 

small business. In general, the Small 

Business Administration (SBA) has size 

standards that define small businesses 

within a given industry based on either 

the average annual receipts (millions of 

dollars) or average employment (number 

of employees) of a firm (‘‘Table of Size 

Standards Matched To North American 

Industry Classification System Codes, 

January 28, 2004,’’ U.S. Small Business 

Administration, available at http:// 

www.sba.gov). However, we did not 

have data available on retiree coverage 

among either establishments or firms by 

annual revenues, but these data are 

available by employee size. We used an 

alternative size standard for RFA 

purposes based on our consultation 

with the Office of Advocacy at the Small 

Business Administration (SBA). The 

alternative size standards are based on 

the number of the firm’s employees, 

rather than the firm’s annual revenues. 

Because our data from the Medical 

Expenditure Panel Survey (MEPS) on 

the number of establishments providing 

retiree drug coverage are at the 2-digit 

North American Industry Classification 

System (NAICS) code level and the 

MEPS industry group level (which is 

based on rolling-up 2-digit NAICS 

codes), while the SBA size standards are 

at the 6-digit NAICS code level, we 

developed an approach for rolling up 

the size standards to the 2-digit NAICS 

code level. For the purpose of our 

analysis, we classified a business within 

a 2-digit NAICS code as small business 

based on the largest SBA employment 

size standard among all the six-digit 

NAICS codes that comprised that twodigit NAICS code. It is likely that this 

methodology overstates the number of 

small businesses because some large 

businesses are likely counted as small 

businesses. Our employee firm size 

standards ranged from 150 to 1,500 

employees.11

We estimate the number of small 

businesses who offer retiree drug 

coverage based on an analysis of 2001 

MEPS data. We mapped the 19 two-digit 

NAICS codes to nine MEPS industry 

groups. Where the MEPS industry group 

consisted of two or more two-digit 

NAICS codes, we defined a small 

business using the largest employee size 

standard among the two-digit NAICS 

codes that crosswalked to the MEPS 

industry code. However, for each of 

nine MEPS industry groups, the MEPS 

data do have the number of 

establishments offering retiree health 

insurance coverage by the number of 

employees in the firm. We estimate that 

in 2001, there were 399,751 

establishments offering retiree coverage 

to their retirees age 65 and older. Of this 

total, 65,208 (not shown in Table V–3) 

were small businesses, based on the 

small business size standards (that is, 

150 to 1,500 as noted earlier). These 

businesses represented 1.3 percent of all 

small establishments. These businesses 

also accounted for 16 percent of all 

establishments offering retiree coverage 

to their retirees that were age 65 and 

over. 

While in the case of small businesses 

the number of establishments is very 

similar to our estimate of number of 

firms, this relationship is not the case 

for the largest firms; that is, those firms 

with more than 1,000 employees. As a 

result, from a firm perspective, we 

estimate that firms with less than 1,000 

employees account for 93 percent of all 

firms offering coverage to retirees age 65 

and over, but account for only 10 

percent of all retirees with employersponsored coverage. 

While we have data on the number of 

small employers who offer retiree 

coverage, by industry sector, we do not 

have data on the number of retirees 

covered by small employers by industry 

sector. The only analysis we are able to 

do is the distribution of age 65 and over 

retirees between large firms with 1,000 

or more employees and firms with less 

than 1,000 employees that offer retiree 

health coverage to this population. Most 

covered retirees receive their drug 

coverage from large employers, both 

because these large employers are more 

likely to provide coverage, and large 

employers have a large number of 

retirees. According to data from MEPS, 

in 2001 the largest private sector firms 

(1,000 or more employees) covered 90 

percent of all the retirees who had 

employer-sponsored retiree coverage, 

with only 10 percent of retirees being 

covered in firms of less than 1,000 

employees. 

As discussed previously, we expect 

that Medicare Part D will also positively 

impact those small employers that had 

provided retiree drug coverage prior to 

implementation of the Medicare 

prescription drug benefit but choose not 

to obtain the Medicare retiree drug 

subsidy payments. For example, some of 

these employers may choose to provide 

alternate forms of prescription drug 

coverage by either offering enhanced 

Medicare Part D benefits for their 

retirees or providing wraparound 

coverage. These employers would see 

reductions in their spending on retiree 

drug coverage, as the Medicare 

prescription drug benefit would 

partially offset their spending on drug 

coverage. 

TABLE V–3.—ESTIMATED NUMBER OF COVERED RETIREES IN PRIVATE SECTOR ESTABLISHMENTS AND FIRMS, 2001 

Firm size 

Number of 

private sector establishments, 

2001 * 

Number of 

private sector firms, 

2001 * 

Ratio of 

number of 

establishments to 

number of 

firms 

Number of 

private sector establishments 

that offer 

coverage to 

retirees 

aged 65 

and over, 

2001 ** 

Estimated 

number of 

private sector firms 

that offer 

coverage to 

retirees 65 

and Over, 

2001 

Number of 

covered retirees aged 

65 and 

over **, 

2001 

Estimated 

average 

number of 

retirees per 

private sector firm 

Estimated 

number of 

covered 

lives, per 

private sector firm (assuming 2 

covered 

lives per retiree) 

Less 100 than employees 5,058,525 4,851,266 1.04 39,308 37,697 115,899 3.1 6.15 

100 to 999 employees ..... 418,085 93,876 4.45 29,438 6,610 147,745 22.4 44.70 

1,000 or more employees 913,080 8,795 103.82 331,006 3,188 2,432,542 763.0 1,525.91 

46800 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

TABLE V–3.—ESTIMATED NUMBER OF COVERED RETIREES IN PRIVATE SECTOR ESTABLISHMENTS AND FIRMS, 2001—

Continued 

Firm size 

Number of 

private sector establishments, 

2001 * 

Number of 

private sector firms, 

2001 * 

Ratio of 

number of 

establishments to 

number of 

firms 

Number of 

private sector establishments 

that offer 

coverage to 

retirees 

aged 65 

and over, 

2001 ** 

Estimated 

number of 

private sector firms 

that offer 

coverage to 

retirees 65 

and Over, 

2001 

Number of 

covered retirees aged 

65 and 

over **, 

2001 

Estimated 

average 

number of 

retirees per 

private sector firm 

Estimated 

number of 

covered 

lives, per 

private sector firm (assuming 2 

covered 

lives per retiree) 

Total .......................... 6,389,690 4,953,937 n/a 399,751 47,496 2,696,186 56.8 113.53 

Sources: *U.S. Census Bureau, Statistics of U.S. Businesses, 2001, http://www.census.gov/epcd/www/smallbus.htm#EmpSize. 

**Medical Expenditure Panel Survey (MEPS), 2001. 

TABLE V–4.—ANALYSIS OF MEDICARE RETIREE DRUG SUBSIDY IMPACTS FOR DIFFERENT PRIVATE SECTOR FIRM SIZES

Firm size 

Number of 

private sector 

firms, 2001 

Total revenues, 

2001 (in 000s) 

Estimated per 

firm revenues, 

2001 

Estimated 

number of 

covered lives 

per firm 

Maximum 

per person 

subsidy 

Total estimated retiree drug 

subsidy 

amount 

Estimated 

subsidy as 

percent of 

revenues 

(percent) 

1 to 9 employees ....................... 3,716,934 $1,815,857,996 $488,535 6.15 $1,330 $8,178 1.7 

10 to 19 employees ................... 616,064 1,049,691,336 1,703,867 6.15 1,330 8,178 0.5 

20 to 99 emmployees ................ 518,258 2,781,101,533 5,366,249 6.15 1,330 8,178 0.2 

100 to 499 employees ............... 85,304 2,385,814,720 27,968,380 44.70 1,330 59,456 0.1 

Sources: Number of Firms, Revenues: U.S. Census Bureau, Statistics of U.S. Businesses, http://www.census.gov/epcd/www/ 

smallbus.htm#EmpSize. 

4. Rural Hospitals 

Section 1102(b) of the Social Security 

Act requires us to prepare a regulatory 

flexibility 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 affect small 

rural hospitals since the program will 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. 

5. Other Requirements in the Regulatory 

Flexibility Act 

The RFA lists five general 

requirements for an IRFA and four 

categories of burden reducing 

alternatives to be considered. We know 

of no relevant Federal rules that 

duplicate, overlap, or conflict with the 

proposed rule (which in any event 

establishes a new program). The 

analysis above, taken together with the 

rest of this preamble, addresses all these 

general requirements. 

We have not, however, addressed the 

various categories of burden reducing 

alternatives listed in the RFA as 

appropriate in IRFAs. These 

alternatives, such as an exemption from 

coverage of the rule for small entities, 

establishment of less onerous 

requirements for small entities, or use of 

performance rather than design 

standards, simply do not apply to a 

situation in which a program beneficial 

to entities both large and small is being 

created, and in which the regulations do 

not create economically ‘‘significant’’

burdens. Furthermore, the consumer 

choice-driven Medicare prescription 

drug benefit is overwhelmingly a 

‘‘performance’’ system rewarding plans 

that operate at lower costs, provide 

better services as evaluated by enrollees 

and potential enrollees. For Part D 

benefits, CMS operates in a stewardship 

role, not as the promulgator of detailed 

design standards (except in a few areas, 

such as protections for enrollees). As to 

the retiree drug subsidy program, we 

likewise propose no detailed design 

standards, restricting our regulations to 

the minimum necessary to meet 

statutory requirements and to assure 

that benefits are actuarially qualified 

and payments to employers soundly 

administered. However, throughout the 

preamble we identify issues and options 

for attention by affected entities. We 

welcome comments on these and 

suggestions for additional steps we can 

take, consistent with the underlying 

statute, to minimize any unnecessary 

burdens on plans, pharmacies, 

employers, or other affected entities. 

L. Accounting Statement 

In accordance with the OMB A–4 

circular on regulatory impact analyses, 

we have included an accounting 

statement in Table V–5. The Medicare 

prescription drug benefit and retiree 

drug subsidy represents a transfer of 

revenues from taxpayers to Medicare 

beneficiaries, States, and retiree plans 

sponsored by employers and unions. 

The table provides an estimate of the 

annualized amount of transfers from 

taxpayers to these entities over the fiveyear period from 2006–2010. For the 

purposes of the accounting statement, 

these estimates are shown separately 

with a 3 percent and 7 percent discount 

rate in 2001 dollars. 

The table also indicates that there will 

be some ‘‘off-budget’’ administrative 

costs associated with the Medicare 

prescription drug benefit, specifically 

the costs associated with disclosure 

notices, coordination of benefits, and 

the Medicare retiree drug subsidy. Costs 

associated with these activities are 

discussed in the respective sections of 

this impact analysis. 

The accounting statement also 

provides a summary of the effects of the 

proposed rule on State and local 

governments and small businesses, as 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46801 

discussed in the relevant sections of the 

analysis. 

TABLE V–5.—ACCOUNTING STATEMENT ANNUALIZED ESTIMATES FOR MEDICARE PRESCRIPTION DRUG BENEFIT AND

RETIREE DRUG SUBSIDY, 2006–2010 

(2001 dollars in billions) 

3 percent discount rate 7 percent discount rate 

Transfers 

Monetized Transfers: ‘‘on budget’’: 

From Taxpayers to Beneficiaries, States, and 

Employers.

$45.9 ............................................................ $40.9 

Administrative Costs: ‘‘off budget’’: 

Notice Requirement ............................................. $0.02 ............................................................ $0.02 

Coordination of Benefits ....................................... Not quantifiable at this time ........................ Not quantifiable at this time 

Administrative Costs Incurred by Employers to 

Obtain the Medicare Retiree Drug Subsidy 

(Excluding Data Reporting Costs).

5.5 percent of subsidy in 2006 and declining in subsequent years.5.5 percent of subsidy in 2006 and declining in subsequent years 

Category Effects 

Effect on State and Local Governments ..................... Net positive effect on State and Local Governments: $1.9 billion (3 percent discount rate) 

and $1.7 billion (7 percent discount rate). 

Effect on small business ............................................. Small Pharmacies: Positive impact. Estimated economic impact is not expected to reach 

the threshold for significant (3 to 5 percent of revenues). 

Small PBMs: Impact favorable for PBM industry, and no significant adverse impact on a 

substantial number of small entities. 

Small Insurers: Impact favorable on insurance industry, and no significant adverse impact 

on a substantial number of small entities as defined by SBA. 

Small Employers: Positive impact. Estimated economic impact is not expected to reach 

the threshold for significant (3 to 5 percent of revenues). 

M. Alternatives Considered 

1. Designation of Regions 

The MMA requires that we establish 

between 10 to 50 PDP regions within the 

50 States and District of Columbia and 

at least one PDP Region covering the 

territories. These regions will define 

PDP service areas. PDPs that provide 

service in a particular region must cover 

that region entirely. PDPs can submit 

bids to provide services in anywhere 

from one to all regions. 

The MMA stipulates that, to the 

extent practicable, PDP regions must be 

consistent with MA regions. However, if 

we determine that access to Part D 

benefits would be improved by 

establishing PDP regions that are 

different than MA regions, we may do 

so. As discussed in the preamble, we 

anticipate designating PDP and MA 

regions before January 1, 2005. The 

designation of regions will be made after 

the market study required by the MMA 

and the opportunity for public 

discussion and comment on this study. 

In designating PDP regions, our 

primary objective will be to ensure that 

all beneficiaries have reliable access to 

PDP plans at the lowest possible cost. 

The law requires that beneficiaries have 

a choice of enrolling in at least 2 

qualifying plans, at least one of which 

is a PDP. If it is not possible to achieve 

that with PDP plans undertaking the 

standard level of risk, the law makes 

provision for limited risk PDPs, and in 

cases where that does not occur a 

fallback plan that is paid based on cost. 

For several reasons, we believe it is 

beneficial to have several PDP plans 

operating in a region. Most importantly, 

more plans means greater beneficiary 

ability to obtain coverage that meets 

their needs and greater competitive 

pressure to provide high quality and 

low costs. We also believe that PDPs 

that assume some financial risk, as 

opposed to a fallback plan that is paid 

based on cost, are likely to negotiate 

larger price concessions for 

beneficiaries. In addition, more 

competition for enrollees between PDPs, 

as well as MA–PDs, is likely to generate 

higher quality service for beneficiaries. 

Given the goal of providing 

beneficiary access to risk-bearing PDP 

plans in as many areas as possible, an 

important question is what type of 

regional configuration, or method of 

configuring regions, has the greatest 

likelihood of achieving this. One of the 

principal questions is whether regions 

should be comprised of the largest 

possible number (the 50 States, or a 

close approximation), or a smaller 

number of regions covering much larger 

geographic areas. Designating a smaller 

number of regions that cover large 

geographic areas might be desirable in 

the sense that areas that might be less 

likely to attract market interest could be 

grouped with other more sought after 

areas. Large regions might also offer 

PDPs a larger potential enrollee market 

that would provide more leverage in 

negotiating rebates and discounts with 

manufacturers. On the other hand, 

regions of too large a size could deter 

participation if there are concerns by 

PDPs about providing uniform benefits 

and bearing financial risk across large 

and possibly diverse health care 

markets. In addition, large regions may 

make it more difficult for small 

organizations to participate as PDPs, 

although there is nothing to preclude 

small organizations from forming joint 

ventures to participate. 

We recognize that there are a number 

of other factors that would affect any 

decision on the designation of regions, 

including State licensure issues for 

insurers and size and capital 

requirements for plans, as well as other 

potential barriers to initial or 

subsequent market entry; the number of 

competitors that are likely to operate in 

an area; and the goal of initiating and 

sustaining competition. We seek public 

comment on the various factors that 

may influence potential PDP plans’

participation decisions and on how we 

can design regions in such a way to best 

ensure access to PDP plans. 

The experience of the Medicare drug 

discount card program may provide 

some preliminary information that has 

46802 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

relevance to the designation of regions 

and ensuring access to PDPs under the 

Medicare drug benefit. The MMA 

required that beneficiaries have a choice 

of at least 2 Medicare endorsed drug 

discount cards. Card sponsors were 

allowed to designate their own service 

area, which could be as small as one 

State. If any portion of a State was 

included in a card sponsor’s service 

area, the entire State must be included. 

In total, 73 drug discount card 

programs were originally approved by 

Medicare. Forty of these programs were 

national in scope, available in every 

State and the District of Columbia (with 

three of these cards also available in the 

territories), exceeding the MMA 

requirement of choice of at least two 

discount cards per State. While there 

were numerous national cards, we 

believe it is uncertain whether this level 

of market entry would occur in the 

context of the Medicare drug benefit 

since PDPs are required to assume some 

financial risk unlike Medicare-approved 

drug card programs. Furthermore, it is 

possible that some discount card 

sponsors that entered the Medicare 

market at the national level did so with 

the intention of gathering information 

and experience about Medicare 

beneficiaries’ prescription drug 

expenditures to guide their decision 

making about what regions to focus on 

under the Medicare drug benefit. 

The remaining Medicare-approved 

drug cards were regional or State cards 

being offered in 42 States, including the 

District of Columbia. There was one 

additional card serving exclusively the 

territories. There were 25 regional cards 

that entered an individual State, the 

smallest possible market area. The 7 

remaining regional cards entered at least 

two States. Nine States had no regional 

discount cards: Massachusetts, Rhode 

Island and Vermont (contiguous States); 

Washington and Oregon (contiguous 

States); Arkansas and Mississippi 

(contiguous States) and Alaska and 

Hawaii. In addition, three of these 

States—Alaska, Mississippi, and 

Vermont—did not have Medicare 

Advantage drug card sponsors in 

operation. This might suggest that in the 

context of the Medicare drug benefit if 

regions were defined at the individual 

State level there could be a lack of PDP 

participation in some regions. However, 

we note that it is difficult to generalize 

from the experience of market entry in 

the Medicare drug discount card 

program to the Medicare drug benefit, 

and we note that PDP sponsors with 

national market interests can participate 

in multiple regions. The large number of 

national Medicare-approved discount 

cards may also have influenced market 

entry by potential regional card 

sponsors. If there are fewer national 

plans under the Medicare drug benefit, 

it is possible that more regional market 

entry might occur. However, the 

requirement that PDPs bear some 

financial risk, which is not the case with 

the Medicare-approved drug card 

program, may result in different market 

entry behavior at both the national and 

regional level. 

Also noteworthy in considering the 

regional boundaries for the prescription 

drug benefit would be the number of 

risk bearing companies that entered the 

Medicare drug discount card market. 

There were 23 drug cards that were 

sponsored by insurance companies (21 

of which are distinct companies). We 

counted Anthem and BlueCross 

BlueShield companies separately, due 

to the distinct drug card markets they 

serve, as well as their legal status as 

separate companies; but other insurance 

companies that were offering more than 

one national card were counted only 

once. There were 33 cards sponsored by 

PBMs (17 of which are distinct 

companies). While PBMs administer 

drug benefits, they historically have not 

been licensed as risk bearing entities 

although they are not precluded from 

doing so in the future. Thus, only 21 of 

the drug card sponsors were risk-bearing 

companies. Three of the 21 risk bearing 

insurance companies developed 

national drug cards, two others entered 

markets of either three or five States, 

and the remaining companies were 

sponsoring drug cards in single States. 

Another issue to be considered in 

designating PDP regions is whether they 

should be the same as Medicare 

Advantage (MA) regions. The statute 

stipulates that to the extent practicable, 

PDP and MA regions should be the 

same. However, because of the nature of 

health plan markets for physician and 

provider services, as opposed to the 

kind of product that PDPs will be 

offering and the uncertainty related to 

configuring insurance pools for riskbased drug only products, we believe 

potentially it may not be feasible to have 

the same regional configurations for 

each of these programs. For example, as 

shown in the regional market entry for 

the Medicare drug discount card, there 

are States in which there are no entrants 

by regional based drug card programs, 

yet these are markets in which there are 

MA plans. Also, there were States in 

which there was market entry by 

regional card programs but in which no 

MA plans participate. This might 

suggest that different regions may be 

appropriate for PDPs and MA plans. 

However, as noted previously, it is 

uncertain the extent to which 

experience with market entry by 

Medicare-approved discount card 

sponsors foreshadows what might occur 

under the Medicare drug benefit. We 

welcome comments on issues that 

should be considered in determining 

whether or not PDP and MA regions 

should be the same. 

As discussed in the Medicare 

Advantage proposed rule, we have 

conducted a preliminary market survey 

(through Research Triangle Institute) to 

inform the designation of PDP and MA 

regions. We are providing opportunity 

for public input during the course of 

that work. 

2. Bid Level Negotiations 

As mentioned previously, the FEHBP 

standard in 5 U.S.C. 8902(i) requires us 

to ascertain that a PDP’s or MA-PD’s bid 

‘‘reasonably and equitably reflects the 

costs of benefits provided.’’ In addition, 

we note that section 1860D–11(e)(2)(c) 

of the Act requires that the portion of 

the bid attributable to basic prescription 

drug coverage must ‘‘reasonably and 

equitably’’ reflect revenue requirements 

* * * for benefits provided under that 

plan, less the sum * * * of the actuarial 

value of reinsurance payments.’’

Analogous to the manner in which 

FEHBP views its management 

responsibilities, we see this requirement 

as imposing the fiduciary responsibility 

to evaluate the appropriateness of the 

overall bid amount. 

In general, we expect to evaluate the 

reasonableness of bids submitted by atrisk plans by means of the actuarial 

valuation analysis. This would require 

evaluating the plan’s assumptions 

regarding the expected distribution of 

costs, including average utilization and 

cost by drug coverage tier, for example, 

in the case of standard coverage—(1) 

those with no claims; (2) those with 

claims up to deductible; (3) those with 

claims between the deductible and the 

initial coverage limit; (4) those with 

claims between the initial coverage limit 

and the catastrophic limit; and (5) those 

with claims in excess of the catastrophic 

limit. We could test these assumptions 

for reasonableness through actuarial 

analysis and comparison to industry 

standards and other comparable bids. 

Bid negotiation could take the form of 

negotiating changes upward or 

downward in the utilization and cost 

per script assumptions underlying the 

bid’s actuarial basis. 

As discussed in greater detail in the 

preamble, we considered the 

circumstances and manner under which 

we would need to use our authority to 

carry out bid level negotiations. We 

anticipate that market forces will 

generally lead to efficient and 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46803 

appropriate bid prices. In areas where 

there is competition for enrollees among 

a number of PDPs and MA-PDs that are 

at-risk for the provision of Part D drug 

coverage to beneficiaries, our strong 

expectation is that we will be able to 

rely on the incentives provided by 

competitive bidding, and we would use 

our authority for bid level negotiations 

only on the rare occasion we find that 

a plan’s data differs significantly from 

its peers without any indication as to 

the factors accounting for this result. If 

there are any Regions with minimal 

competition (for example, just two Part 

D plans) or less financial risk (for 

example, just limited risk PDPs), we 

anticipate that it is possible that bidlevel negotiations might be slightly 

more common. 

A second issue we considered is to 

what extent we could negotiate 

aggregate bid prices with fallback plans. 

As mentioned elsewhere in the 

preamble, similar to at-risk and limitedrisk plans, we will evaluate whether a 

fallback plan bid is reasonably justified, 

and if the price reference points appear 

too high or low, we may request an 

explanation of the bidder’s pricing 

structure and the nature of their 

arrangements with manufacturers. We 

would also ensure that there is no 

conflict of interest leading to higher 

bids. 

In addition, since fallback plans are 

paid on a cost basis, there is 

significantly less incentive for them to 

negotiate lower drug prices and take 

other steps to reduce drug expenditures. 

Consequently, we also considered 

options through the contracting process 

to provide fallback plans with some 

incentives to control cost. We are 

proposing to tie fallback plan 

performance payments to the plan’s 

ability to keep drug costs below a 

certain level. We believe that this carries 

out Congress’ requirement under 

1860D–11(g)(5)(B)(i) of the Act that 

payments to fallback plans take into 

account the plan’s ability to contain 

costs through mechanisms such as 

generic substitution or price discounts. 

Under this approach, we might include 

performance incentives similar to those 

used in many pharmacy benefit 

management contracts today, such as 

the plan achieving certain targets such 

as an average discount (including 

manufacturer discounts) off of AWP (or 

other pricing reference points chosen by 

CMS), average cost per script, average 

generic substitution rate, average 

dispensing fee per script, or average 

administrative fee per script. However, 

because these incentives would apply 

only to fallback plan performance fees, 

they would not provide as strong 

incentives for drug cost control as the 

incentives faced by risk-bearing plans to 

keep overall costs down. 

3. Coordination of Benefits 

The MMA requires that beneficiaries’

incurred costs be tracked to determine 

when a Medicare beneficiary enrolled in 

Part D is eligible for catastrophic 

coverage. The MMA provides that with 

respect to out-of-pocket expenditures: 

‘‘such costs shall be treated as incurred 

only if they are paid by the part D 

eligible individual (or by another 

person, such as a family member, on 

behalf of the individual), under section 

1860D–14, or under a State 

Pharmaceutical Assistance Program and 

the part D eligible individual (or other 

person) is not reimbursed through 

insurance or otherwise, a group health 

plan or other third party arrangement 

(other than under such section or such 

a Program) for such costs.’’ This means 

that beneficiary prescription drug 

expenditures covered by supplemental 

insurers (other than SPAPs) are not 

considered incurred costs that count 

toward the true out-of-pocket cost limit 

(TrOOP) that triggers catastrophic 

coverage. Consequently, the MMA 

requires coordination between Part D 

plans and other insurers with respect to 

payment of claims for any prescription 

drug coverage that is supplemental to 

Medicare Part D coverage. This will 

necessitate that an efficient and effective 

operational framework be established to 

track beneficiary out-of-pocket 

expenditures. Elsewhere, the preamble 

of this rule discusses and seeks 

comment on a number of options that 

could be considered for developing such 

a framework. 

There are a number of issues to be 

considered. One of the principal issues 

is what entity or entities should be 

responsible for creating any 

infrastructure needed to track TrOOP 

incurred costs. Should it be the 

responsibility of PDPs and MA–PDs or 

should the government be responsible 

for developing a system that can collect 

and distribute information on costs 

reimbursed by all payors in order to 

facilitate accurate calculation of TrOOP? 

If the government took responsibility for 

developing such a system, there is the 

additional question of whether that 

system should operate in such a way 

that pharmacies query the system or that 

the system provides information to Part 

D plans which in turn provide 

information to pharmacies. Another 

issue is whether reporting of 

information by supplemental insurers to 

a coordination of benefits system should 

be mandatory or voluntary. We are also 

considering whether or not we should 

mandate that Part D plans collect 

information related to coordination of 

benefits under the Part D program, and 

whether or not we should mandate that 

beneficiaries enrolling in Part D provide 

third party payment information as part 

of their enrollment application (which 

might be validated through a HIPAA 

compliant beneficiary release of 

information). 

In considering these various options, 

we believe there are a number of issues 

to be considered. One is the extent to 

which the various alternatives would 

advance the goal of accurately tracking 

beneficiary out-of-pocket expenditures. 

Another is the cost-effectiveness and 

efficiency of various options under 

consideration. We also think it is 

important to consider the cost that any 

coordination of benefits approach may 

place on various entities and the degree 

to which the burden is shared. We seek 

public comment on all of the 

coordination of benefits options and 

issues under consideration. 

4. Charitable Assistance and TrOOP 

We also consider the issue of whether 

beneficiary cost-sharing for Medicare 

Part D enrollees paid for by charities 

should be considered incurred costs that 

count toward the true out-of-pocket 

threshold (TrOOP) that triggers 

Medicare Part D comprehensive 

coverage. The MMA States with regard 

to out-of-pocket expenditures: ‘‘such 

costs shall be treated as incurred only if 

they are paid by the part D eligible 

individual (or by another person, such 

as a family member, on behalf of the 

individual), under section 1860D–14, or 

under a State Pharmaceutical Assistance 

Program and the part D eligible 

individual (or other person) is not 

reimbursed through insurance or 

otherwise, a group health plan or other 

third party arrangement (other than 

under such section or such a Program) 

for such costs.’’ This raises the question 

of how cost-sharing paid for by private 

charities relates to the true-out-of-pocket 

threshold. 

We believe that the statute provides 

discretion in terms of whether a 

charity’s payment of a Part D enrollee’s 

cost-sharing should be considered 

incurred costs that count toward the 

TrOOP. Many laws define ‘‘person’’ to 

include corporate entities or 

organizations. Since private charities 

tend to be corporate entities or 

organizations that likely do not fall into 

the categories of ‘‘insurance or 

otherwise, group health plan, or other 

third party arrangement,’’ we believe 

there is statutory discretion to count a 

charity as ‘‘another person’’ for purposes 

of the TrOOP calculation. 

46804 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

We have proposed in this rule that 

payment of Part D cost-sharing by a 

charity should be considered incurred 

costs that count toward the TrOOP, 

provided that charitable organization 

does not meet the definition of 

‘‘insurance or otherwise, group health 

plan, or other third party arrangement,’’

as outlined in the preamble. By allowing 

charitable payment of Part D costsharing to count toward the TrOOP, we 

believe this will help beneficiaries who 

are most in need of financial assistance 

in affording prescription drugs. While 

this decision to allow charitable dollars 

to count toward TrOOP would increase 

Medicare program expenditures slightly 

by allowing more beneficiaries to 

qualify for catastrophic coverage, we 

would expect the additional Medicare 

costs to be quite small. The number of 

people helped by charity organizations 

will likely be rather modest and the 

impact on Medicare costs would be only 

for the subset of these people with 

catastrophic expenses. Given the very 

small effect on Medicare program 

spending and that many beneficiaries 

will have incomes or assets that exceed 

the criteria for the low-income subsidy, 

we feel that promoting the maintenance 

of charitable assistance to beneficiaries 

by counting charitable payments of 

beneficiary cost-sharing toward the 

TrOOP is important. 

5. Actuarial Equivalence of Retiree Drug 

Subsidy and Interactions With Other 

Means of Enhancing Retiree Drug 

Coverage 

As mentioned previously, the MMA 

provides the Secretary with the 

authority to determine the standards 

and methods for actuarial equivalence. 

In considering the issues related to 

actuarial equivalence we have been very 

cognizant that the Congress has clearly 

and repeatedly articulated four key 

policy objectives for the Medicare 

retiree drug subsidy program and for 

securing and enhancing retiree drug 

coverage more generally. The first goal 

involves maximizing the number of 

retirees retaining employer-based drug 

coverage, primarily through the retiree 

drug subsidy program created by 

Section 1860D–22 of the Act but also 

through the other means of assuring 

high-quality retiree drug coverage that 

are provided by the Act (including, as 

described above, employer wraparound 

coverage and employer support for 

enhanced Part D plans). The second goal 

entails not creating windfalls, where 

retirees might receive a smaller subsidy 

from sponsors of their retiree drug plans 

than Medicare would pay on their 

behalf. The third goal is to minimize the 

administrative burdens on beneficiaries, 

employers, and unions. The final goal is 

to minimize costs to the government of 

providing retiree drug subsidies (and 

not exceed the budget estimates). While 

the first, third and fourth goals received 

extensive discussion during the creation 

of the MMA, the second goal has also 

emerged in response to the possibility 

that the MMA might create the potential 

for an unintended windfall. 

As discussed previously in the 

preamble, our consideration of various 

alternatives reflects the four objectives 

of maximizing the number of 

beneficiaries who receive high-quality 

retiree drug coverage, avoiding 

windfalls, minimizing administrative 

burden, and not exceeding budget 

estimates. The MMA provisions creating 

Part D provide multiple options for plan 

sponsors, ranging from participating in 

the retiree drug subsidy to various 

mechanisms for enrolling retirees in 

Part D prescription drug plans while 

offering enhanced benefits. Our goal is 

not only to protect but also to enhance 

coverage offered retirees. As discussed 

elsewhere in this document, prior to 

enactment of the MMA, employers have 

been systematically restricting drug 

coverage for future retirees. Taken 

together, these legal and behavioral 

factors introduce substantial uncertainty 

about how plan sponsors will assess 

their options and react to the new Part 

D benefit. 

We believe the Secretary has authority 

to achieve these goals. One key element 

of this authority is the requirements that 

plans qualifying for the retiree drug 

subsidy must offer at least actuarially 

equivalent benefits to those offered by 

standard Part D prescription drug plans 

(PDPs). We seek comments on how best 

to use the Secretary’s statutory authority 

in setting the specific actuarial 

equivalence requirements to qualify for 

the retiree drug subsidy, recognizing 

any tradeoffs and interactions among 

our key goals and that our 

implementation of this definition must 

be consistent with the statutory 

authority provided the Secretary. As 

discussed previously in the preamble, 

there is a range of aspects of the 

actuarial equivalence definition, each of 

which may have an impact on achieving 

the key objectives. 

a. Alternative 1: Gross Value Test 

One possible definition would 

stipulate that plans must meet the same 

test as for ‘‘creditable coverage.’’ The test 

for creditable coverage requires that the 

total or ‘‘gross’’ value of the benefit 

package offered by the employer at least 

equal that of the standard Part D benefit 

offered by PDPs, without regard to the 

financing of this benefit package. More 

specifically, under this approach the 

sponsor of a retiree prescription drug 

plan would be eligible for a subsidy if 

the expected amount of paid claims 

under the retiree prescription drug plan 

is at least equal to the expected amount 

of paid claims under standard Medicare 

Part D prescription drug coverage. 

However, this ‘‘single prong’’

approach to defining actuarial 

equivalence could not by itself preclude 

the existence of windfalls. This is 

because, without considering financing, 

an employer theoretically could impose 

as much as the full cost of the benefit 

package on the employee through 

employee premiums, and still be 

eligible for a subsidy payment if the 

package the employee was buying met 

the actuarial equivalence test. That is, 

the employer could contribute a smaller 

amount toward the financing of the 

package than it would receive in a 

subsidy payment. We seek comments on 

whether additional steps associated 

with this approach could preclude 

windfalls. In particular, some observers 

have argued that the forces in a 

competitive labor market, collectively 

bargained contracts, and constraints on 

changing state, local and other public 

sector retiree health plans obviate the 

likelihood of windfalls. We have serious 

reservations about the adequacy of such 

forces in precluding the existence of any 

windfalls without significant additional 

administrative monitoring by Medicare 

or others to assure that benefit subsidy 

payments are passed on to augment 

benefits received by retirees. Such 

approaches may create excessive 

administrative burdens on retirees, 

employers, and unions, and thus 

alternative approaches to precluding 

windfalls are likely to be preferable. 

b. Alternative 2: Gross Value Test With 

Subsidy Not To Exceed Plan Sponsor 

Contribution 

Another possible policy option would 

combine the gross value test with a 

requirement that the amount of the 

retiree drug subsidy could not exceed 

the amount paid by plan sponsors on 

behalf their retirees. This approach 

would assure the elimination of 

windfalls: The subsidy provided by the 

employer or union to the retiree’s drug 

coverage would have to exceed the 

Medicare subsidy payment to the 

employer or union. While this approach 

is simple both to describe and 

operationalize, we have questions about 

the adequacy of the legal basis 

underpinning such a policy. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46805 

12There is special tax treatment available for the 

retiree drug subsidy. Plan sponsors get to deduct all 

the associated expenses but the value of the subsidy 

payments is not recognized as income. 

c. Alternative 3: Two-Prong Actuarial 

Equivalence 

A third approach, which could be 

implemented in a variety of ways, 

would establish a ‘‘two-prong’’ test of 

actuarial equivalence: The ‘‘gross’’ test 

assures the total value of benefits, and 

the ‘‘net’’ test reflects only the value of 

benefits not financed by beneficiaries. 

This third approach is also structured to 

preclude windfalls. 

Under this approach, in order to 

qualify for the subsidy a sponsor’s plan 

would have to meet both prongs of the 

actuarial equivalence standard. The first 

prong would again be a test based 

strictly on plan design, as described in 

more detail previously. The second 

prong would be a ‘‘net value’’ test in 

which the gross value of the plan design 

would be reduced to account for the 

level of benefits financed solely by the 

beneficiary. For instance, the net value 

of the coverage could be calculated by 

subtracting the retiree premium from 

the expected amount of paid claims 

under the retiree drug program. 

The ‘‘net’’ prong of the two-prong test 

of actuarial equivalence has several 

variants. While each variant of the twoprong test precludes windfalls, each 

presents a different balance among 

potentially competing objectives. At a 

minimum, we believe as a policy matter 

that the net value of the creditable 

coverage should at least equal the per 

capita amount that Medicare would 

expect to pay as the retiree drug 

subsidy. As noted above, using MCBS 

data, we roughly estimate this value at 

$611 in 2006, though we acknowledge 

that other data sources may produce 

other estimates. While there may be 

policy advantages to this approach, we 

have questions about the adequacy of 

the legal basis underpinning such a 

policy. We specifically invite comment 

on the question of whether the language 

could reasonably be interpreted to 

support this approach. 

Alternatively, a higher threshold 

might be required, though as the 

threshold is raised, it would be more 

difficult for retiree plans to qualify that 

do not provide windfalls and that offer 

coverage that is at least as generous in 

overall actuarial value as the Medicare 

subsidy. Two other benchmarks are 

conceptually possible as alternative 

values for the net test. These two 

conceptually possible values would be 

tied either to a specified fraction of the 

expected value of the Medicare payment 

to standard Part D PDPs for retirees with 

enhanced coverage or to the value of the 

$611 retiree drug subsidy after taking 

taxes into account.12 Determining the 

appropriate amount for the threshold 

value poses a significant data problem 

because of the heterogeneity of the plan 

sponsors. For example, we estimate that 

at least 60 percent of retirees that are age 

65 and older receive retiree health 

benefits from entities that are exempt 

from taxation (including both public 

and nonprofit entities, based on data 

from the 2001 Medical Expenditure 

Panel Survey); for those plan sponsors 

subject to taxation, their rates of 

taxation vary markedly. In addition, as 

mentioned above, we have questions 

about the adequacy of the legal basis 

underpinning this approach. 

Similarly, the value of benefits offered 

by plans providing creditable coverage 

varies widely, ranging from being only 

marginally more generous than standard 

Part D benefits to being extremely 

generous. (Some retiree plans provide 

less generous coverage, but as noted 

previously, they would not be creditable 

for purposes of the subsidy.) As a result, 

it could be challenging to calculate 

appropriate reinsurance payments and 

equitably operationalize the subsidies 

for these plans. 

As noted above, adopting a two-prong 

test with the higher value for the net test 

could arguably provide greater 

protection to beneficiaries but might 

drive more sponsors out of participating 

in the retiree drug subsidy and toward 

using the Part D-based options for 

supporting and enhancing drug 

coverage Conversely, adopting a lower 

value for the net test might qualify more 

plan sponsors to participate in the 

retiree drug subsidy, but it might also 

discourage some employers and unions 

from increasing their contributions to 

reach the higher threshold level, and 

thereby increasing generosity of 

coverage. 

Finally, the employer’s decision about 

using the retiree subsidy versus 

continuing to provide enhanced retiree 

coverage through other means (offering 

supplemental drug coverage that wraps 

around Part D, qualifying directly for 

the Part D subsidy as a Part D enhanced 

plan, and/or paying the additional costs 

on top of the Medicare Part D subsidy 

for enhanced benefits in PDPs or in MA 

plans) depends on the attractiveness of 

each of these options. We note that none 

of these alternatives permit employer 

windfalls. We intend for these 

additional approaches to providing 

generous retiree coverage to be attractive 

to employers who may not make 

sufficient contributions or provide 

sufficiently generous coverage on their 

own to qualify for the retiree drug 

subsidy. This combination of 

approaches will maximize the number 

of beneficiaries who receive additional 

drug coverage as a result of adding 

together Medicare contributions and 

contributions from employers and 

unions. 

Public comment would help limit 

uncertainty by clarifying the likely 

responses of plan sponsors to these 

different approaches. In addition, we 

solicit comments not just on desirability 

of the different options, but as noted 

above on the legal bases for possible 

options, and on the impact of the 

combination of approaches on 

increasing the overall generosity of drug 

coverage available to retirees. 

6. Payment Methodology—Method and 

Frequency of Medicare Retiree Drug 

Subsidy Payments 

We believe that the MMA gives us 

broad discretion to determine the 

methodology for distributing the 

Medicare retiree drug subsidy 

payments. We wish to develop a 

payment methodology that is least 

burdensome to employers, 

technologically feasible, and costefficient. Additionally, our payment 

methodology must accommodate the 

exclusion of rebates from retiree drug 

subsidy payments. 

As discussed earlier in the preamble, 

we are considering four potential 

approaches for making Medicare retiree 

drug subsidy payments. The first 

alternative that we are considering is 

our proposed approach, which 

combines monthly payments based on 

actual experience with monthly 

adjustments for price concessions as 

they are received. We are also 

considering three potential alternatives 

to our proposed approach: annual 

retroactive retiree drug subsidy 

payments, interim payments throughout 

the year with a settlement after the end 

of the plan or calendar year, and lagged 

payments based on actual experience on 

a periodic basis throughout the year 

with a settlement after the end of the 

year. We discuss the pros and cons of 

these four alternatives further below. 

a. Alternative 1: Monthly Retiree Drug 

Subsidy Payments Based on Actual 

Experience With Monthly Adjustments 

for Price Concessions 

Under the first alternative, CMS 

would make monthly Medicare retiree 

drug subsidy payments to employers 

based on actual claims experience 

throughout the year, with monthly 

adjustments for price concessions as 

46806 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

they are received, along with any 

adjustments to actual expenditures for 

prior months, and a final reconciliation 

no later than 45 days after the end of the 

calendar year (excluding outstanding 

rebates and discounts). 

Specifically, by the 15th day of each 

month, each qualified plan sponsor 

would submit information to CMS 

certifying the total amount by which 

actual retiree-beneficiary gross drug 

spending (based on actual claims 

experience) exceeded the cost threshold 

yet remained below the cost limit for the 

preceding month, and Medicare would 

pay 28 percent of the certified amount 

to the sponsor by the 30th of that 

month. As part of their monthly data 

submission to CMS, plan sponsors 

would also apply the appropriate share 

of any discounts, rebates, or other price 

concessions, along with any 

adjustments to the actual expenditures 

for prior months. Any amounts owed to 

the government would offset the retiree 

drug subsidy payment for that month, 

and to the extent that the amount owed 

to the government exceeds any 

applicable monthly payment, the plan 

sponsor would pay that amount to CMS. 

No later than 45 days after the end of 

the calendar year, the plan sponsor 

would submit a final reconciliation to 

CMS for payment by or, if applicable, to 

CMS (excluding any outstanding rebates 

and discounts, which may not be 

received until after the close of the their 

plan year). Plan sponsors or plan 

administrators would be required to 

maintain detailed records of claims 

payment and other matters. 

While this alternative is arguably the 

most data intensive of the four 

alternatives that we are considering 

here, we believe that it is the most 

straightforward option, minimizing 

reliance on projections and actuarial 

representations. This option would also 

facilitate ensuring that sponsors receive 

expeditious payment of the full retiree 

drug subsidy amounts to which they are 

entitled. As discussed previously, we 

are considering and seek comment on 

whether to require a surety bond type of 

instrument or preferred creditor status 

in order to address situations related to 

businesses that may terminate or 

experience bankruptcy prior to 

completion of a final reconciliation. 

b. Alternative 2: Annual Retroactive 

Retiree Drug Subsidy Payments 

Under the second alternative, CMS 

would make an annual retroactive 

Medicare retiree drug subsidy payment 

to each employer after the end of the 

year. By the beginning of the fourth 

month after the end of the year, each 

employer would submit information to 

CMS on the number of months of 

coverage for each qualifying covered 

retiree and their gross and allowable 

costs. These costs would be based on 

data derived directly from claims 

payments and retiree cost-sharing for 

prescriptions dispensed during the year 

and discounts, chargebacks and rebates 

for that year. CMS would review this 

submission and make a payment for the 

year by the end of the following month. 

This alternative would be the simplest 

to administer of the four alternatives 

considered here and would obviate the 

need for interaction between CMS and 

employers other than during the review 

process. From the perspective of 

employers, however, this alternative 

may be problematic since payment 

would not be received until after the 

end of the year. 

c. Alternative 3: Interim Retiree Drug 

Subsidy Payments With Year End 

Settlement 

Under the third alternative, CMS 

would make interim payments 

throughout the year with a settlement 

after the end of the year. Employers that 

sponsor qualified retiree plans would 

estimate the per capita Medicare retiree 

drug subsidy payments they would 

expect to receive, based on historical 

data on prescription drug claims for 

their qualifying covered retirees, along 

with rebates or discounts that the 

employer has received from drug 

manufacturers. Employers would 

submit their estimated per capita retiree 

drug subsidy payment and any 

supporting documentation to CMS at 

the same time that they submit their 

attestation of their qualified retiree 

prescription drug plan’s actuarial 

equivalence to standard Medicare Part D 

coverage. CMS would review each 

employer’s estimate and related 

documentation, and would determine 

an interim monthly per capita amount. 

In order to minimize the possibility of 

having to recoup large amounts of 

money at the time of settlement, CMS 

would pay each plan sponsor a 

percentage of this interim monthly per 

capita amount on a periodic basis for 

each of their qualifying covered retirees. 

We are proposing under this alternative 

to pay 70 percent of the interim monthly 

per capita amount in 2006 and 2007, 

given the significant uncertainty that 

will exist in estimating Medicare retiree 

drug subsidy payments. This alternative 

is more administratively complex than 

the second alternative because it entails 

calculating an interim payment amount 

for each employer; making periodic 

payments during the year; and 

conducting a settlement with each 

employer after the end of the year with 

actual claims data. It would, however, 

provide Medicare retiree drug subsidy 

payments to employers during the year, 

which could be beneficial to employers 

from a cash flow perspective. 

d. Alternative 4: Lagged Interim Retiree 

Drug Subsidy Payments 

Under the fourth alternative, CMS 

would make lagged Medicare retiree 

drug subsidy payments to employers 

based on actual claims experience, on a 

periodic basis throughout the year, with 

a settlement after the end of the year 

that would be limited to reconciling 

estimated versus actual discounts, 

chargebacks, and rebates. By the 15th 

day of the month after the end of the 

payment period, each qualified 

employer would submit information to 

CMS on gross and allowable costs for 

the previous payment period for each of 

their qualifying covered retirees whose 

gross costs to date exceeded the cost 

threshold, but did not exceed the cost 

limit. Employers would base the cost 

data that they submit to CMS on their 

actual claims experience, adjusted on a 

percentage basis for estimated 

discounts, chargebacks and rebates 

(each employer would also submit a 

justification for the percentage used). 

By the 15th of the following month, 

CMS would review the submission and 

make a Medicare retiree drug subsidy 

payment to the employer. By the 

beginning of the fourth month after the 

close of the year, the employer would 

submit documentation on actual 

discounts, chargebacks and rebates that 

were received for the plan, with a 

comparison to the estimated discounts, 

chargebacks and rebates that were used 

in calculating the payments. We would 

correct any underpayment or 

overpayment by adjusting the 

employer’s subsequent periodic 

payments. 

Similar to the first, this fourth 

alternative is more administratively 

complex than the second and third 

alternatives considered here, but as with 

the first alternative it would provide 

employers with a payment stream that 

comes closer to subsidizing their actual 

plan expenditures as they occur. 

However in contrast to the first 

alternative, it relies on projected 

amounts related to retrospective 

discounts, chargebacks, and rebates, 

with a reconciliation process, and thus 

does not come as close as the first 

alternative to ensuring that sponsors 

receive expeditious payment of the full 

retiree drug subsidy amounts to which 

they are entitled. Compared with the 

first and third alternatives, this fourth 

alternative would reduce somewhat the 

risk to the government and employers 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46807 

that substantial overpayments or 

underpayments would need to be 

redeemed. 

e. Frequency of Retiree Drug Subsidy 

Payments 

If an interim payment process is 

chosen, then there would be the 

additional question of the frequency of 

the Medicare retiree drug subsidy 

payments. One could envision a system 

of bi-annual, quarterly or monthly 

payments under either of these 

alternatives. The advantage of making 

more frequent retiree drug subsidy 

payments is that it would provide a 

more even cash flow for employers. On 

the other hand, a disadvantage of more 

frequent payments may be increased 

administrative costs for both CMS and 

employers. This may particularly be the 

case for the first and fourth alternatives, 

which would require employers to 

submit actual cost data to CMS 

following the end of each payment 

period in order to receive the retiree 

drug subsidy payments. 

We are also considering a variable 

payment alternative in which the 

frequency of payment would vary in 

accordance with the size of the 

employer’s plan. Under this scenario, 

employers with 10,000 or more 

qualifying covered retirees would 

receive monthly Medicare retiree drug 

subsidy payments while employers with 

fewer than 10,000 qualifying covered 

retirees would receive quarterly 

payments, and very small employers 

could choose to minimize their 

reporting burden by receiving payments 

on an annual basis. This alternative 

would enable employers that have very 

large numbers of qualifying covered 

retirees, for whom the Medicare retiree 

drug subsidy payments would 

potentially represent a large amount of 

money, to receive their periodic subsidy 

payments on a more frequent basis. 

Making more frequent Medicare retiree 

drug subsidy payments to employers 

that provide drug coverage to large 

numbers of qualifying covered retirees 

would balance the administrative 

workload considerations that are 

associated with more frequent payments 

with the desire to assist these employers 

by matching the distribution of their 

Medicare retiree drug subsidy payments 

more closely with the timeframe during 

which the related expenses were 

incurred. However, we are concerned 

that this alternative may be too 

administratively complex for CMS to 

implement. We are also seeking 

comment on whether to use more than 

one of the payment alternatives 

described above, while determining 

which payment method would apply 

based on the size of the sponsor’s plan 

(for example, in order to minimize 

administrative burden on small 

businesses, sponsors with fewer than 

100 qualifying covered retirees could 

receive an annual retroactive payment, 

while sponsors with larger plans could 

have access to one of the other payment 

alternatives). 

7. Data Collection—Aggregate vs. 

Individual Level 

Qualified retiree prescription drug 

plan sponsors (or the plan 

administrators that have been 

designated by the sponsors) will need to 

submit cost data relating to their 

qualifying covered retirees so that CMS 

will be able to accurately calculate each 

sponsor’s Medicare retiree drug subsidy 

payment. As discussed earlier, in 

addition to certain beneficiary 

identifying and eligibility information, 

each plan sponsor (or plan 

administrator that has been designated 

by the sponsor) will be required to 

submit cost data for each of their 

qualifying covered retirees (including 

information about the period of time 

when these costs was incurred). We are 

considering three alternatives relating to 

the level of detail of this cost data: (1) 

Submission of aggregate allowable costs 

data, (2) submission of beneficiary-level 

total allowable costs data, and (3) 

submission of actual claims data. We 

discuss these three alternatives further 

below. 

a. Alternative 1: Submission of 

Aggregate Level Cost Data 

Under this alternative, CMS would 

require the plan sponsor (or the plan 

administrator designated by the 

sponsor) to submit the aggregate total of 

all allowable drug costs for all of the 

qualifying covered retirees that were 

enrolled in the plan during the time 

period in question. These costs would 

represent the allowable costs incurred 

between the cost threshold and cost 

limit for each qualifying covered retiree, 

with a reduction for the anticipated 

rebates and discounts (which would be 

calculated based upon historical data). 

Under this alternative, the plan 

sponsors would not submit separate cost 

data for each qualifying covered retiree. 

However, each plan sponsor (or their 

administrator) would have to maintain 

the individual-level claims data that 

support its submission for audit 

purposes. While this alternative would 

probably be easier for the sponsors and 

would be the most protective of the 

individual’s privacy, it may be the most 

problematic in terms of accurately 

calculating the Medicare retiree drug 

subsidy payments. 

b. Alternative 2: Submission of 

Beneficiary Level Cost Data 

Under this alternative, the plan 

sponsor (or its plan administrator) 

would submit the total allowable costs 

for each individual qualifying covered 

retiree during the time period in 

question. This alternative would be 

more complex for the sponsor and 

would raise some privacy questions, but 

it would be more reliable in terms of 

calculating the Medicare retiree drug 

subsidy payments. 

c. Alternative 3: Submission of Actual 

Claims Data 

Under this third alternative, each plan 

sponsor (or its plan administrator) 

would submit the actual claims data for 

each qualifying covered retiree during 

the time period in question. However, 

this alternative would be the most 

complex in terms of calculating the 

Medicare retiree drug subsidy payments 

and would be the most problematic in 

terms of privacy concerns. Accordingly, 

we have ruled out this alternative. 

N. Conclusion 

We estimate that about 41 million 

Medicare beneficiaries will receive drug 

coverage either through a Medicare Part 

D plan (that is, by enrolling in a PDP or 

a MA-PD) or through an employer or 

union sponsored retiree plan that is 

eligible for the Medicare retiree drug 

subsidy in calendar year (CY) 2006. By 

CY 2010, due to growth in the overall 

Medicare population, we estimate that 

nearly 45 million Medicare beneficiaries 

will be receiving such coverage. The net 

Federal budgetary effect of the Medicare 

prescription drug benefit and retiree 

drug subsidy is estimated to be about 

$287 billion during CY 2006–2010. 

Medicare Part D is estimated to generate 

about $8.2 billion in net savings for 

States over the five-year period from 

2006–2010. 

All Medicare beneficiaries will have 

access to a benefit that protects against 

catastrophic drug costs. On average, for 

non-low-income beneficiaries the 

benefit will cover approximately half 

their costs, and for beneficiaries with 

very high drug costs it covers 

substantially more. For low-income 

beneficiaries coverage is comprehensive 

covering on average about 95 percent of 

their prescription drug costs. 

Medicare beneficiaries who have no 

drug coverage today will now be able to 

obtain an affordable benefit that 

provides substantial assistance with 

prescription drug costs. Those 

beneficiaries with existing private 

coverage through retirement benefits 

and Medicare Advantage plans will 

46808 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

receive the benefits of new Medicare 

subsidies to maintain and enhance their 

coverage. Beneficiaries with public 

coverage through Medicaid and State 

programs will have more secure (and 

potentially more generous) benefits 

because of the comprehensive lowincome Medicare benefit. Beneficiaries 

who pay the full costs for limited 

Medigap drug coverage will now be able 

to obtain highly-subsidized, more 

generous coverage. 

Overall, we anticipate that by giving 

beneficiaries access to affordable 

insurance coverage that helps them to 

pay for their outpatient prescription 

drugs—which have become a critical 

component in the delivery of 

comprehensive, quality health care 

services—the Medicare prescription 

drug benefit will help beneficiaries to 

lead healthier, more productive lives. 

List of Subjects 

42 CFR Part 403 

Grant programs—health, Health 

insurance, Hospitals, Intergovernmental 

relations, Medicare, Reporting and 

recordkeeping requirements 

42 CFR Part 411 

Kidney diseases, Medicare, Reporting 

and recordkeeping requirements 

42 CFR Part 417 

Administrative practice and 

procedure, Grant programs-health, 

Health care, Health insurance, Health 

maintenance organizations (HMO), Loan 

programs-health, Medicare, Reporting 

and recordkeeping requirements 

42 CFR Part 423 

Administrative practice and 

procedure, Emergency medical services, 

Health facilities, Health maintenance 

organizations (HMO), Health 

professions, Medicare, Penalties, 

Privacy, Reporting and recordkeeping 

requirements 

For reasons set forth in the preamble 

in this proposed regulation, the Centers 

for Medicare & Medicaid Services 

proposes to amend 42 CFR chapter IV as 

follows: 

PART 403—SPECIAL PROGRAMS AND 

PROJECTS 

1. The authority citation for part 403 

continues to read as follows: 

Authority: 42.U.S.C. 1359b-3 and secs. 

1102 and 1871 of the Social Security Act (42 

U.S.C. 1302 and 1395hh). 

Subpart B—Medicare Supplemental 

Policies 

2. Section 403.205 is revised to read 

as follows: 

§ 403.205 Medicare supplemental policy. 

(a) Except as specified in paragraph 

(e) of this section, Medicare 

supplemental (or Medigap) policy 

means a health insurance policy or 

other health benefit plan that—

(1) A private entity offers to a 

Medicare beneficiary; and 

(2) Is primarily designed, or is 

advertised, marketed, or otherwise 

purported to provide payment for 

expenses incurred for services and items 

that are not reimbursed under the 

Medicare program because of 

deductibles, coinsurance, or other 

limitations under Medicare. 

(b) The term policy includes both 

policy form and policy as specified in 

paragraphs (b)(1) and (b)(2) of this 

section. 

(1) Policy form. Policy form is the 

form of health insurance contract that is 

approved by and on file with the State 

agency for the regulation of insurance. 

(2) Policy. Policy is the contract’

(i) Issued under the policy form; and 

(ii) Held by the policy holder. 

(c) Medicare supplemental policy 

includes—

(1) An individual policy; 

(2) A group policy; 

(3) A rider attached to an individual 

or group policy; or 

(4) As of January 1, 2006, a standalone limited health benefit plan or 

policy that supplements Medicare 

benefits and is sold primarily to 

Medicare beneficiaries or that otherwise 

meets the definition of a Medicare 

supplemental policy as defined in this 

section. 

(d) Any rider attached to a Medicare 

supplemental policy becomes an 

integral part of the basic policy. 

(e) Medicare supplemental policy 

does not include a Medicare Advantage 

plan, a Prescription Drug plan under 

Part D, or any of the other types of 

health insurance policies or health 

benefit plans that are excluded from the 

definition of a Medicare supplemental 

policy in section 1882(g)(1) of the Act. 

PART 411—EXCLUSIONS FROM 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

3. The authority citation for part 411 

is revised 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—Financial Relationships 

Between Physicians and Entities 

Furnishing Designated Health Services 

4. In § 411.351, the definition of 

‘‘Outpatient prescription drugs’’ is 

revised to read as follows: 

* * * * * 

§ 411.351 Definitions 

* * * * * 

Outpatient prescription drugs means 

all drugs covered by Medicare Part B 

and Part D. 

* * * * * 

PART 417—HEALTH MAINTENANCE 

ORGANIZATIONS, COMPETITIVE 

MEDICAL PLANS, AND HEALTH CARE 

PREPAYMENT PLANS 

5. The authority citation for part 417 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh), secs. 1301, 1306, and 1310 of the 

Public Health Service Act (42 U.S.C. 300e, 

300e–5, and 300e–9), and 31 U.S.C. 9701. 

6. In § 417.440, add paragraph 

(b)(1)(iii) to read as follows: 

§ 417.440 Entitlement to health care 

services from an HMO or CMP. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) Medicare Part D services, to the 

extent the HMO or CMP offers qualified 

prescription drug coverage under Part D, 

and the enrollee is entitled to benefits 

under Part D. 

* * * * * 

7. In § 417.534, add paragraph (c) to 

read as follows: 

§ 417.534 Allowable costs. 

* * * * * 

(c) Medicare Part D program costs. To 

the extent that an HMO or CMP 

provides qualified prescription drug 

coverage to enrollees under Part D, no 

costs related to the offering or provision 

of Part D benefits will be reimbursed 

under this part. These costs will be 

reimbursed solely under the applicable 

provisions of part 423 of this chapter. 

8. Part 423 is added as set forth below: 

PART 423—VOLUNTARY MEDICARE 

PRESCRIPTION DRUG BENEFIT 

Subpart A—General Provisions 

Sec. 

423.1 Basis and Scope. 

423.4 Definitions. 

423.6 Cost-Sharing in beneficiary education 

and enrollment. 

Subpart B—Eligibility and Enrollment 

423.30 Eligibility to enroll. 

423.34 Enrollment process. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46809 

423.36 Enrollment periods. 

423.38 Effective dates. 

423.42 Coordination of enrollment and 

disenrollment through PDPs. 

423.44 Disenrollment by the PDP. 

423.46 Late enrollment penalty. 

423.48 Information about Part D. 

423.50 Approval of marketing materials and 

enrollment forms. 

423.56 Procedures to determine and 

document creditable status of 

prescription drug coverage. 

Subpart C—Benefits and Beneficiary 

Protections 

423.100 Definitions. 

423.104 Requirements related to qualified 

prescription drug coverage. 

423.112 Establishment of prescription drug 

plan service areas. 

423.120 Access to covered Part D drugs. 

423.124 Special rules for access to covered 

Part D drugs at out-of-network 

pharmacies. 

423.128 Dissemination of plan information. 

423.132 Public disclosure of 

pharmaceutical prices for equivalent 

drugs. 

423.136 Privacy, confidentiality, and 

accuracy of enrollee records. 

Subpart D—Cost Control and Quality 

Improvement Requirements for Prescription 

Drug Benefit Plans 

423.150 Scope 

423.153 Cost and utilization management, 

quality assurance, medication therapy 

management programs, and programs to 

control fraud, abuse, and waste. 

423.156 Consumer satisfaction surveys. 

423.159 Electronic prescription program. 

423.162 Quality improvement organization 

activity. 

423.165 Compliance deemed on the basis of 

accreditation. 

423.168 Accreditation organizations. 

423.171 Procedures for approval of 

accreditation as a basis for deeming 

compliance. 

Subpart E—Reserved 

Subpart F—Submission of Bids and 

Monthly Beneficiary Premiums; Plan 

Approval 

423.251 Scope. 

423.258 Definitions. 

423.265 Submission of bids and related 

information. 

423.272 Review and negotiation of bid and 

approval of plans submitted by potential 

PDP sponsors or MA organizations 

planning to offer MA–PD plans. 

423.279 National average monthly bid 

amount. 

423.286 Rules regarding premiums. 

423.293 Collection of monthly beneficiary 

premiums. 

Subpart G—Payments to PDP Sponsors 

and MA Organizations Offering MA–PD 

Plans for All Medicare Beneficiaries for 

Qualified Prescription Drug Coverage 

423.301 Scope. 

423.308 Definitions and terminology. 

423.315 General payment provisions. 

423.322 Requirement for disclosure of 

information. 

423.329 Determination of payments. 

423.336 Risk-sharing arrangements. 

423.343 Retroactive adjustments and 

reconciliations. 

423.346 Reopenings. 

Subpart H—Reserved 

Subpart I—Organization Compliance With 

State Law and Preemption by Federal Law 

423.401 General requirements for PDP 

sponsors. 

423.410 Waiver of certain requirements in 

order to expand choice. 

423.420 Solvency standards for nonlicensed entities. 

423.425 Licensure does not substitute for or 

constitute certification. 

423.440 Prohibition of State imposition of 

premium taxes;relation to State laws. 

Subpart J—Coordination Under Part D With 

Other Prescription Drug Coverage 

423.452 Scope. 

423.453 Definitions and terminology. 

423.458 Application of Part D rules to MA–

PD plans on and after January 1, 2006. 

423.462 Medicare secondary payer 

procedures. 

423.464 Coordination of benefits with other 

providers of prescription drug coverage. 

Subpart K—Application Procedures and 

Contracts With PDP Sponsors 

423.501 Definitions. 

423.503 Evaluation and determination 

procedures for applications to be a 

sponsor. 

423.504 General provisions. 

423.505 Contract provisions. 

423.506 Effective date and term of contract. 

423.507 Non renewal of contract. 

423.508 Modification or termination of 

contract by mutual consent. 

423.509 Termination of contract by CMS. 

423.510 Termination of contract by PDP 

sponsor. 

423.512 Minimum enrollment 

requirements. 

423.414 Reporting requirements. 

Subpart L—Effect of Change of Ownership 

or Leasing of Facilities During Term of 

Contract 

423.551 General provisions. 

423.552 Novation agreement requirements. 

423.553 Effect of leasing a PDP sponsor’s 

facilities. 

Subpart M—Grievances, Coverage 

Determinations, and Appeals 

423.560 Definitions. 

423.562 General provisions. 

423.564 Grievance procedures. 

423.566 Coverage determinations. 

423.570 Expediting certain coverage 

determinations. 

423.572 Timeframes and notice 

requirements for expedited coverage 

determinations. 

423.576 Effect of a coverage determination. 

423.578 Exceptions process. 

423.580 Right to a redetermination. 

423.582 Request for a standard 

redetermination. 

423.584 Expediting certain 

redeterminations. 

423.586 Opportunity to submit evidence. 

423.590 Timeframes and responsibility for 

making redeterminations. 

423.600 Reconsideration by an independent 

review entity. 

423.602 Notice of reconsideration 

determination by the independent 

review entity. 

423.604 Effect of a reconsideration 

determination. 

423.610 Right to an ALJ hearing. 

423.612 Request for an ALJ hearing. 

423.620 Medicare Appeals Council review 

423.630 Judicial review. 

423.634 Reopening and revising 

determinations and decisions. 

423.636 How a PDP sponsor must effectuate 

standard predeterminations, 

reconsideration determinations, or 

decisions. 

423.638 How a PDP sponsor must effectuate 

expedited redeterminations or 

reconsidered determinations. 

Subpart N—Medicare Contract 

Determinations and Appeals 

423.641 Contract determinations. 

423.642 Notice of contract determination. 

423.643 Effect of contract determination. 

423.644 Reconsideration: Applicability. 

423.645 Request for reconsideration. 

423.646 Opportunity to submit evidence. 

423.647 Reconsidered determination. 

423.648 Notice of reconsidered 

determination. 

423.649 Effect of reconsidered 

determination. 

423.650 Right to a hearing. 

423.651 Request for hearing. 

423.652 Postponement of effective date of a 

contract determination when a request 

for a hearing for a contract determination 

is filed timely. 

423.653 Designation of hearing officer. 

423.654 Disqualification of hearing officer. 

423.655 Time and place of hearing. 

423.656 Appointment of representatives. 

423.657 Authority of representatives. 

423.658 Conduct of hearing. 

423.659 Evidence. 

423.660 Witnesses. 

423.661 Discovery. 

423.662 Pre-hearing. 

423.663 Record of hearing. 

423.664 Authority of hearing officer. 

423.665 Notice and effect of hearing 

decision. 

423.666 Review by Administrator. 

423.667 Effect of Administrator’s decision. 

423.668 Reopening of contract or 

reconsidered determination or decision 

of a hearing officer or the Administrator. 

423.669 Effect of revised determination. 

Subpart O—Intermediate Sanctions 

423.750 Kinds of sanctions. 

423.752 Basis for imposing sanctions. 

423.756 Procedures for imposing sanctions. 

423.758 Maximum amount of civil money 

penalties imposed by CMS. 

423.760 Other applicable provisions. 

Subpart P—Premium and Cost-Sharing 

Subsidies for Low-Income Individuals 

423.771 Basis and Scope. 

423.772 Definitions. 

423.773 Requirements for eligibility. 

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423.774 Eligibility determinations, 

redeterminations, and applications. 

423.780 Premium subsidy. 

423.782 Cost-sharing subsidy. 

423.800 Administration of subsidy 

program. 

Subpart Q—Guaranteeing Access to a 

Choice of Coverage (Fallback Plans) 

423.851 Scope. 

423.855 Definitions. 

423.859 Assuring access to a choice of 

coverage. 

423.863 Submission and approval of bids. 

423.867 Rules regarding premiums. 

423.871 Contract terms and conditions. 

423.875 Payments to fallback plans. 

Subpart R—Payments to Sponsors of 

Retiree Prescription Drug Plans 

423.880 Basis and scope. 

423.882 Definitions. 

423.884 Requirements for qualified retiree 

prescription drug plans. 

423.886 Retiree drug subsidy amounts. 

423.888 Payment methods, including 

provision of necessary information. 

423.890 Appeals. 

423.892 Change in Ownership. 

423.894 Construction. 

Subpart S—Special Rules for States—

Eligibility Determinations for Subsidies and 

General Payment Provisions 

423.900 Basis and Scope. 

423.902 Definitions. 

423.904 Eligibility determinations for lowincome subsidies. 

423.906 General payment provisions. 

423.907 Treatment of territories. 

423.908 Phased-down State contribution to 

drug benefit costs assumed by Medicare. 

423.910 Requirements. 

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 A—General Provisions 

§ 423.1 Basis and scope. 

(a) Basis. (1) This part is based on the 

indicated provisions of the following 

sections of the Social Security Act: 

1860D–1. Eligibility, enrollment, and 

information. 

1860D–2. Prescription drug benefits. 

1860D–3. Access to a choice of 

qualified prescription drug 

coverage. 

1860D–4. Beneficiary protections for 

qualified prescription drug 

coverage. 

1860D–11. PDP regions; submission of 

bids; plan approval. 

1860D–12. Requirements for and 

contracts with prescription drug 

plan (PDP) sponsors. 

1860D–13. Premiums; late enrollment 

penalty. 

1860D–14. Premium and cost-sharing 

subsidies for low-income 

individuals. 

1860D–15. Subsidies for Part D eligible 

individuals for qualified 

prescription drug coverage. 

1860D–16. Medicare Prescription Drug 

Account in the Federal 

Supplementary Medical Insurance 

Trust Fund. 

1860D–21. Application to Medicare 

Advantage program and related 

managed care programs. 

1860D–23. State pharmaceutical 

assistance programs. 

1860D–24. Coordination requirements 

for plans providing prescription 

drug coverage. 

1860D–31. Medicare prescription drug 

discount card and transitional 

assistance program. 

1860D–41. Definitions; treatment of 

references to provisions in Part C. 

1860D–42. Miscellaneous provisions. 

(2) The following specific sections of 

the Medicare Modernization Act also 

address the prescription drug benefit 

program: 

Sec. 102 Medicare Advantage 

conforming amendments. 

Sec. 103 Medicaid amendments. 

Sec. 104 Medigap. 

Sec. 109 Expanding the work of 

Medicare Quality Improvement 

Organizations to include Parts C 

and D. 

(b) Scope. This part establishes 

standards for beneficiary eligibility, 

access, benefits, protections, and lowincome subsidies in Part D, as well as 

establishes standards and sets forth 

requirements, limitations, procedures 

and payments for organizations 

participating in the Voluntary Medicare 

Prescription Drug Program. 

§ 423.4 Definitions. 

The following definitions apply to 

this part, unless the context indicates 

otherwise: 

Actuarial equivalence means a state of 

equivalent value demonstrated through 

the use of generally accepted actuarial 

principles and in accordance with 

section 1860D–11(c) of the Act and with 

CMS guidelines described at 

§ 423.265(c)(3). 

Brand name drug means a drug for 

which an application is approved under 

section 505(c) of the Federal Food, Drug, 

and Cosmetic Act (21 U.S.C. 355(c)), 

including an application referred to in 

section 505(b)(2) of the Act (21 U.S.C. 

355(b)(2)) 

Fallback prescription drug plan 

means a prescription drug plan offered 

by a fallback entity that—

(1) Offers only standard prescription 

drug coverage; 

(2) Provides access to negotiated 

prices; and 

(3) Meets other requirements as 

specified by CMS in subpart Q of this 

part. 

Formulary means the entire list of Part 

D drugs covered by a PDP sponsor’s or 

Medicare Advantage organization’s drug 

plan. 

Full-benefit dual eligible beneficiary 

means an individual who meets the 

criteria established in § 423.772, 

regarding coverage under both Part D 

and Medicaid. 

Generic drug means a drug for which 

an application under section 505(j) of 

the Federal Food, Drug, and Cosmetic 

Act (21 U.S.C. 355(j)) is approved. 

Insurance risk means, for a 

participating pharmacy, risk of the type 

commonly assumed only by insurers 

licensed by a State and does not include 

payment variations designed to reflect 

performance-based measures of 

activities within the control of the 

pharmacy, such as formulary 

compliance and generic drug 

substitutions, nor does it include 

elements potentially in the control of 

the pharmacy (for example, labor costs 

or productivity). 

MA stands for Medicare Advantage, 

which refers to the program authorized 

under Part C of the Act. 

MA plan means health benefits 

coverage offered under a policy or 

contract with Medicare by an MA 

organization as defined in § 422.2. 

MA–PD plan means an MA plan that 

provides qualified prescription drug 

coverage. 

Medicare prescription drug account 

means the account created within the 

Federal Supplementary Medical 

Insurance Trust Fund for purposes of 

Medicare Part D. 

Part D eligible individual means an 

individual who is entitled to or enrolled 

in Medicare benefits under Part A and/ 

or Part B. 

PDP region means a prescription drug 

plan region as determined by CMS 

under § 423.112. 

PDP sponsor means a 

nongovernmental entity that is certified 

under this part as meeting the 

requirements and standards of this part 

that apply to entities that offer 

prescription drug plans. 

Prescription drug plan or PDP means 

prescription drug coverage that is 

offered under a policy, contract, or plan 

that has been approved as specified in 

§ 423.272 and that is offered by a PDP 

sponsor that has a contract with CMS 

that meets the contract requirements 

under subpart K of this part. 

Service area means, for purposes of 

eligibility to enroll to receive Part D 

benefits, (1) for a prescription drug plan, 

an area established in § 423.112(a) 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46811 

within which access standards under 

§ 423.120 are met; and (2) for an MA–

PD plan, an area that meets the 

definition of MA service area as 

described in § 422.2, and within which 

access standards under § 423.120 are 

met. 

State Pharmaceutical Assistance 

Program (SPAP) means a program (other 

than the Medicaid program) operated by 

a State (or under contract with a State) 

that—

(1) Provides financial assistance for 

the purchase or provision of 

supplemental prescription drug 

coverage or benefits on behalf of Part D 

eligible individuals; 

(2) Provides assistance to Part D 

eligible individuals in all Part D plans 

without discriminating based upon the 

Part D plan in which an individual 

enrolls; 

(3) Meets the benefit coordination 

requirements specified in subpart J of 

this part; and 

(4) Does not change or affect the 

primary payor status of a Part D plan. 

Subsidy-eligible individual means a 

Part D eligible individual who is 

enrolled in a PDP or MA–PD plan and 

who has an income below 150 percent 

of the poverty level as applicable to a 

family of the size involved and who 

meets the resource requirements 

specified in subpart P of this part. 

Tiered cost-sharing means a process 

of grouping Part D drugs into different 

cost sharing levels within a PDP 

sponsor’s formulary. 

§ 423.6 Cost-sharing in beneficiary 

education and enrollment-related costs. 

The requirements of section 

1857(e)(2) of the Act and § 422.6 with 

regard to the payment of fees 

established by CMS for cost sharing of 

enrollment related costs apply to PDP 

sponsors under Part D. 

Subpart B—Eligibility and Enrollment. 

§ 423.30 Eligibility to enroll. 

(a) Enrollment in a PDP. Except as 

otherwise provided in paragraph (b) of 

this section, a Part D eligible individual 

is eligible to enroll in a PDP or fallback 

plan if he or she lives in the plan’s 

service area. 

(b) MA enrollees are not eligible to 

enroll in a PDP except as follows: 

(1) A Part D eligible individual is 

eligible to enroll in a PDP if the 

individual is enrolled in a MA private 

fee-for-service plan (as defined in 

section 1859(b)(2) of the Act) that does 

not provide qualified prescription drug 

coverage; and 

(2) A Part D eligible individual is 

eligible to enroll in a PDP if the 

individual is enrolled in a MSA plan (as 

defined in section 1859(b)(3) of the Act). 

(c) Enrollment in a MA–PD Plan. A 

Part D eligible individual enrolled in a 

MA–PD plan must obtain qualified 

prescription drug coverage through that 

plan. 

§ 423.34 Enrollment process. 

(a) General Rule. A PDP sponsor must 

enroll in its PDP all Part D eligible 

individuals who are eligible to enroll in 

its plan under § 423.30(a) and who elect 

to enroll in the plan during the 

individual’s initial enrollment period, 

the annual coordinated election period, 

or a special enrollment period as 

specified in § 423.36. 

(b) Enrollment. (1) A Part D eligible 

individual seeking to enroll in a PDP 

must complete the PDP’s enrollment 

form or other enrollment process 

permitted by CMS. 

(2) The PDP sponsor must process an 

individual’s enrollment request in 

accordance with CMS enrollment 

guidelines. 

(c) Notice requirement. The PDP 

sponsor must provide the individual 

with prompt notice of acceptance or 

denial of the individual’s enrollment 

request, in a format and manner 

specified by CMS. 

(d) Enrollment requirement for full 

benefit dual eligibles. (1) General rule. 

Full benefit dual eligible individuals 

who fail to enroll in a PDP or a MA–PD 

plan during their initial enrollment 

period or special enrollment period 

under § 423.36(c)(4) will be 

automatically enrolled into—

(i) A PDP offering basic prescription 

drug coverage in the PDP region where 

the individual resides that has a 

monthly beneficiary premium that does 

not exceed the premium subsidy 

amount, or, 

(ii) In the case of an individual 

enrolled in an MA plan without 

qualified prescription drug coverage, a 

MA–PD plan offered by the same MA 

organization that has a monthly 

beneficiary premium that does not 

exceed the premium subsidy amount, in 

accordance with procedures established 

by CMS. 

(2) When there is more than one PDP 

in a PDP region. In the event that there 

is more than one PDP in a PDP region 

with a monthly beneficiary premium at 

or below the premium subsidy amount, 

full benefit dual eligible individuals 

subject to automatic enrollment under 

this paragraph will be enrolled in such 

PDPs on a random basis. 

(3) Declining enrollment & 

disenrollment. Nothing in this 

paragraph shall be deemed to prevent 

these full benefit dual eligible 

individuals from—

(i) Affirmatively declining enrollment 

in a PDP or MA–PDP, or 

(ii) Disenrolling from the PDP or MA–

PDP in which they have been 

automatically enrolled and electing a 

new PDP or MA–PD plan, pursuant to 

the special election period, as provided 

for under § 423.42. 

§ 423.36 Enrollment periods. 

(a) Initial enrollment period for Part 

D—Basic rule. The initial enrollment 

period is the period during which an 

individual is first eligible to enroll in a 

Part D plan. 

(1) In 2005. An individual who is first 

eligible to enroll in a Part D plan on or 

prior to January 31, 2006, has an initial 

enrollment period from November 15, 

2005 through May 15, 2006. 

(2) February 2006. An individual who 

is first eligible to enroll in a Part D plan 

in February 2006 has an initial 

enrollment period from November 15, 

2005 through May 31, 2006. 

(3) March 2006 and subsequent 

months. (i) Except as provided in (3)(ii) 

below, the initial enrollment period for 

an individual who is first eligible to 

enroll in a Part D plan on or after March 

2006 is the same as the initial 

enrollment period for Medicare Part B 

under § 407.14. 

(ii) Exception. For those individuals 

who are not eligible to enroll in a Part 

D plan at any time during their initial 

enrollment period for Medicare Part B, 

their initial enrollment period under 

this Part will be the 3 months before 

becoming eligible for Part D, the month 

of eligibility, and the three months 

following eligibility to Part D. 

(b) Annual coordinated election 

period. (1) For 2006. This period begins 

on November 15, 2005 and ends on May 

15, 2006. 

(2) For 2007 and subsequent years. 

For coverage beginning 2007 or any 

subsequent year, the annual coordinate 

election period is November 15th 

through December 31st for coverage 

beginning the following calendar year. 

(c) Special enrollment periods. An 

individual eligible to enroll in a Part D 

plan enroll in a PDP or disenroll from 

a PDP and enroll in another PDP, as 

applicable, at any time under any of the 

following circumstances—

(1) The individual involuntarily loses 

creditable prescription drug coverage or 

such coverage is involuntarily reduced 

so that it is no longer creditable 

coverage under § 423.56(a). Loss of 

credible prescription drug coverage due 

to failure to pay any required premium 

shall not be considered involuntary loss 

of such coverage. 

46812 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(2) The individual was not adequately 

informed, as required by standards 

established by CMS under § 423.56, that 

he or she has lost his or her creditable 

prescription drug coverage, never had 

credible prescription drug coverage, or 

the coverage is involuntarily reduced so 

that it is no longer creditable 

prescription drug coverage. 

(3) The individual’s enrollment or 

nonenrollment in Part D is 

unintentional, inadvertent, or erroneous 

because of the error, misrepresentation, 

or inaction of a Federal employee, or 

any person authorized by the Federal 

government to act on its behalf. 

(4) The individual is a full-benefit 

dual eligible individual as defined 

under section 1935(c)(6) of the Act. 

(5) The individual elects to disenroll 

from a MA–PD plan and elects coverage 

under Medicare Part A and Part B in 

accordance with § 422.62(c). 

(6) The PDP sponsor’s contract is 

terminated by the PDP sponsor or by 

CMS, as provided under § 422.507 

through § 422.510. 

(7) The individual is no longer 

eligible for the PDP because of a change 

in his or her place of residence to a 

location outside of the PDP region(s) in 

which the PDP is offered. 

(8) The individual demonstrates to 

CMS, in accordance with guidelines 

issued by CMS, that—

(i) The PDP sponsor offering the PDP 

substantially violated a material 

provision of its contract under this part 

in relation to the individual, including, 

but not limited to the following—

(A) Failure to provide the individual 

on a timely basis benefits available 

under the plan; 

(B) Failure to provide benefits in 

accordance with applicable quality 

standards; or 

(C) The PDP (or its agent, 

representative, or plan provider) 

materially misrepresented the plan’s 

provisions in marketing the plan to the 

individual. 

(ii) The individual meets other 

exceptional circumstances as CMS may 

provide. 

§ 423.38 Effective dates. 

(a) Initial enrollment period. An 

enrollment made prior to the month of 

entitlement to or enrollment in 

Medicare benefits under Part A and/or 

enrollment in Part B is effective the first 

day of the month the individual is 

entitled to or enrolled in Part A or 

enrolled in Part B. An enrollment made 

during or after the month of entitlement 

to or enrollment in Part A and/or 

enrollment in Part B is effective the first 

day of the calendar month following the 

month in which the enrollment in Part 

D is made. If the individual is not 

eligible to enroll in Part D on the first 

day of the calendar month following the 

month in which the election to enroll in 

Part D is made, the enrollment in Part 

D will be effective the first day of the 

month the individual is eligible for Part 

D. In no case will an enrollment in Part 

D be effective before January 1, 2006 or 

before entitlement to or enrollment in 

Part A and/or Part B. 

(b) Annual coordinated election 

periods. (1) General Rule. Except as 

provided under paragraph (b)(2) of this 

section, for an enrollment or change of 

enrollment in Part D made during an 

annual coordinated election period as 

described in § 423.36(a)(2), the coverage 

or change in coverage is effective as of 

first day of the following calendar year. 

(2) Exception for January 1, 2006–May 

15, 2006. Enrollment elections made 

during the annual election period 

between January 1, 2006 and May 15, 

2006 will be effective the first day of the 

calendar month following the month in 

which the enrollment in Part D is made. 

(c) Special enrollment periods. For an 

enrollment or change of enrollment in 

Part D made during a special enrollment 

period specified in § 423.36(a)(3), the 

effective date shall be determined by 

CMS, which, to the extent practicable, 

will be determined in a manner 

consistent with protecting the 

continuity of health benefits coverage. 

§ 423.42 Coordination of enrollment and 

disenrollment through PDPs. 

(a) Enrollment. An individual who 

wishes to enroll in a PDP may enroll 

during the enrollment periods specified 

in § 423.36, by filing the appropriate 

enrollment form with the PDP or 

through other mechanisms CMS 

determines are appropriate. 

(b) Disenrollment. An individual who 

wishes to disenroll from a PDP may 

disenroll during the periods specified in 

§ 423.36 in either of the following 

manners: 

(1) Enroll in a different PDP plan; 

(2) Submit a disenrollment request to 

the PDP in the form and manner 

prescribed by CMS; or 

(3) File the appropriate disenrollment 

request through other mechanisms as 

determined by CMS. 

(c) Responsibilities of the PDP 

sponsor. The PDP sponsor must—

(1) Submit a disenrollment notice to 

CMS within timeframes CMS specifies; 

(2) Provide the enrollee with a notice 

of disenrollment as CMS determines 

and approves; and 

(3) File and retain disenrollment 

requests for the period specified in CMS 

instructions. 

(d) Retroactive disenrollment. CMS 

may grant retroactive disenrollment in 

the following cases: 

(1) There never was a legally valid 

enrollment; 

or, (2) A valid request for 

disenrollment was properly made but 

not processed or acted upon. 

(e) Maintenance of Enrollment. An 

individual who is enrolled in a PDP will 

remain enrolled in that PDP until one of 

the following occurs: 

(i) The individual successfully enrolls 

in another PDP; 

(ii) The individual voluntarily 

disenrolls from the PDP; 

(iii) The individual is involuntarily 

disenrolled from the PDP or; 

(iv) The PDP is discontinued and no 

longer serves the area in which the 

individual resides. 

§ 423.44 Disenrollment by the PDP. 

(a) General Rule. Except as provided 

in paragraphs (b) through (d) of this 

section, a PDP sponsor may not—

(1) Involuntarily disenroll an 

individual from any PDP it offers; or 

(2) Orally or in writing, or by any 

action or inaction, request or encourage 

an individual to disenroll. 

(b) Basis for disenrollment. (1) 

Optional involuntary disenrollment. A 

PDP sponsor may disenroll an 

individual from a PDP it offers in any 

of the following circumstances: 

(i) Any monthly premium is not paid 

on a timely basis, as specified under 

paragraph (d)(1) of this section; or 

(i) The individual has engaged in 

disruptive behavior, as specified under 

paragraph (d)(2) of this section. 

(2) Required involuntary 

disenrollment. A PDP sponsor must 

disenroll an individual from a PDP it 

offers in any of the following 

circumstances: 

(i) The individual no longer resides in 

the PDP’s service area. 

(ii) The individual loses entitlement 

or enrollment to Medicare benefits 

under Part A and/or Part B. 

(iii) Death of the individual. 

(iv) The PDP sponsor’s contract is 

terminated by CMS or that terminates a 

PDP. The PDP sponsor must disenroll 

affected enrollees in accordance with 

the procedures for disenrollment set 

forth at § 423.507 through § 423.510. 

(v) The individual materially 

misrepresents information, as 

determined by CMS, to the PDP sponsor 

that the individual has or expects to 

receive reimbursement for third-party 

coverage. 

(c) Notice Requirement. (1) If the 

disenrollment is for any of the reasons 

specified in paragraphs (b)(1), (b)(2)(i), 

or (b)(iv) of this section (that is, other 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46813 

than death or loss of entitlement or 

enrollment to benefits under Part A and/ 

or enrollment in Part B), the PDP 

sponsor must give the individual timely 

notice of the disenrollment with an 

explanation of why the PDP is planning 

to disenroll the individual. 

(2) Notices for reasons specified in 

paragraphs (b)(1) through (b)(2)(i) and 

(b)(2)(iv) of this section must—

(i) Be provided to the individual 

before submission of the disenrollment 

notice to CMS; and 

(ii) Include an explanation of the 

individual’s right to a hearing under the 

PDP’s grievance procedures. 

(d) Process for Disenrollment. (1) 

Monthly PDP premiums that are not 

paid timely. A PDP sponsor may 

disenroll an individual from the PDP for 

failure to pay any monthly premium 

under the following circumstances: 

(i) The PDP sponsor can demonstrate 

to CMS that it made reasonable efforts 

to collect the unpaid premium amount. 

(ii) The PDP sponsor gives the 

enrollee notice of disenrollment that 

meets the requirements set forth in 

paragraph (c) of this section. 

(iii) Reenrollment in the PDP. If an 

individual is disenrolled from the PDP 

for failure to pay monthly PDP 

premiums, the PDP sponsor has the 

option to decline future enrollment by 

such individual in any of its PDPs until 

the individual has paid any past 

premiums due to the PDP sponsor. 

(2) Disruptive or threatening behavior. 

(i) Basis for disenrollment. A PDP 

sponsor may disenroll an individual 

from its PDP if the individual’s behavior 

is disruptive, unruly, abusive, 

uncooperative or threatening. Disruptive 

behavior may not be based upon 

noncompliance with medical advice. An 

individual may be deemed to engage in 

disruptive or threatening behavior if the 

individual exhibits any of the following: 

(A) Behavior that jeopardizes his or 

her health or safety, or the health and 

safety of others; or 

(B) Behavior that impairs the PDP 

sponsor (or a network pharmacy’s) 

ability to furnish services to either the 

individual or other individuals enrolled 

in the plan; or 

(C) An individual with decisionmaking capacity who refuses to comply 

with the material terms of the 

enrollment agreement. 

(ii) Effort to resolve the problem. The 

PDP sponsor must make a good faith 

effort to resolve the problems the 

individual presents, including the use 

(or attempted use) of the PDP’s 

grievance procedures. The beneficiary 

has a right to submit any information or 

explanation that he or she may wish to 

submit to the PDP. 

(iii) Documentation. The PDP sponsor 

must document the enrollee’s behavior, 

its own efforts to resolve any problems, 

as described in paragraphs (d)(2)(i) 

through (d)(2)(iii) of this section and 

any extenuating circumstances. The 

PDP sponsor must also submit to CMS 

such documentation, as well as any 

documentation received by the 

beneficiary. 

(iv) CMS review of the proposed 

disenrollment. CMS decides after 

reviewing the documentation submitted 

by the PDP sponsor whether the sponsor 

has met the criteria for disenrollment for 

disruptive or threatening behavior. 

(v) Effective date of disenrollment. If 

CMS permits a PDP to disenroll an 

individual for disruptive behavior, the 

termination is effective the first day of 

the calendar month after the month in 

which the PDP gives the individual 

written notice of the disenrollment that 

meets the requirements set forth in 

paragraph (c) of this section. 

(vi) Reenrollment in the PDP. Once an 

individual is disenrolled from the PDP 

for disruptive behavior, the PDP sponsor 

has the option to decline future 

enrollment by the individual in any of 

its PDPs for a period of time CMS 

specifies. 

(vii) Expedited process. In the event 

that an individual’s disruptive or 

threatening behavior is so extreme as to 

have caused harm to others or prevented 

the PDP from providing services, CMS 

may consider allowing an expedited 

disenrollment process in accordance 

with procedures established by CMS. 

(3) Loss of entitlement or enrollment 

in Part A and Part B benefits. If an 

individual is no longer entitled or 

enrolled to Medicare benefits under Part 

A and enrolled in Part B, CMS will 

notify the PDP that the disenrollment is 

effective the first day of the calendar 

month following the last month of 

entitlement or enrollment to benefits 

under Part A or Part B. 

(4) Death of the individual. If the 

individual dies, disenrollment is 

effective the first day of the calendar 

month following the month of death. 

(5) Plan termination. 

(i) When a PDP contract terminates as 

provided in § 423.507 through 423.510 

as the PDP sponsor must give each 

affected PDP enrollee notice of the 

effective date of the plan termination 

and a description of alternatives for 

obtaining benefits under Part D, as 

specified by CMS. 

(ii) The notice must be sent before the 

effective date of the plan termination or 

area reduction, and in the timeframes 

specified by CMS. 

(6) Misrepresentation of third-party 

reimbursement. (i) If CMS determines 

an individual has materially 

misrepresented information to the PDP 

regarding whether the individual has or 

expects to receive reimbursement from 

group health plans, insurers or 

otherwise, or similar third party 

arrangements for incurred costs for 

covered Part D drugs under 

§ 423.44(b)(2)(v), the termination is 

effective the first day of the calendar 

month after the month in which the PDP 

gives the individual written notice of 

the disenrollment that meets the 

requirements set forth in paragraph (c) 

of this section. 

(ii) Reenrollment in the PDP. Once an 

individual is disenrolled from the PDP 

for misrepresentation of third party 

reimbursement, the PDP sponsor has the 

option to decline future enrollment by 

the individual in any of its PDPs for a 

period of time CMS specifies. 

(iii) Ineligibility for SEP. An 

individual who is disenrolled for 

misrepresentation of third party 

reimbursement is not eligible for an 

SEP. The individual may enroll in a 

PDP during the next annual coordinated 

election period as provided in 

§ 423.36(b) 

§ 423.46 Late enrollment penalty. 

(a) General. A Part D eligible 

individual must pay the late penalty 

described under § 423.286(d)(3) if there 

is a continuous period of 63 days or 

longer at any time after termination of 

the individual’s initial enrollment 

period during all of which the 

individual meets the following 

conditions: 

(1) The individual was eligible to 

enroll in a PDP or MA–PD plan; 

(2) The individual was not covered 

under any creditable prescription drug 

coverage; and 

(3) The individual was not enrolled in 

a PDP or MA–PD plan. 

(b) [Reserved] 

§ 423.48 Information about Part D. 

Each PDP and MA–PD plan must 

provide, on an annual basis, and in a 

format and using standard terminology 

that CMS may specify in guidance, the 

information necessary to enable CMS to 

provide to current and potential Part D 

eligible individuals the information they 

need to make informed decisions among 

the available choices for Part D 

coverage. 

§ 423.50 Approval of marketing materials 

and enrollment forms. 

(a) CMS review of marketing 

materials. (1) Except as provided in 

paragraph (a)(2) of this section, a PDP 

may not distribute any marketing 

materials (as defined in paragraph (b) of 

46814 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

this section), or enrollment forms, or 

make such materials or forms available 

to Part D eligible individuals, unless—

(i) At least 45 days (or 10 days if using 

marketing materials that use, without 

modification, proposed model language 

as specified by CMS) before the date of 

distribution, the PDP sponsor submits 

the material or form to CMS for review 

under the guidelines in paragraph (c) of 

this section; and 

(ii) CMS does not disapprove the 

distribution of the material or form. 

(2) If the PDP sponsor is deemed by 

CMS to meet certain performance 

requirements established by CMS, the 

PDP sponsor may distribute designated 

marketing materials 5 days following 

their submission to CMS. 

(b) Definition of marketing materials. 

Marketing materials include any 

informational materials targeted to 

Medicare beneficiaries which—

(1) Promote the PDP; 

(2) Inform Medicare beneficiaries that 

they may enroll, or remain enrolled in 

a PDP; 

(3) Explain the benefits of enrollment 

in a PDP, or rules that apply to 

enrollees; 

(4) Explain how Medicare services are 

covered under a PDP, including 

conditions that apply to such coverage; 

(5) Examples of marketing materials 

include, but are not limited to—

(i) General audience materials such as 

general circulation brochures, 

newspapers, magazines, television, 

radio, billboards, yellow pages, or the 

Internet. 

(ii) Marketing representative materials 

such as scripts or outlines for 

telemarketing or other presentations. 

(iii) Presentation materials such as 

slides and charts. 

(iv) Promotional materials such as 

brochures or leaflets, including 

materials for circulation by third parties 

(for example, physicians or other 

providers). 

(v) Membership communication 

materials such as membership rules, 

subscriber agreements, member 

handbooks and wallet card instructions 

to enrollees. 

(vi) Letters to members about 

contractual changes; changes in 

providers, premiums, benefits, plan 

procedures etc. 

(vii) Membership or claims processing 

activities. 

(c) Guidelines for CMS review. In 

reviewing marketing material or 

enrollment forms under paragraph (a) of 

this section, CMS determines (unless 

otherwise specified in additional 

guidance) that the marketing materials—

(1) Provide, in a format (and, where 

appropriate, print size), and using 

standard terminology that may be 

specified by CMS, the following 

information to Medicare beneficiaries 

interested in enrolling—

(i) Adequate written description of 

rules (including any limitations on the 

providers from whom services can be 

obtained), procedures, basic benefits 

and services, and fees and other charges. 

(ii) Adequate written explanation of 

the grievance and appeals process, 

including differences between the two, 

and when it is appropriate to use each. 

(iii) Any other information necessary 

to enable beneficiaries to make an 

informed decision about enrollment. 

(2) Notify the general public of its 

enrollment period in an appropriate 

manner, through appropriate media, 

throughout its service area. 

(3) Include in the written materials 

notice that the PDP is authorized by law 

to refuse to renew its contract with 

CMS, that CMS also may refuse to 

renew the contract, and that termination 

or non-renewal may result in 

termination of the beneficiary’s 

enrollment in the PDP. 

(4) Are not materially inaccurate or 

misleading or otherwise make material 

misrepresentations. 

(5) For markets with a significant nonEnglish speaking population, provide 

materials in the language of these 

individuals. 

(d) Deemed approval. If CMS has not 

disapproved the distribution of a 

marketing materials or form submitted 

by a PDP sponsor with respect to a PDP 

plan in a region, CMS is deemed not to 

have disapproved the distribution of the 

marketing material or form in all other 

regions covered by the PDP, with the 

exception of any portion of the material 

or form that is specific to the particular 

region. 

(e) Standards for PDP marketing. (1) 

In conducting marketing activities, a 

PDP may not—

(i) Provide for cash or other 

remuneration as an inducement for 

enrollment or otherwise. This does not 

prohibit explanation of any legitimate 

benefits the beneficiary might obtain as 

an enrollee of the PDP. 

(ii) Engage in any discriminatory 

activity such as, including targeted 

marketing to Medicare beneficiaries 

from higher income areas without 

making comparable efforts to enroll 

Medicare beneficiaries from lower 

income areas. 

(iii) Solicit Medicare beneficiaries 

door-to-door. 

(iv) Engage in activities that could 

mislead or confuse Medicare 

beneficiaries, or misrepresent the PDP 

sponsor or its PDP. The PDP 

organization may not claim that it is 

recommended or endorsed by CMS or 

Medicare or the Department of Health 

and Human Services or that CMS or 

Medicare or the Department of Health 

and Human Services recommends that 

the beneficiary enroll in the PDP. It 

may, however, explain that the 

organization is approved for 

participation in Medicare. 

(v) Use providers or provider groups 

to distribute printed information 

comparing the benefits of different PDPs 

unless the materials have the 

concurrence of all PDP sponsors 

involved and have received prior 

approval by CMS. 

(vi) Accept PDP enrollment forms in 

provider offices or other places where 

health care is delivered. 

(vii) Employ PDP plan names that 

suggest that a plan is not available to all 

Medicare beneficiaries 

(viii) Engage in any other marketing 

activity prohibited by CMS in its 

marketing guidance. 

(2) In its marketing, the PDP 

organization must—

(i) Demonstrate to CMS’s satisfaction 

that marketing resources are allocated to 

marketing to the disabled Medicare 

population as well as beneficiaries age 

65 and over. 

(ii) Establish and maintain a system 

for confirming that enrolled 

beneficiaries have in fact enrolled in the 

PDP and understand the rules 

applicable under the plan. 

§ 423.56 Procedures to determine and 

document creditable status of prescription 

drug coverage. 

(a) Definition. Creditable prescription 

drug coverage means any of the 

following types of coverage, but only if 

the actuarial value of the coverage 

equals or exceeds the actuarial value of 

defined standard prescription drug 

coverage as demonstrated through the 

use of generally accepted actuarial 

principles and in accordance with the 

requirements of § 423.265(c)(3): 

(1) Prescription drug coverage under a 

PDP or MA–PD plan. 

(2) Medicaid coverage under title XIX 

of the Act or under a waiver under 

section 1115 of the Act. 

(3) Coverage under a group health 

plan, including the Federal employees 

health benefits program, and qualified 

retiree prescription drug plans as 

defined in section 1860D–22(a)(2) of the 

Act. 

(4) Coverage under programs that 

provide financial assistance for the 

purchase or provision of supplemental 

prescription drug coverage or benefits 

on behalf of Part D eligible individuals. 

(5) Coverage of prescription drugs for 

veterans, survivors and dependents 

under chapter 17 of title 38, USC. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46815 

(6) Coverage under a Medicare 

supplemental policy (Medigap policy) 

under section 1882 of the Act, and as 

specified in 42 CFR 403.205, that 

provides prescription drug benefits, 

whether or not the coverage was issued 

pursuant to standardization 

requirements under section 1882(p)(1) 

of the Act. 

(7) Military coverage under chapter 55 

of title 10, U.S.C., including TRICARE. 

(8) Individual health insurance 

coverage (as defined in section 

2791(b)(5) of the Public Health Service 

Act) that includes coverage for 

outpatient prescription drugs and that 

does not meet the definition of an 

excepted benefit (as defined in section 

2791(c) of the Public Health Service 

Act). 

(9) Coverage provided by the medical 

care program of the Indian Health 

Service, Tribe or Tribal organization, or 

Urban Indian organization (I/T/U). 

(b) General. With the exception of 

PDPs and MA–PD plans under 

423.56(a)(1), each entity that offers 

prescription drug coverage under any of 

the types described in § 423.56(a), must 

disclose to all Part D eligible individuals 

enrolled in or seeking to enroll in such 

coverage whether such coverage meets 

the requirements of actuarial 

equivalence of § 423.265. 

(c) Disclosure of non-creditable 

coverage. In the case that the coverage 

does not meet the actuarial equivalence 

requirements at § 423.265 the disclosure 

described in paragraph (b) of this 

section to Part D eligible individuals 

must include: 

(1) The fact that the coverage does not 

meet the actuarial equivalence 

requirement under 423.265; 

(2) That there are limitations on the 

periods in a year in which the 

individual may enroll under a PDP or 

MA–PD plan; and 

(3) That the individual may be subject 

to a late enrollment penalty, under 

§ 423.46. 

(d) Disclosure to CMS. Each entity 

must disclose the creditable coverage 

status to CMS in a form and manner 

described by CMS. 

(e) Notification. Notification to Part-D 

eligible individuals must be provided in 

a form and manner prescribed by CMS. 

(f) When an individual is not 

adequately informed of coverage. If an 

individual establishes to CMS that he or 

she was not adequately informed that 

his or her prescription drug coverage 

was not creditable, the individual may 

apply to CMS to have such coverage 

treated as creditable coverage for 

purposes of applying § 423.46. 

Subpart C—Benefits and Beneficiary 

Protections. 

§ 423.100 Definitions. 

As used in this subpart, unless 

otherwise specified—

Alternative prescription drug coverage 

means coverage of covered Part D drugs 

other than standard prescription drug 

coverage that meets the requirements of 

§ 423.104(f). The term ‘‘alternative 

prescription drug coverage’’ must be 

either—

(1) Basic alternative coverage 

(alternative coverage that is actuarially 

equivalent to defined standard 

coverage), as determined through 

processes and methods established 

under § 423.265; or 

(2) Enhanced alternative coverage 

(alternative coverage that meets the 

requirements of § 423.104(g)(1)). 

Basic prescription drug coverage 

means coverage of covered Part D drugs 

that is either standard prescription drug 

coverage or basic alternative coverage. 

Bioequivalent has the meaning given 

such term in section 505(j)(8) of the 

Food, Drug, and Cosmetic Act. 

Covered Part D drug means—

(1) Unless excluded under number (2) 

of this definition, any of the following 

if used for a medically accepted 

indication (as defined in section 

1927(k)(6) of the Act)—

(i) A drug that may be dispensed only 

upon a prescription and that is 

described in sections 1927(k)(2)(A)(i) 

through (iii) of the Act; 

(ii) A biological product described in 

sections 1927(k)(2)(B)(i) through (iii) of 

the Act; 

(iii) Insulin described in section 

1927(k)(2)(C) of the Act; 

(iv) The following medical supplies 

associated with the injection of insulin: 

syringes, needles, alcohol swabs, and 

gauze; or 

(v) A vaccine licensed under section 

351 of the Public Health Service Act. 

(2) Does not include—

(i) Drugs for which payment as so 

prescribed and dispensed or 

administered to an individual is 

available with respect to that individual 

under Parts A or B (even though a 

deductible may apply, or even though 

the individual is eligible for coverage 

under Parts A or B but has declined to 

enroll in Parts A or B); and 

(ii) Drugs or classes of drugs, or their 

medical uses, which may be excluded 

from coverage or otherwise restricted 

under Medicaid pursuant to sections 

1927(d)(2) or (d)(3) of the Act, except for 

smoking cessation agents. 

Group health plan has the meaning 

given such term in § 411.101 of this 

chapter. 

Incurred costs means costs incurred 

by a Part D enrollee for covered part D 

drugs covered under (or treated as 

covered under) a prescription drug plan 

or MA–PD plan—

(1) That are not paid for under the 

prescription drug plan or MA–PD as a 

result of application of any annual 

deductible or other cost-sharing rules 

for covered part D drugs prior to the Part 

D enrollee satisfying the out-of-pocket 

threshold under § 423.104(e)(5)(iii), 

including any price differential for 

which the Part D enrollee is responsible 

under § 423.120(a)(6) and 

§ 423.124(b)(2); and 

(2) That are paid for—

(i) By the Part D enrollee or on behalf 

of the Part D enrollee by another person, 

and the Part D enrollee (or person 

paying on behalf of the Part D enrollee) 

is not reimbursed through insurance or 

otherwise, a group health plan, or other 

third party payment arrangement, or the 

person paying on behalf of the Part D 

enrollee is not paying under insurance 

or otherwise, a group health plan, or 

third party payment arrangement; 

(ii) Under a State Pharmaceutical 

Assistance Program as described in 

§ 423.454); or 

(iii) Under § 423.782. 

Insurance or otherwise means a plan 

(other than a group health plan) or 

program that provides, or pays the cost 

of, medical care (as defined in section 

2791(a)(2) of the Public Health Service 

Act, 42 U.S.C. 300gg-91(a)(2)), including 

any of the following: 

(1) Health insurance coverage as 

defined in 42 U.S.C. 300gg-91(b)(1); 

(2) An MA plan as described in 

§ 422.2 of this chapter. 

(3) A program of all-inclusive care for 

the elderly (PACE) under titles XVIII 

and XIX of the Act; 

(4) An approved State child health 

plan under title XXI of the Act 

providing benefits for child health 

assistance that meet the requirements of 

section 2103 of the Act; 

(5) The Medicaid program under title 

XIX of the Act or a waiver pursuant to 

section 1115 of the Act; 

(6) The veterans health care program 

under chapter 17 of title 38 of the U.S.C. 

(7) Any other government-funded 

program whose principal activity is the 

direct provision of health care to 

individuals. 

I/T/U pharmacy means a pharmacy 

operated by the Indian Health Service, 

an Indian tribe or tribal organization, or 

an urban Indian organization, all of 

which are defined in section 4 of the 

Indian Health Care Improvement Act, 25 

U.S.C. 1603. 

Long-term care facility means a 

skilled nursing facility, as defined in 

46816 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

section 1819(a) of the Act, or nursing 

facility, as defined in section 1919(a) of 

the Act. 

Long-term care pharmacy means a 

pharmacy owned by or under contract 

with a long-term care facility to provide 

prescription drugs to the facility’s 

residents. 

Long-term care network pharmacy 

means a long-term care pharmacy that is 

a network pharmacy. 

Negotiated prices means prices for 

covered Part D drugs that—

(1) Are available to beneficiaries at the 

point of sale at network pharmacies; and 

(2) Take into account discounts, direct 

or indirect subsidies, rebates, other 

price concessions, and direct or indirect 

remunerations and include any 

dispensing fees. 

Network pharmacy means a licensed 

pharmacy that is not a mail order 

pharmacy and that is under contract 

with a PDP sponsor or MA organization 

offering an MA–PD plan to provide 

negotiated prices to its prescription drug 

plan or MA–PD plan enrollees. 

Non-preferred pharmacy means a 

network pharmacy that offers Part D 

enrollees higher cost-sharing for covered 

Part D drugs than a preferred pharmacy. 

Out-of-network pharmacy means a 

licensed pharmacy that is not under 

contract with a PDP sponsor or MA 

organization offering an MA–PD plan to 

provide negotiated prices to its 

prescription drug plan or MA–PD plan 

enrollees. 

Person means a natural person, 

corporation, mutual company, 

unincorporated association, partnership, 

joint venture, limited liability company, 

trust, estate, foundation, not-for-profit 

corporation, unincorporated 

organization, government or 

governmental subdivision or agency. 

Plan allowance means the amount 

prescription drug plans and MA–PD 

plans use to determine their payment 

and Part D enrollees’ cost-sharing for 

covered Part D drugs purchased at outof-network pharmacies in accordance 

with the requirements of § 423.124(b). 

Preferred drug means a covered part 

D drug on a prescription drug plan or 

MA–PD plan’s formulary for which 

beneficiary cost-sharing is lower than 

for a non-preferred drug in the plan’s 

formulary. 

Preferred pharmacy means a network 

pharmacy that offers Part D enrollees 

lower cost-sharing for covered Part D 

drugs than a non-preferred pharmacy. 

Qualified prescription drug coverage 

means any standard prescription drug 

coverage or alternative prescription drug 

coverage that meets the requirements of 

§ 423.104(d). 

Required prescription drug coverage 

means coverage of covered Part D drugs 

under an MA–PD plan that consists of 

either—

(1) Basic prescription drug coverage; 

or 

(2) Enhanced alternative coverage, 

provided there is no MA monthly 

supplemental beneficiary premium 

applied under the plan due to the 

application of a credit against the 

premium of a rebate under § 422.266(b) 

of this chapter. 

Rural means a five-digit ZIP code in 

which the population density is less 

than 1,000 individuals per square mile. 

Standard prescription drug coverage 

means coverage of covered Part D drugs 

that meets the requirements of 

§ 423.104(e). The term ‘‘standard 

prescription drug coverage’’ must be 

either—

(1) Defined standard coverage 

(standard prescription drug coverage 

that provides for cost-sharing as 

described in §§ 423.104(e)(2)(i)(A) and 

(e)(5)(i)); or 

(2) Actuarially equivalent standard 

coverage (standard prescription drug 

coverage that provides for cost-sharing 

as described in § 423.104(e)(2)(i)(B) or 

cost-sharing as described in 

§ 423.104(e)(5)(ii), or both). 

Suburban means a five-digit ZIP code 

in which the population density is 

between 1,000 and 3,000 individuals 

per square mile. 

Supplemental benefits means benefits 

that meet the requirements of 

§ 423.104(g)(1)(ii). 

Therapeutically equivalent refers to 

drugs that are rated as therapeutic 

equivalents under the Food and Drug 

Administration’s most recent 

publication of ‘‘Approved Drug Products 

with Therapeutic Equivalence 

Evaluations.’’

Third party payment arrangement 

means any contractual or similar 

arrangement under which a person has 

a legal obligation to pay for covered Part 

D drugs. 

Urban means a five-digit ZIP code in 

which the population density is greater 

than 3,000 individuals per square mile. 

Usual and customary (U&C) price 

means the price that a pharmacy charges 

a customer who does not have any form 

of prescription drug coverage. 

§ 423.104 Requirements related to 

qualified prescription drug coverage. 

(a) General. Subject to the conditions 

and limitations set forth in this subpart, 

a PDP sponsor offering a prescription 

drug plan or an MA organization 

offering an MA–PD plan must provide 

enrollees with coverage of the benefits 

described in paragraph (c) of this 

section. The benefits may be provided 

directly by the PDP sponsor or MA 

organization or through arrangements 

with other entities. CMS reviews and 

approves these benefits consistent with 

§ 423.272, and using written policy 

guidelines and requirements in this part 

and other CMS instructions. 

(b) Availability of plans. Except as 

provided in § 422.60(b) of this chapter, 

a PDP sponsor offering a prescription 

drug plan must offer that plan to all Part 

D eligible beneficiaries residing in the 

plan’s service area. 

(c) Types of benefits. A prescription 

drug plan or MA–PD plan must include 

qualified prescription drug coverage. 

(d) Qualified prescription drug 

coverage. Qualified prescription drug 

coverage includes—

(1) Standard prescription drug 

coverage consistent with paragraph (e) 

of this section; or 

(2) Alternative prescription drug 

coverage consistent with paragraph (f) of 

this section. 

(e) Standard prescription drug 

coverage. Standard prescription drug 

coverage includes access to negotiated 

prices as described under paragraph 

(h)(1) of this section, provides coverage 

of covered Part D drugs, and must meet 

the following requirements—

(1) Deductible. An annual deductible 

equal to—

(i) For 2006. $250; or 

(ii) For years subsequent to 2006. The 

amount specified in this paragraph for 

the previous year, increased by the 

annual percentage increase specified in 

paragraph (e)(5)(iv) of this section, and 

rounded to the nearest multiple of $5. 

(2) Cost-sharing under the initial 

coverage limit. 

(i) 25 Percent coinsurance. 

Coinsurance for costs for covered Part D 

drugs covered under the plan above the 

annual deductible specified in 

paragraph (e)(1) of this section, and up 

to the initial coverage limit under 

paragraph (e)(3) of this section, that is—

(A) Equal to 25 percent for defined 

standard coverage; or 

(B) Actuarially equivalent to an 

average expected coinsurance of no 

more than 25 percent, as determined 

through processes and methods 

established under § 423.265, for 

actuarially equivalent standard 

coverage. 

(ii) Tiered copayments. A prescription 

drug plan or MA–PD plan may apply 

tiered copayments without limit, 

provided that any tiered copayments are 

consistent with paragraph (e)(2)(i)(B) of 

this section and are reviewed as 

described in § 423.272(b)(2). 

(3) Initial coverage limit. The initial 

coverage limit is equal to—

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46817 

(i) For 2006. $2,250. 

(ii) For years subsequent to 2006. The 

amount specified in this paragraph for 

the previous year, increased by the 

annual percentage increase specified in 

paragraph (e)(5)(iv) of this section, and 

rounded to the nearest multiple of $10. 

(4) Cost-sharing between the initial 

coverage limit and the annual out-ofpocket threshold. Coinsurance for costs 

for covered Part D drugs covered under 

the plan above the initial coverage limit 

described in paragraph (e)(3) of this 

section and annual out-of-pocket 

threshold described in paragraph 

(e)(5)(iii) of this section that is equal to 

100 percent. 

(5) Protection against high out-ofpocket expenditures. (i) After an 

enrollee’s incurred costs exceed the 

annual out-of-pocket threshold 

described in paragraph (e)(5)(iii) of this 

section, cost-sharing equal to the greater 

of—

(A) Copayments. (1) In 2006, $2 for a 

generic drug or preferred drug that is a 

multiple source drug (as defined in 

section 1927(k)(7)(A)(i) of the Act) and 

$5 for any other drug; and 

(2) For subsequent years, the 

copayment amounts specified in this 

paragraph for the previous year 

increased by the annual percentage 

increase described in paragraph 

(e)(5)(iv) of this section and rounded to 

the nearest multiple of 5 cents; or 

(B) Coinsurance. Five percent 

coinsurance. 

(ii) As determined through processes 

and methods established under 

§ 423.265, a prescription drug plan or 

MA–PD plan may substitute for costsharing under paragraph (e)(5)(i) of this 

section an amount that is actuarially 

equivalent to expected cost-sharing 

under paragraph (e)(5)(i) of this section. 

(iii) Annual out-of-pocket threshold. 

For purposes of this part, the annual 

out-of-pocket threshold equals—

(A) For 2006. $3,600. 

(B) For years subsequent to 2006. The 

amount specified in this paragraph for 

the previous year, increased by the 

annual percentage increase specified in 

paragraph (e)(5)(iv) of this section, and 

rounded to the nearest multiple of $50. 

(iv) Annual percentage increase. The 

annual percentage increase for each year 

is equal to the annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs in 

the United States for Part D eligible 

individuals and is based on data for the 

12-month period ending in July of the 

previous year. 

(f) Alternative prescription drug 

coverage. Alternative prescription drug 

coverage includes access to negotiated 

prices as described under paragraph 

(h)(1) of this section, provides coverage 

of covered Part D drugs, and must meet 

the following requirements—

(1) Has an annual deductible that does 

not exceed the annual deductible 

specified in paragraph (e)(1) of this 

section; 

(2) Imposes cost-sharing no greater 

than that specified in paragraph (e)(5)(i) 

or (ii) of this section once the annual 

out-of-pocket threshold described in 

paragraph (e)(5)(iii) is met; 

(3) Has an unsubsidized value that is 

at least equal to the unsubsidized value 

of standard prescription drug coverage. 

For purposes of this subparagraph, the 

unsubsidized value of coverage is the 

amount by which the actuarial value of 

the coverage exceeds the actuarial value 

of the subsidy payments under 

§ 423.782 with respect to such coverage; 

and 

(4) Provides coverage that is designed, 

based upon an actuarially representative 

pattern of utilization, to provide for the 

payment, with respect to costs incurred 

that are equal to the initial coverage 

limit under paragraph (e)(3) of this 

section, of an amount equal to at least 

the product of—

(i) The amount by which the initial 

coverage limit described in paragraph 

(e)(3) of this section for the year exceeds 

the deductible described in paragraph 

(e)(1) of this section; and 

(ii) 100 percent minus the 

coinsurance percentage specified in 

paragraph (e)(2)(i) of this section. 

(g) Enhanced alternative coverage. (1) 

Enhanced alternative coverage must 

meet the requirements under paragraph 

(f) of this section and includes—

(i) Basic prescription drug coverage, 

as defined in § 423.100; and 

(ii) Supplemental benefits, which 

include—

(A) Coverage of drugs other than 

covered Part D drugs; and/or 

(B) Any of the following changes or 

combination of changes that increase 

the actuarial value of benefits above the 

actuarial value of defined standard 

prescription drug coverage, as 

determined through processes and 

methods established under § 423.265—

(1) A reduction in the annual 

deductible described in paragraph (e)(1) 

of this section; 

(2) A reduction in the cost-sharing 

described in paragraphs (e)(2) or (e)(5) 

of this section, or 

(3) An increase in the initial coverage 

limit described in paragraph (e)(3) of 

this section. 

(2) Restrictions on the offering of 

enhanced alternative coverage by PDP 

sponsors. A PDP sponsor may not offer 

enhanced alternative coverage in a 

service area unless the PDP sponsor also 

offers a prescription drug plan in that 

service area that provides basic 

prescription drug coverage. 

(3) Restrictions on the offering of 

enhanced alternative coverage by MA 

organizations. Effective January 1, 2006, 

an MA organization—

(i) May not offer an MA coordinated 

care plan, as defined in § 422.4 of this 

chapter, in an area unless either that 

plan (or another MA plan offered by the 

MA organization in that same service 

area) includes required prescription 

drug coverage; and 

(ii) May not offer prescription drug 

coverage (other than that required under 

Parts A and B of Title XVIII of the Act) 

to an enrollee—

(A) Under an MSA plan, as defined in 

§ 422.2 of this chapter; or 

(B) Under another MA plan (including 

a private fee-for-service plan, as defined 

in § 422.4 of this chapter) unless the 

drug coverage under such other plan 

provides qualified prescription drug 

coverage and unless the requirements of 

paragraph (g)(3)(i) of this section are 

met. 

(h) Negotiated prices. (1) Access to 

negotiated prices. Under qualified 

prescription drug coverage offered by a 

PDP sponsor or an MA organization, the 

PDP sponsor or MA organization is 

required to provide its enrollees with 

access to negotiated prices for covered 

Part D drugs included in its plan’s 

formulary. Negotiated prices must be 

provided even if no benefits are payable 

to the beneficiary for covered Part D 

drugs because of the application of any 

deductible or 100 percent coinsurance 

requirement following satisfaction of 

any initial coverage limit. 

(2) Interaction with Medicaid best 

price. Prices negotiated with a 

pharmaceutical manufacturer, including 

discounts, subsidies, rebates, and other 

price concessions, for covered Part D 

drugs by the following entities will not 

be taken into account in establishing 

Medicaid’s best price under section 

1927(c)(1)(C) of the Act—

(i) A prescription drug plan; 

(ii) An MA–PD plan; or 

(iii) A qualified retiree prescription 

drug plan (as defined in § 423.882) for 

Part D eligible individuals. 

(3) Disclosure. (i) A PDP sponsor or an 

MA organization offering qualified 

prescription drug coverage is required to 

disclose to CMS data on aggregate 

negotiated price concessions obtained 

from pharmaceutical manufacturers and 

passed through to beneficiaries, via 

pharmacies and other dispensers, in the 

form of lower subsidies paid by CMS on 

behalf of low-income individuals 

described in § 423.782, or in the form of 

lower monthly beneficiary premiums 

46818 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

and/or lower covered Part D drug prices 

at the point of sale, as specified in 

§ 423.336(c)(1) and § 423.343(c)(1). 

(ii) Information on negotiated prices 

disclosed to CMS under paragraph (h)(3) 

of this section is protected under the 

confidentiality provisions applicable 

under section 1927(b)(3)(D) of the Act. 

(4) Audits. CMS may conduct periodic 

audits of the financial statements and all 

records of PDP sponsors and MA 

organizations pertaining to any qualified 

prescription drug coverage they may 

offer under either a prescription drug 

plan or an MA–PD plan. 

§ 423.112 Establishment of prescription 

drug plan service areas. 

(a) Service area for prescription drug 

plans. The service area for a 

prescription drug plan consists of one or 

more PDP regions as established under 

paragraphs (b) and (c) of this section. 

(b) Establishment of PDP regions. (1) 

General. CMS establishes PDP regions 

in a manner consistent with the 

requirements for the establishment of 

MA regions as described at § 422.455 of 

this chapter. 

(2) Relation to MA regions. To the 

extent practicable, PDP regions are the 

same as MA regions. CMS may establish 

PDP regions that are not the same as MA 

regions if CMS determines that the 

establishment of these regions improves 

access to prescription drug plan benefits 

for Part D eligible individuals. 

(c) Authority for territories. CMS 

establishes a PDP region or regions for 

States that are not within the 50 States 

and the District of Columbia. 

(d) Revision of PDP regions. CMS may 

revise the PDP regions established 

under paragraphs (b) and (c) of this 

section. 

(e) Regional or national plan. Nothing 

in this section prevents a prescription 

drug plan from being offered in two or 

more PDP regions in their entirety or in 

all PDP regions in their entirety. 

§ 423.120 Access to covered Part D drugs. 

(a) Assuring pharmacy access. (1) 

Convenient access to network 

pharmacies. Except as provided in 

paragraph (a)(3) of this section, a 

prescription drug plan or MA–PD plan 

must have a contracted pharmacy 

network, consisting of pharmacies other 

than mail-order pharmacies, sufficient 

to ensure that for beneficiaries residing 

in the prescription drug plan’s service 

area, as described in § 423.112, or the 

MA–PD plan’s service area, as described 

in § 422.2 of this chapter, the following 

requirements are satisfied: 

(i) At least 90 percent of Medicare 

beneficiaries, on average, in urban areas 

served by the prescription drug plan or 

MA–PD plan live within 2 miles of a 

network pharmacy; 

(ii) At least 90 percent of Medicare 

beneficiaries, on average, in suburban 

areas served by the prescription drug 

plan or MA–PD plan live within 5 miles 

of a network pharmacy; and 

(iii) At least 70 percent of Medicare 

beneficiaries, on average, in rural areas 

served by the prescription drug plan or 

MA–PD plan live within 15 miles of a 

network pharmacy. 

(2) Access to mail-order pharmacies. 

A prescription drug plan’s or MA–PD 

plan’s contracted pharmacy network 

may be supplemented by pharmacies 

offering home delivery via mail-order, 

provided the requirements of paragraph 

(a)(1) of this section are met. 

(3) Waiver of pharmacy access 

requirements. CMS waives the 

requirements under paragraph (a)(1) of 

this section in the case of—

(i) An MA–PD plan that provides its 

enrollees with access to covered Part D 

drugs through pharmacies owned and 

operated by the MA organization, 

provided the organization’s pharmacy 

network is sufficient to provide access 

to its enrollees that is comparable to the 

standard set forth under paragraph (a)(1) 

of this section. 

(ii) An MA private fee-for-service plan 

described in § 422.4 of this chapter 

that—

(A) Offers qualified prescription drug 

coverage; 

(B) Provides plan enrollees with 

access to covered Part D drugs 

dispensed at all pharmacies, without 

regard to whether they are contracted 

network pharmacies and without 

charging cost-sharing in excess of that 

described in §§ 423.104(e)(2) and (5). 

(4) Pharmacy network contracting 

requirements. In establishing its 

contracted pharmacy network, a PDP 

sponsor or MA organization offering 

qualified prescription drug coverage—

(i) Must contract with any pharmacy 

that meets the prescription drug plan’s 

or MA–PD plan’s terms and conditions; 

and 

(ii) May not require a pharmacy to 

accept insurance risk as a condition of 

participation in the PDP plan’s or MA–

PD plan’s network. 

(5) Discounts for preferred 

pharmacies. A PDP sponsor or MA 

organization offering a prescription drug 

plan or an MA–PD plan that provides 

coverage other than defined standard 

coverage may reduce copayments or 

coinsurance for covered Part D drugs 

(relative to the copayments or 

coinsurance applicable when those 

covered Part D drugs are obtained 

through a non-preferred pharmacy) 

when a Part D eligible individual 

enrolled in its prescription drug plan or 

MA–PD plan obtains the covered Part D 

drug through a preferred pharmacy. If 

the prescription drug plan or MA–PD 

plan provides actuarially equivalent 

standard coverage, the plan must still 

meet the requirements under 

§§ 423.104(e)(2) and (5). Any costsharing reduction must not increase 

CMS payments under § 423.329. 

(6) Level playing field between mailorder and network pharmacies. A PDP 

sponsor or MA organization must 

permit its prescription drug plan or 

MA–PD plan enrollees to receive 

benefits, which may include a 90-day 

supply of covered Part D drugs, at a 

network retail pharmacy instead of a 

network mail-order pharmacy, provided 

an enrollee obtaining a covered Part D 

drug a network retail pharmacy pays for 

any differential in the negotiated price 

for the covered Part D drug at the 

network retail pharmacy and network 

mail-order pharmacy. 

(b) Formulary requirements. A PDP 

sponsor or MA organization that uses a 

formulary under its qualified 

prescription drug coverage must meet 

the following requirements—

(1) Development and revision by a 

pharmacy and therapeutic committee. A 

PDP sponsor or MA organization’s 

formulary must be reviewed by a 

pharmacy and therapeutic committee 

that—

(i) Includes a majority of members 

who are practicing physicians and/or 

practicing pharmacists. 

(ii) Includes at least one practicing 

physician and at least one practicing 

pharmacist who are independent and 

free of conflict with respect to the PDP 

sponsor and prescription drug plan, or 

MA organization and MA–PD plan, and 

who are experts regarding care of 

elderly or disabled individuals. 

(iii) Bases clinical decisions on the 

strength of scientific evidence and 

standards of practice, including 

assessing peer-reviewed medical 

literature, pharmacoeconomic studies, 

outcomes research data, and other such 

information as it determines 

appropriate. 

(iv) Considers whether the inclusion 

of a particular covered Part D drug in a 

formulary or formulary tier has any 

therapeutic advantages in terms of 

safety and efficacy. 

(v) Documents in writing its decisions 

regarding formulary development and 

revision. 

(2) Inclusion of drugs in all 

therapeutic categories and classes. A 

prescription drug plan’s or MA–PD 

plan’s formulary must include at least 

two covered Part D drugs within each 

therapeutic category and class of 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46819 

covered Part D drugs, with different 

strengths and doses available for those 

drugs. Only one covered Part D drug 

must be included in a particular 

category or class of covered Part D drugs 

if the category or class includes only 

one covered Part D drug. 

(3) Limitation on changes in 

therapeutic classification. Except as 

CMS may permit to account for new 

therapeutic uses and newly approved 

covered Part D drugs, a PDP sponsor or 

MA organization offering an MA–PD 

plan may not change the therapeutic 

categories and classes in a formulary 

other than at the beginning of each plan 

year. 

(4) Periodic evaluation of protocols. A 

PDP sponsor or MA organization 

offering an MA–PD plan must 

periodically evaluate and analyze 

treatment protocols and procedures 

related to its plan’s formulary. 

(5) Provision of notice regarding 

formulary changes. A PDP sponsor or 

MA organization offering an MA–PD 

plan must provide at least 30 days 

notice to CMS, affected enrollees, 

authorized prescribers, pharmacies, and 

pharmacists prior to removing a covered 

Part D drug from its plan’s formulary, or 

making any change in the preferred or 

tiered cost-sharing status of a covered 

Part D drug. 

(6) Limitation on formulary changes 

prior to the beginning of a contract year. 

A PDP sponsor or MA organization 

offering an MA–PD plan may not 

remove a covered Part D drug from its 

plan’s formulary, or make any change in 

the preferred or tiered cost-sharing 

status of a covered Part D drug, between 

the beginning of the annual coordinated 

election period described in § 423.36(b) 

and 30 days after the beginning of the 

contract year associated with that 

annual coordinated election period. 

(7) Provider and patient education. A 

PDP sponsor or MA organization 

offering an MA–PD plan must establish 

policies and procedures to educate and 

inform health care providers and 

enrollees concerning its formulary. 

(c) Use of standardized technology. A 

PDP sponsor or MA organization 

offering an MA–PD plan must issue and 

reissue, as necessary, a card or other 

type of technology that its enrollees may 

use to access negotiated prices for 

covered Part D drugs as provided under 

§ 423.104(h). The card or other 

technology must comply with standards 

CMS establishes. 

§ 423.124 Special rules for access to 

covered Part D drugs at out-of-network 

pharmacies 

(a) Out-of-network access to covered 

part D drugs. A PDP sponsor or MA 

organization offering an MA–PD plan 

must assure that Part D enrollees have 

adequate access to covered Part D drugs 

dispensed at out-of-network pharmacies 

when such enrollees cannot reasonably 

be expected to obtain such drugs at a 

network pharmacy. 

(b) Financial responsibility for out-ofnetwork access to covered Part D drugs. 

A Part D enrollee is financially 

responsible for the sum of the following 

costs of a covered Part D drug obtained 

as provided in paragraph (a) of this 

section—

(1) Any deductible or cost-sharing 

(relative to the plan allowance, as 

described in § 423.100, for that covered 

Part D drug); and 

(2) Any differential between the outof-network pharmacy’s usual and 

customary price and the PDP sponsor or 

MA organization’s plan allowance 

(including any applicable beneficiary 

cost-sharing) for that covered Part D 

drug. 

§ 423.128 Dissemination of plan 

information. 

(a) Detailed description. A PDP 

sponsor or MA organization offering an 

MA–PD plan must disclose the 

information specified in paragraph (b) of 

this section—

(1) To each enrollee of a prescription 

drug plan offered by the PDP sponsor or 

the MA–PD plan offered by the MA 

organization under this part; 

(2) In a clear, accurate, and 

standardized form; and 

(3) At the time of enrollment and at 

least annually thereafter. 

(b) Content of plan description. The 

plan description must include the 

following information about the 

qualified prescription drug coverage 

offered under a prescription drug plan 

or an MA–PD plan—

(1) Service area. The plan’s service 

area. 

(2) Benefits. The benefits offered 

under the plan, including—

(i) Applicable conditions and 

limitations. 

(ii) Premiums. 

(iii) Cost-sharing (such as 

copayments, deductibles, and 

coinsurance), and cost-sharing for 

subsidy eligible individuals. 

(iv) Any other conditions associated 

with receipt or use of benefits. 

(3) Cost-sharing. A description of how 

a Part D eligible individual may obtain 

more information on cost-sharing 

requirements, including tiered or other 

copayment levels applicable to each 

drug (or class of drugs), in accordance 

with paragraph (d) of this section. 

(4) Formulary. The manner in which 

any formulary (including any tiered 

formulary structure) functions, 

including—

(i) The process for obtaining an 

exception to a prescription drug plan’s 

or MA–PD plan’s tiered cost-sharing 

structure; 

(ii) A description of how a Part D 

eligible individual may obtain 

additional information on the 

formulary, including the formulary 

itself, in accordance with paragraph (d) 

of this section. 

(5) Access. The number, mix, and 

distribution (addresses) of network 

pharmacies from which enrollees may 

reasonably be expected to obtain 

covered Part D drugs and how the 

prescription drug plan sponsor or MA 

organization meets the requirements of 

§ 423.120(a)(1) for access to covered Part 

D drugs; 

(6) Out-of-network coverage. 

Provisions for access to covered Part D 

drugs at out-of-network pharmacies, 

consistent with § 423.124(a). 

(7) Grievance, coverage 

determinations, reconsideration, 

exceptions, and appeals procedures. All 

grievance, coverage determination, 

reconsideration, exceptions, and appeal 

rights and procedures required under 

§ 423.564 et. seq. 

(8) Quality assurance program. A 

description of the quality assurance 

program required under § 423.153(c), 

including the medication therapy 

management program required under 

§ 423.153(d). 

(9) Disenrollment rights and 

responsibilities. 

(c) Disclosure upon request of general 

coverage information, utilization, and 

grievance information. Upon request of 

a Part D eligible individual, a PDP 

sponsor or MA organization offering an 

MA–PD plan must provide the 

following information—

(1) General coverage information. 

General coverage information, 

including—

(i) Enrollment procedures. 

Information and instructions on how to 

exercise election options under this 

part; 

(ii) Rights. A general description of 

procedural rights (including grievance, 

coverage determination, 

reconsideration, exceptions, and 

appeals procedures) under this part; 

(iii) Potential for contract termination. 

The fact that a PDP sponsor or MA 

organization may terminate or refuse to 

renew its contract, or, in the case of an 

MA organization, reduce the service 

area included in its contract, and the 

effect that any of those actions may have 

on individuals enrolled in a 

prescription drug plan or MA–PD plan; 

46820 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(iv) Benefits. (A) Covered services 

under the prescription drug plan; 

(B) Any beneficiary cost-sharing, such 

as deductibles, coinsurance, and 

copayment amounts, including costsharing for subsidy eligible individuals; 

(C) Any maximum limitations on outof-pocket expenses; 

(D) The extent to which an enrollee 

may obtain benefits from out-of-network 

providers; 

(E) The types of pharmacies that 

participate in the prescription drug 

plan’s or MA–PD plan’s network and 

the extent to which an enrollee may 

select among those pharmacies; and 

(F) Out-of-network pharmacy access. 

(v) Premiums; 

(vi) The prescription drug plan’s or 

MA–PD plan’s formulary; 

(vii) The prescription drug plan’s or 

MA–PD plan’s service area; and 

(viii) Quality and performance 

indicators for benefits under a plan as 

determined by CMS. 

(2) The procedures the PDP sponsor 

or MA organization offering an MA–PD 

plan uses to control utilization of 

services and expenditures. 

(3) The number of disputes, and the 

disposition in the aggregate, in a manner 

and form described by CMS. These 

disputes are categorized as—

(i) Grievances according to § 422.564 

of this chapter; 

(ii) Rights to a reconsideration 

according to § 422.578 et. seq of this 

chapter. 

(4) Financial condition of the PDP 

sponsor or MA organization, including 

the most recently audited information 

regarding, at a minimum, a description 

of the financial condition of the PDP 

sponsor or MA organization offering the 

prescription drug plan or MA–PD plan. 

(d) Provision of specific information. 

Each PDP sponsor or MA organization 

offering qualified prescription drug 

coverage must have mechanisms for 

providing specific information on a 

timely basis to current and prospective 

enrollees upon request. These 

mechanisms must include—

(1) A toll-free customer call center 

that—

(i) Is open during usual business 

hours. 

(ii) Provides customer telephone 

service, including to pharmacists, in 

accordance with standard business 

practices. 

(2) An Internet Website that—

(i) Includes, at a minimum, the 

information required in paragraph (b) of 

this section. 

(ii) Includes a current formulary for 

its PDP plan or MA–PD plan, updated 

at least weekly. 

(iii) Provides current and prospective 

Part D enrollees with at least 30 days 

notice regarding the removal or change 

in the preferred or tiered cost-sharing 

status of a covered Part D drug on its 

prescription drug plan’s or MA–PD 

plan’s formulary. 

(3) The provision of information in 

writing, upon request. 

(e) Claims information. A PDP 

sponsor or MA organization offering 

qualified prescription drug coverage 

must furnish to enrollees, in a form 

easily understandable to such enrollees, 

an explanation of benefits when 

prescription drug benefits are provided 

under qualified prescription drug 

coverage. The explanation of benefits 

must—

(1) List the item or service for which 

payment was made and the amount of 

the payment for each item or service. 

(2) Include a notice of the individual’s 

right to request an itemized statement. 

(3) Include the cumulative, year-todate total amount of benefits provided, 

in relation to—

(i) The deductible for the current year. 

(ii) The initial coverage limit for the 

current year. 

(iii) The annual out-of-pocket 

threshold for the current year. 

(4) Include the cumulative, year-todate total of incurred costs to the extent 

practicable. 

(5) Include any applicable formulary 

changes as described in § 423.120(b)(5). 

(6) Be provided during any month 

when prescription drug benefits are 

provided under this part. 

§ 423.132 Public disclosure of 

pharmaceutical prices for equivalent drugs. 

(a) General requirements. Except as 

provided under paragraph (c) of this 

section, a PDP sponsor or an MA 

organization offering an MA–PD plan 

must require a pharmacy that dispenses 

a covered Part D drug to inform an 

enrollee of any differential between the 

price of that drug and the price of the 

lowest priced generic version of that 

drug available at that pharmacy, unless 

the particular covered Part D drug being 

purchased is the lowest-priced generic 

version of that drug available at that 

pharmacy. 

(b) Timing of notice. Subject to 

paragraph (d) of this section, the 

information under paragraph (a) of this 

section must be provided at the point of 

sale or, in the case of dispensing by mail 

order, at the time of delivery of the drug. 

(c) Waiver of public disclosure 

requirement. CMS waives the 

requirement under paragraph (a) of this 

section in the case of—

(1) An MA private fee-for-service plan 

described in § 422.4 of this chapter 

that—

(i) Offers qualified prescription drug 

coverage and provides plan enrollees 

with access to covered Part D drugs 

dispensed at all pharmacies, without 

regard to whether they are contracted 

network pharmacies; and 

(ii) Does not charge additional costsharing for access to covered Part D 

drugs dispensed at out-of-network 

pharmacies. 

(2) An out-of-network pharmacy; 

(3) An I/T/U network pharmacy; and 

(4) A network pharmacy that is 

located in any of the U.S. territories; and 

(5) Such other circumstances where 

CMS deems compliance with the 

requirements of paragraph (a) of this 

section to be impossible or 

impracticable. 

(d) Modification of timing 

requirement. CMS modifies the 

requirement under paragraph (b) of this 

section as follows—

(1) For long-term care network 

pharmacies, which must meet the 

requirement in paragraph (a) of this 

section within a time period specified 

by CMS; and 

(2) Under such other circumstances 

where CMS deems compliance with the 

requirement under paragraph (b) of this 

section to be impossible or 

impracticable. 

§ 423.136 Privacy, confidentiality, and 

accuracy of enrollee records. 

The provisions of § 422.118 of this 

chapter apply to a PDP sponsor and 

prescription drug plan in the same 

manner as they apply to an MA 

organization and an MA plan. 

Subpart D—Cost Control and Quality 

Improvement Requirements for 

Prescription Drug Benefit Plans 

§ 423.150 Scope. 

The regulations in this subpart specify 

requirements relating to the following: 

(a) Cost and utilization management 

programs, quality assurance programs, 

medication therapy management 

programs (MTMP), and programs to 

control fraud, abuse, and waste for PDP 

sponsors and MA organizations offering 

MA–PD plans. 

(b) CMS consumer satisfaction 

surveys of prescription drug plan and 

MA–PD. 

(c) Electronic prescription program. 

(d) Compliance deemed on the basis 

of accreditation. 

(e) Accreditation organizations. 

(f) Procedures for the approval of 

accreditation organizations as a basis for 

deeming compliance. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46821 

§ 423.153 Cost and utilization 

management, quality assurance, medication 

therapy management programs, and 

programs to control fraud, abuse, and 

waste. 

(a) General rule. Each PDP sponsor or 

MA organization offering an MA–PD 

plan must have established, for covered 

Part D drugs, furnished through a 

prescription drug plan or MA–PD plan, 

a cost-effective drug utilization 

management program, a quality 

assurance program, an MTMP, and a 

program to control fraud, abuse, and 

waste as described in § 423.153(b), 

§ 423.153(c), § 423.153(d), and 

§ 423.153(e) of this section. 

(b) Cost-effective drug utilization 

management. A cost-effective drug 

utilization management program must—

(1) Include incentives to reduce costs 

when medically appropriate; and 

(2) Maintain policies and systems to 

assist in preventing over-utilization and 

under-utilization of prescribed 

medications. 

(c) Quality assurance program. A 

quality assurance program must include 

measures and systems to reduce 

medication errors and adverse drug 

interactions and improve medication 

use. The program must establish 

processes for—

(1) Drug utilization review; 

(2) Patient counseling; and 

(3) Patient information record-keeping 

(d) Medication therapy management 

program. (1) General rule. A medication 

therapy management program—

(i) Must assure that drugs prescribed 

to targeted beneficiaries described in 

paragraph (d)(2) of this section are 

appropriately used to optimize 

therapeutic outcomes through improved 

medication use; 

(ii) Must, for the targeted beneficiaries 

described in paragraph (d)(2) of this 

section, reduce the risk of adverse 

events, including adverse drug 

interactions; 

(iii) May be furnished by a 

pharmacist; and 

(iv) May distinguish between services 

in ambulatory and institutional settings. 

(2) Targeted beneficiaries. Targeted 

beneficiaries for the medication therapy 

management program described in 

paragraph (d)(1) of this section are 

enrolled Part D eligible individuals 

who—

(i) Have multiple chronic diseases; 

(ii) Are taking multiple covered Part 

D drugs; and 

(iii) Are likely to incur annual costs 

for covered Part D drugs that exceed a 

predetermined level that CMS 

determines. 

(3) Use of experts. The MTMP must be 

developed in cooperation with licensed 

and practicing pharmacists and 

physicians. 

(4) Coordination with care 

management plans. The MTMP must be 

coordinated with any care management 

plan established for a targeted 

individual under a chronic care 

improvement program under section 

1807 of MMA. 

(5) Considerations in pharmacy fees. 

An applicant to become a PDP sponsor 

or an MA organization wishing to offer 

an MA–PD plan must—

(i) Describe in its application how it 

will take into account the resources 

used and time required to implement 

the MTMP it chooses to adopt in 

establishing fees for pharmacists or 

others providing medication therapy 

management services for covered Part D 

drugs under a prescription drug plan. 

(ii) Disclose to CMS upon request the 

amount of the management and 

dispensing fees and the portion paid for 

medication therapy management 

services to pharmacists and others upon 

request. Reports of these amounts are 

protected under the provisions of 

section 1927(b)(3)(D) of the Act. 

(e) Program to control fraud, abuse, 

and waste. PDP sponsors and MA 

organizations offering MA–PD plans 

must develop performance standards to 

evaluate, prevent, and investigate fraud, 

abuse, and waste. These standards will 

apply to the PDP sponsor’s or MA 

organization’s evaluation of PDPs, MA–

PDs, pharmacy benefit managers, or 

other subcontractors managing or 

coordinating the benefit for the 

organization or sponsor, pharmacies, 

physicians, and any other providers 

with whom the PDP sponsor or MA 

organizations does business. 

(f) Exception for private fee-for-service 

MA plans offering qualified prescription 

drug coverage. In the case of an MA 

plan described in § 422.4(a)(3) of this 

chapter, the requirements under 

paragraphs (b) and (d) of this section do 

not apply. 

§ 423.156 Consumer satisfaction surveys. 

CMS conducts consumer satisfaction 

surveys of PDP and MA–PD enrollees 

similar to the surveys it conducts of MA 

enrollees under § 422.152 (b) of this 

chapter. 

§ 423.159 Electronic prescription program. 

(a) Electronic prescription standards. 

PDP sponsors and MA organizations 

offering qualified prescription drug 

coverage must have the capacity to 

support and must comply with 

electronic prescription standards 

relating to covered Part D drugs, for Part 

D eligible individuals, developed by 

CMS, once final standards are effective. 

(b) Promotion of electronic prescribing 

by MA–PD plans. An MA organization 

offering an MA-PD plan may provide for 

a separate or differential payment to a 

participating physician that prescribes 

covered Part D drugs in accordance with 

electronic prescription standards, 

including voluntary standards 

promulgated by CMS as well as final 

standards established by CMS once final 

standards are effective. 

§ 423.162 Quality Improvement 

Organization activities. 

(a) General rule. Quality Improvement 

Organizations (QIOs) are required to 

offer providers, practitioners, MA 

organizations, and PDP sponsors quality 

improvement assistance pertaining to 

health care services, including those 

related to prescription drug therapy. 

QIOs offer assistance according to 

contracts established with the Secretary. 

(b) Collection of information. 

Information collected, acquired, or 

generated by a QIO in the performance 

of its responsibilities under this section 

is subject to the confidentiality 

provisions of 42 CFR Part 480. PDP 

sponsors and MA organizations offering 

MA–PD plans are required to provide 

specified information to CMS for 

distribution to the QIOs as well as 

directly to QIOs. 

(c) MA organizations and PDP 

sponsors. For purposes of 42 CFR Parts 

476 and 480, MA organizations and PDP 

sponsors are included in the definition 

of ‘‘health care facility.’’

§ 423.165 Compliance deemed on the 

basis of accreditation. 

(a) General rule. A PDP sponsor or 

MA organization offering an MA–PD 

plan is deemed to meet all of the 

requirements of any of the areas 

described in paragraph (b) of this 

section if—

(1) The PDP sponsor or MA 

organization is fully accredited (and 

periodically reaccredited) for the 

standards related to the applicable area 

under paragraph (b) of this section by a 

private, national accreditation 

organization approved by CMS; and 

(2) The accreditation organization 

uses the standards approved by CMS for 

the purposes of assessing the PDP 

sponsor or MA organization’s 

compliance with Medicare 

requirements. 

(b) Deemable requirements. The 

requirements relating to the following 

areas are deemable: 

(1) Access to covered drugs, as 

provided under § 423.120 and § 423.124. 

(2) Cost and utilization management, 

quality assurance, medication therapy 

management programs, and programs to 

46822 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

control fraud, abuse, and waste, as 

provided under § 423.153. 

(3) Privacy, confidentiality, and 

accuracy of enrollee records, as 

provided under § 423.136. 

(c) Effective date of deemed status. 

The date the PDP sponsor or MA 

organization offering an MA–PD plan is 

deemed to meet the applicable 

requirements is the later of the 

following: 

(1) The date the accreditation 

organization is approved by CMS. 

(2) The date the PDP sponsor or MA 

organization is accredited by the 

accreditation organization. 

(d) Obligations of deemed PDP 

sponsors and MA organizations offering 

MA–PD plans. A PDP sponsor or MA 

organization offering an MA–PD plan 

deemed to meet Medicare requirements 

must—

(1) Submit to surveys by CMS to 

validate its accreditation organization’s 

accreditation process; and 

(2) Authorize its accreditation 

organization to release to CMS a copy of 

its most recent accreditation survey, 

together with any survey-related 

information that CMS may require 

(including corrective action plans and 

summaries of unmet CMS 

requirements). 

(e) Removal of deemed status. CMS 

removes part or all of a PDP sponsor or 

MA organization’s deemed status for 

any of the following reasons—

(1) CMS determines, on the basis of its 

own investigation, that the PDP sponsor 

or MA organization does not meet the 

Medicare requirements for which 

deemed status was granted. 

(2) CMS withdraws its approval of the 

accreditation organization that 

accredited the PDP sponsor or MA 

organization. 

(3) The PDP sponsor or MA 

organization fails to meet the 

requirements of paragraph (d) of this 

section. 

(f) Enforcement authority. CMS 

retains the authority to initiate 

enforcement action against any PDP 

sponsor or MA organization offering an 

MA–PD plan that it determines, on the 

basis of its own survey or the results of 

an accreditation survey, no longer meets 

the Medicare requirements for which 

deemed status was granted. 

§ 423.168 Accreditation organizations. 

(a) Conditions for approval. CMS may 

approve an accreditation organization 

for a given standard under this part if it 

meets the following conditions: 

(1) In accrediting PDP sponsors and 

MA organizations offering MA–PD 

plans, it applies and enforces standards 

that are at least as stringent as Medicare 

requirements for the standard or 

standards in question. 

(2) It complies with the application 

and reapplication procedures set forth 

in § 423.171. 

(3) It ensures that—

(i) Any individual associated with it, 

who is also associated with an entity it 

accredits, does not influence the 

accreditation decision concerning that 

entity; 

(ii) The majority of the membership of 

its governing body is not comprised of 

managed care organizations, PDP 

sponsors or their representatives; and 

(iii) Its governing body has a broad 

and balanced representation of interests 

and acts without bias. 

(b) Notice and comment. (1) Proposed 

notice. CMS publishes a notice in the 

Federal Register whenever it is 

considering granting an accreditation 

organization’s application for approval. 

The notice—

(i) Announces CMS’s receipt of the 

accreditation organization’s application 

for approval; 

(ii) Describes the criteria CMS uses in 

evaluating the application; and 

(iii) Provides at least a 30-day 

comment period. 

(2) Final notice. (i) After reviewing 

public comments, CMS publishes a final 

notice in the Federal Register indicating 

whether it has granted the accreditation 

organization’s request for approval. 

(ii) If CMS grants the request, the final 

notice specifies the effective date and 

the term of the approval that may not 

exceed 6 years. 

(c) Ongoing responsibilities of an 

approved accreditation organization. 

An accreditation organization approved 

by CMS must undertake the following 

activities on an ongoing basis: 

(1) Provide to CMS in written form 

and on a monthly basis all of the 

following: 

(i) Copies of all accreditation surveys, 

together with any survey-related 

information that CMS may require 

(including corrective action plans and 

summaries of unmet CMS 

requirements). 

(ii) Notice of all accreditation 

decisions. 

(iii) Notice of all complaints related to 

deemed PDP sponsors or MA 

organizations. 

(iv) Information about any PDP 

sponsor or MA organization against 

which the accrediting organization has 

taken remedial or adverse action, 

including revocation, withdrawal, or 

revision of the PDP sponsor’s or MA 

organization’s accreditation. (The 

accreditation organization must provide 

this information within 30 days of 

taking the remedial or adverse action.) 

(v) Notice of any proposed changes in 

its accreditation standards or 

requirements or survey process. If the 

organization implements the changes 

before or without CMS approval, CMS 

may withdraw its approval of the 

accreditation organization. 

(2) Within 30 days of a change in CMS 

requirements, submit the following to 

CMS—

(i) An acknowledgment of CMS’s 

notification of the change. 

(ii) A revised crosswalk reflecting the 

new requirements. 

(iii) An explanation of how the 

accreditation organization plans to alter 

its standards to conform to CMS’s new 

requirements, within the timeframes 

specified in the notification of change it 

receives from CMS. 

(3) Permit its surveyors to serve as 

witnesses if CMS takes an adverse 

action based on accreditation findings. 

(4) Within 3 days of identifying, in an 

accredited PDP sponsor or MA 

organization, a deficiency that poses 

immediate jeopardy to the 

organization’s enrollees or to the general 

public, give CMS written notice of the 

deficiency. 

(5) Within 10 days of CMS’s notice of 

withdrawal of approval, give written 

notice of the withdrawal to all 

accredited PDP sponsors and MA 

organizations. 

(6) On an annual basis, provide 

summary data specified by CMS that 

relate to the past year’s accreditation 

activities and trends. 

(d) Continuing Federal oversight of 

approved accreditation organizations. 

Specific criteria and procedures for 

continuing oversight and for 

withdrawing approval of an 

accreditation organization include the 

following: 

(1) Equivalency review. CMS 

compares the accreditation 

organization’s standards and its 

application and enforcement of those 

standards to the comparable CMS 

requirements and processes when—

(i) CMS imposes new requirements or 

changes its survey process; 

(ii) An accreditation organization 

proposes to adopt new standards or 

changes in its survey process; or 

(iii) The term of an accreditation 

organization’s approval expires. 

(2) Validation review. CMS or its 

agent may conduct a survey of an 

accredited organization, examine the 

results of the accreditation 

organization’s own survey, or attend the 

accreditation organization’s survey to 

validate the organization’s accreditation 

process. At the conclusion of the 

review, CMS identifies any 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46823 

accreditation programs for which 

validation survey results indicate—

(i) A 20 percent rate of disparity 

between certification by the 

accreditation organization and 

certification by CMS or its agent on 

standards that do not constitute 

immediate jeopardy to patient health 

and safety if unmet; 

(ii) Any disparity between 

certification by the accreditation 

organization and certification by CMS or 

its agent on standards that constitute 

immediate jeopardy to patient health 

and safety if unmet; or 

(iii) That, regardless of the rate of 

disparity, there are widespread or 

systematic problems in an 

organization’s accreditation process that 

accreditation no longer provides 

assurance that the Medicare 

requirements are met or exceeded. 

(3) Onsite observation. CMS may 

conduct an onsite inspection of the 

accreditation organization’s operations 

and offices to verify the organization’s 

representations and assess the 

organization’s compliance with its own 

policies and procedures. The onsite 

inspection may include, but is not 

limited to the following: 

(i) Reviewing documents. 

(ii) Auditing meetings concerning the 

accreditation process. 

(iii) Evaluating survey results or the 

accreditation status decision-making 

process. 

(iv) Interviewing the organization’s 

staff. 

(4) Notice of intent to withdraw 

approval. If an equivalency review, 

validation review, onsite observation, or 

CMS’s daily experience with the 

accreditation organization suggests that 

the accreditation organization is not 

meeting the requirements of this 

subpart, CMS will give the organization 

written notice of its intent to withdraw 

approval. 

(5) Withdrawal of approval. CMS may 

withdraw its approval of an 

accreditation organization at any time if 

CMS determines that—

(i) Deeming, based on accreditation, 

no longer guarantees that the PDP 

sponsor or MA organization meets the 

requirements for offering qualified 

prescription drug coverage, and failure 

to meet those requirements may 

jeopardize the health or safety of 

Medicare enrollees and constitute a 

significant hazard to the public health; 

or 

(ii) The accreditation organization has 

failed to meet its obligations under this 

section or under § 423.158 or § 423.162. 

(6) Reconsideration of withdrawal of 

approval. An accreditation organization 

dissatisfied with a determination to 

withdraw CMS approval may request a 

reconsideration of that determination in 

accordance with subpart D of part 488 

of this chapter. 

§ 423.171 Procedures for approval of 

accreditation as a basis for deeming 

compliance. 

(a) Required information and 

materials. A private, national 

accreditation organization applying for 

approval must furnish to CMS all of the 

following information and materials 

(when reapplying for approval, the 

organization need furnish only the 

particular information and materials 

requested by CMS): 

(1) The types of prescription drug 

plans and MA–PD plans that it reviews 

as part of its accreditation process. 

(2) A detailed comparison of the 

organization’s accreditation 

requirements and standards with the 

Medicare requirements (for example, a 

crosswalk). 

(3) Detailed information about the 

organization’s survey process, including 

the following: 

(i) Frequency of surveys and whether 

surveys are announced or unannounced. 

(ii) Copies of survey forms, and 

guidelines and instructions to 

surveyors. 

(iii) Descriptions of—

(A) The survey review process and the 

accreditation status decision making 

process; 

(B) The procedures used to notify 

accredited PDP sponsors and MA 

organizations of deficiencies and to 

monitor the correction of those 

deficiencies; and 

(C) The procedures used to enforce 

compliance with accreditation 

requirements. 

(4) Detailed information about the 

individuals who perform surveys for the 

accreditation organization, including 

the—

(i) Size and composition of 

accreditation survey teams for each type 

of plan reviewed as part of the 

accreditation process; 

(ii) Education and experience 

requirements surveyors must meet; 

(iii) Content and frequency of the inservice training provided to survey 

personnel; 

(iv) Evaluation systems used to 

monitor the performance of individual 

surveyors and survey teams; and 

(v) Organization’s policies and 

practice for the participation, in surveys 

or in the accreditation decision process 

by an individual who is professionally 

or financially affiliated with the entity 

being surveyed. 

(5) A description of the organization’s 

data management and analysis system 

for its surveys and accreditation 

decisions, including the kinds of 

reports, tables, and other displays 

generated by that system. 

(6) A description of the organization’s 

procedures for responding to and 

investigating complaints against 

accredited organizations, including 

policies and procedures regarding 

coordination of these activities with 

appropriate licensing bodies and 

ombudsmen programs. 

(7) A description of the organization’s 

policies and procedures for the 

withholding or removal of accreditation 

for failure to meet the accreditation 

organization’s standards or 

requirements, and other actions the 

organization takes in response to 

noncompliance with its standards and 

requirements. 

(8) A description of all types (for 

example, full or partial) and categories 

(for example, provisional, conditional, 

or temporary) of accreditation offered by 

the organization, the duration of each 

type and category of accreditation, and 

a statement identifying the types and 

categories that serve as a basis for 

accreditation if CMS approves the 

accreditation organization. 

(9) A list of all currently accredited 

PDP sponsors and MA organizations 

and the type, category, and expiration 

date of the accreditation held by each of 

them. 

(10) A list of all full and partial 

accreditation surveys scheduled to be 

performed by the accreditation 

organization as requested by CMS. 

(11) The name and address of each 

person with an ownership or control 

interest in the accreditation 

organization. 

(b) Required supporting 

documentation. A private, national 

accreditation organization applying or 

reapplying for approval also must 

submit the following supporting 

documentation—

(1) A written presentation that 

demonstrates its ability to furnish CMS 

with electronic data in CMS compatible 

format. 

(2) A resource analysis that 

demonstrates that it’s staffing, funding, 

and other resources are adequate to 

perform the required surveys and 

related activities. 

(3) A statement acknowledging that, 

as a condition for approval, it agrees to 

comply with the ongoing responsibility 

requirements of § 423.168(c). 

(c) Additional information. If CMS 

determines that it needs additional 

information for a determination to grant 

or deny the accreditation organization’s 

request for approval, it notifies the 

organization and allows time for the 

46824 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

organization to provide the additional 

information. 

(d) Onsite visit. CMS may visit the 

accreditation organization’s offices to 

verify representations made by the 

organization in its application, 

including, but not limited to, review of 

documents and interviews with the 

organization’s staff. 

(e) Notice of determination. CMS 

gives the accreditation organization, 

within 210 days of receipt of its 

completed application, a formal notice 

that—

(1) States whether the request for 

approval has been granted or denied; 

(2) Gives the rationale for any denial; 

and 

(3) Describes the reconsideration and 

reapplication procedures. 

(f) Withdrawal. An accreditation 

organization may withdraw its 

application for approval at any time 

before it receives the formal notice 

specified in paragraph (e) of this 

section. 

(g) Reconsideration of adverse 

determination. An accreditation 

organization that has received a notice 

of denial of its request for approval may 

request a reconsideration in accordance 

with subpart D of part 488 of this 

chapter. 

(h) Request for approval following 

denial. (1) Except as provided in 

paragraph (h)(2) of this section, an 

accreditation organization that has 

received notice of denial of its request 

for approval may submit a new request 

if it—

(i) Has revised its accreditation 

program to correct the deficiencies on 

which the denial was based. 

(ii) Can demonstrate that the PDP 

sponsors and MA organizations that it 

has accredited meet or exceed 

applicable Medicare requirements; and 

(iii) Resubmits the application in its 

entirety. 

(2) An accreditation organization that 

has requested reconsideration of CMS’

denial of its request for approval may 

not submit a new request until the 

reconsideration is administratively 

final. 

Subpart F—Submission of Bids and 

Monthly Beneficiary Premiums; Plan 

Approval 

§ 423.251 Scope. 

This section sets forth the 

requirements and limitations on 

submission, review, negotiation and 

approval of competitive bids for 

prescription drug plans and MA–PD 

plans; the calculation of the national 

average bid amount; and the 

determination of enrollee premiums. 

§ 423.258 Definitions. 

For the purposes of this part, the 

following definitions apply: 

Full risk plan means a prescription 

drug plan that is not a limited risk plan 

or a fallback prescription drug plan. 

Limited risk plan means a 

prescription drug plan that provides 

basic prescription drug coverage and for 

which the PDP sponsor includes a 

modification of risk level described in 

§ 423.265(d) in its bid submitted for the 

plan. This term does not include a 

fallback prescription drug plan. 

Standardized bid amount means, for 

a prescription drug plan that provides 

basic prescription drug coverage, the 

PDP approved bid; for a prescription 

drug plan that provides supplemental 

prescription drug coverage, the portion 

of the PDP approved bid that is 

attributable to basic prescription drug 

coverage; for a MA–PD plan, the portion 

of the accepted bid amount that is 

attributable to basic prescription drug 

coverage. 

§ 423.265 Submission of bids and related 

information. 

(a) Eligibility for bidding. (1) Eligible 

entities. With the exception set forth in 

paragraph (a)(2) of this section, an 

applicant may submit a bid to become 

a PDP sponsor or to become an MA 

organization offering an MA–PD plan 

(2) Limitation on entities offering 

fallback prescription drug plans. CMS 

will not accept a bid from a potential 

PDP sponsor for the offering of a full 

risk or limited risk prescription drug 

plan in a PDP region for a year if the 

applicant—

(i) Submitted a bid under § 423.863 

for the year (as the first year of a 

contract period under § 423.863) to offer 

a fallback prescription drug plan in any 

PDP region; 

(ii) Offers a fallback prescription drug 

plan in any PDP region during the year; 

or 

(iii) Offered a fallback prescription 

drug plan in that PDP region during the 

previous year. 

(3) Construction. For purposes of this 

paragraph, an entity is treated as 

submitting a bid for a prescription drug 

plan or offering a fallback prescription 

drug plan if the entity is acting as a 

subcontractor of a PDP sponsor that is 

offering a plan. The previous sentence 

does not apply to entities that are 

subcontractors of an MA organization 

except insofar as the MA organization is 

applying to act as a PDP sponsor of a 

prescription drug plan. 

(b) Bid Submission. Not later than the 

first Monday in June, each potential 

PDP sponsor or MA organization 

planning to offer an MA–PD plan must 

submit bids and supplemental 

information described in this section for 

each prescription drug or MA–PD plan 

it intends to offer in the subsequent 

calendar year. 

(c) Basic rule for bid. Each potential 

PDP sponsor or MA organization must 

submit a bid in a format to be specified 

by CMS for each prescription drug plan 

or MA–PD plan it offers. Each bid must 

reflect a uniform benefit package, 

including premium (except as provided 

for the late enrollment penalty 

described in § 423.286(d)(3)) and all 

applicable cost sharing, for all 

individuals enrolled in the plan. Each 

bid must reflect the applicant’s estimate 

of its average monthly revenue 

requirements to provide qualified 

prescription drug coverage (including 

any supplemental coverage) for a Part D 

eligible individual with a national 

average risk profile for the factors 

described in § 423.329(b)(1). 

(1) Included costs. The bid includes 

costs (including administrative costs 

and return on investment/profit) for 

which the plan is responsible in 

providing basic and supplemental 

benefits. 

(2) Excluded costs. The bid does not 

include costs associated with payments 

by the enrollee for deductible, 

copayments, coinsurance, payments 

projected to be made by CMS for 

reinsurance, or any other costs for 

which the sponsor is not responsible. 

(3) Actuarial valuation. The bid must 

be prepared in accordance with CMS 

actuarial guidelines based on generally 

accepted actuarial principles. A 

qualified actuary must certify the plan’s 

actuarial valuation (which may be 

prepared by others under his/her 

direction or review), and must be a 

member of the American Academy of 

Actuaries to be deemed qualified. 

Applicants may use qualified outside 

actuaries to prepare their bids. 

(d) Specific requirements for bids. The 

bid submission must include the 

following information: 

(1) Coverage. A description of the 

coverage to be provided under the plan, 

including any supplemental coverage 

and the deductible and other cost 

sharing. 

(2) Actuarial value of bid 

components. The applicant must 

provide the following information on 

bid components, as well as actuarial 

certification that the values are 

calculated according to CMS guidelines 

on actuarial valuation, including 

adjustment for the effect that providing 

alternative prescription drug coverage 

(rather than defined standard 

prescription drug coverage) has on drug 

utilization, if applicable. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46825 

(i) The actuarial value of the qualified 

prescription drug coverage to be offered 

under each plan for a Part D eligible 

individual with a national average risk 

profile for the factors described in 

§ 423.329(b)(1) and the basis for the 

estimate. 

(ii) The portion of the bid attributable 

to basic prescription drug coverage and 

the portion (if any) attributable to 

supplemental benefits. 

(iii) The assumptions regarding 

reinsurance amounts payable under 

§ 423.329(c) used in calculating the bid. 

(iv) The assumptions regarding lowincome cost-sharing payable under 

§ 423.329(d) used in calculating the bid. 

(v) The amount of administrative 

costs and return on investment or profit 

included in the bid. 

(3) Service area. A description of the 

service area of the plan. 

(4) Level of risk assumed. For a 

potential PDP sponsor, the level of risk 

assumed in the bid specified in 

paragraph (e) of this section. 

(5) Plan Average Risk Score. An 

estimate of the plan’s average 

prescription drug risk score (as 

established under § 423.329(b)) for all 

projected enrollees for purposes of risk 

adjusting any supplemental premium. 

(6) Additional information. 

Additional information CMS requests to 

support bid amounts and facilitate 

negotiation. 

(e) Special rule for PDP sponsors. Bids 

for all plans offered by a potential PDP 

sponsor in a region, but not those of 

potential MA organizations offering 

MA–PD plans, may include a uniform 

modification of the amount of risk 

assumed (based on a process to be 

specified) as described in one or more 

of the following paragraphs. Any such 

modification will apply to all plans 

offered by the PDP sponsor in a PDP 

region. 

(1) Increase in Federal percentage 

assumed in initial risk corridor. An 

equal percentage point increase in the 

percents applied for costs between the 

first and second threshold limits under 

§ 423.336(b)(2)(i) and (b)(2)(ii)(A) and 

§ 423.336 (b)(3)(i) and (b)(3)(ii)(A). This 

provision does not affect the application 

of a higher percentage for plans in 2006 

or 2007 under § 423.336(b)(2)(iii). 

(2) Increase in Federal percentage 

assumed in second risk corridor. An 

equal percentage point increase in the 

percents applied for costs above the 

second threshold upper limit or below 

the second threshold upper limit under 

paragraphs § 423.336(b)(2)(ii)(B) and 

(b)(3)(ii)(B). 

(3) Decrease in size of risk corridors. 

A decrease in the size of the risk 

corridors by means of reductions in the 

threshold risk percentages specified in 

§ 423.336(a)(2)(ii)(A) and/or (a)(2)(ii)(B). 

(f) Special rule for fallback plans. 

Fallback plan bids are not subject to the 

rules in this section. They must follow 

requirements specified in § 423.863. 

§ 423.272 Review and negotiation of bid 

and approval of plans submitted by 

potential PDP sponsors or MA 

organizations planning to offer MA–PD 

plans. 

(a) Review and negotiation regarding 

information, terms and conditions. CMS 

reviews the information filed under 

§ 423.265(c) in order to conduct 

negotiations regarding the terms and 

conditions of the proposed bid and 

benefit plan using authority similar to 

that of the Director of the Office of 

Personnel Management for health 

benefit plans under Chapter 89 of title 

5, U.S.C. 

(b) Approval of proposed plans. CMS 

will approve the prescription drug plan 

or MA–PD plan only if the plan and the 

PDP sponsor or MA organization 

offering the plan comply with all 

applicable CMS Part D requirements, 

including those related to the provision 

of qualified prescription drug coverage 

and actuarial determinations. 

(1) Application of revenue 

requirements standard. CMS only 

approves a bid if it determines that the 

portions of the bid attributable to basic 

and supplemental prescription drug 

coverage are supported by the actuarial 

bases provided and reasonably and 

equitably reflect the revenue 

requirements (as used for purposes of 

section 1302(8)(C) of the Public Health 

Service Act) for benefits provided under 

that plan, less the sum (determined on 

a monthly per capita basis) of the 

actuarial value of the reinsurance 

payments under section § 423.329(c). 

(2) Plan design. CMS does not 

approve a bid if it finds that the design 

of the plan and its benefits (including 

any formulary and tiered formulary 

structure) are likely to substantially 

discourage enrollment by certain Part D 

eligible individuals under the plan. If 

the design of the categories and classes 

within a formulary is consistent with 

the model guidelines (if any) established 

by the United States Pharmacopeia, that 

formulary may not be found to 

discourage enrollment on the basis of its 

categories and classes alone. 

(c) Limited risk plans. (1) Application 

of limited risk plans. There is no limit 

on the number of full risk plans that 

CMS approves under paragraph (b) of 

this section. CMS only approves a 

limited risk plan in accordance with 

paragraphs (c)(2) and (c)(3) of this 

section if the access requirements under 

§ 423.859 are not otherwise met for a 

PDP region. 

(2) Maximizing assumption of risk. 

CMS gives priority in approval for those 

limited risk plans bearing the highest 

level of risk, but may take into account 

the level of the bids submitted by the 

plans and is not required to accept the 

plan with the highest assumption of 

risk. In no case does CMS approve a 

limited risk plan under which the 

modification of risk level provides for 

no (or a minimal) level of financial risk. 

(3) Limited exercise of authority. CMS 

only approves the minimum number of 

limited risk plans needed to meet the 

access requirements. 

(d) Special rules for private fee-forservice (PFFS) plans that offer 

prescription drug coverage. PFFS plans 

choosing to offer prescription drug 

coverage are subject to all MA–PD bid 

submission and approval requirements 

with the following exceptions: 

(1) Exemption from negotiations. 

These plans are exempt from the review 

and negotiation process in paragraph (a) 

of this section, and are not held to the 

revenue requirements standard in 

paragraph (b)(1) of this section. 

(2) Requirements regarding negotiated 

prices. These plans are not required to 

provide access to negotiated prices. 

However, if they do, they must meet the 

applicable requirements of § 423.104(h). 

(3) Modification of pharmacy access 

standard and disclosure requirement. If 

the plan provides coverage for drugs 

purchased from all pharmacies, without 

charging additional cost sharing and 

without regard to whether they are 

participating providers, §§ 423.120(a) 

and 423.132 requiring certain network 

access standards and the disclosure of 

the availability of lower cost 

bioequivalent generic drugs does not 

apply to the plan. 

§ 423.279 National average monthly bid 

amount. 

(a) Bids included. For each year 

(beginning with 2006) CMS computes a 

national average monthly bid amount 

from approved bids in order to calculate 

the base beneficiary premium, as 

provided in § 423.286(c). The national 

average monthly bid amount is equal to 

a weighted average of the standardized 

bid amounts for each prescription drug 

plan and for each MA–PD plan 

described in section 1851(a)(2)(A)(i) of 

the Act. The calculation does not 

include bids submitted for MSA plans, 

MA private fee-for-service plans, 

specialized MA plans for special needs 

individuals, PACE programs under 

section 1894, and under reasonable cost 

reimbursement contracts under section 

1876(h) of the Act. 

46826 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(b) Calculation of weighted average. 

The national average monthly bid 

amount is a weighted average, with the 

weight for each plan equal to a 

percentage with the numerator equal to 

the number of Part D eligible 

individuals enrolled in the plan in the 

reference month (as defined in 

§ 422.258(c)(1)) and the denominator 

equal to the total number of Part D 

eligible individuals enrolled in all the 

Part D plans included in the calculation 

of the national average bid amount in 

the reference month. For purposes of 

calculating the monthly national 

average monthly bid amount for 2006, 

CMS determines the weighted average 

for 2005. 

(c) Geographic adjustment. (1) CMS 

establishes an appropriate methodology 

for adjusting the national average 

monthly bid amount to take into 

account differences in prices for covered 

Part D drugs among PDP regions. 

(2) CMS does not apply any 

geographic adjustments if CMS 

determines that price variations among 

PDP regions are negligible. 

(3) CMS applies any geographic 

adjustment in a budget neutral manner 

so as to not result in a change in the 

aggregate payments that may have been 

made if CMS had not applied an 

adjustment. 

§ 423.286 Rules regarding premiums. 

(a) General rule. Except as provided in 

paragraphs (d)(3) and (e) of this section, 

and in § 423.463(b) with regard to 

employer group waivers, the monthly 

beneficiary premium for a prescription 

drug plan or MA–PD plan in a PDP 

region is the same for all part D eligible 

individuals enrolled in the plan. The 

monthly beneficiary premium for a 

prescription drug plan or MA–PD plan 

is the base beneficiary premium, as 

determined in paragraph (c) of this 

section, adjusted as described in 

paragraph (d) of this section for the 

difference between the bid and the 

national average monthly bid amount, 

any supplemental benefits and for any 

late enrollment penalties. 

(b) Beneficiary premium percentage. 

The beneficiary premium percentage for 

any year is a fraction, the—

(1) Numerator of which is 25.5 

percent; and 

(2) Denominator of which is as 

follows: 

(i) 100 percent minus the percentage 

established in paragraph (b)(2)(ii) of this 

section. 

(ii) The percentage established in this 

paragraph equals: 

(A) The total reinsurance payments 

that CMS estimates will be paid under 

§ 423.329(c) for the coverage year; 

divided by—

(B) The amount estimated under 

paragraph (b)(2)(ii)(A) of this section for 

the year plus total payments that CMS 

estimates will be paid to prescription 

drug plans and MA–PD plans that are 

attributable to the standardized bid 

amount during the year, taking into 

account amounts paid by both CMS and 

enrollees. 

(c) Base beneficiary premium. The 

base beneficiary premium for a 

prescription drug plan for a month is 

equal to the product of the—

(1) Beneficiary premium percentage as 

specified in paragraph (b) of this 

section; and 

(2) National average monthly bid 

amount (computed under § 423.279) for 

the month. 

(d) Adjustments to base beneficiary 

premium. The base beneficiary 

premium may be adjusted to reflect any 

of the following scenarios, if applicable. 

(1) Adjustment to reflect difference 

between bid and national average bid. If 

the amount of the standardized bid 

amount exceeds the amount of the 

adjusted national average monthly bid 

amount, the monthly base beneficiary 

premium is increased by the amount of 

the excess. If the amount of the adjusted 

national average monthly bid amount 

exceeds the standardized bid amount, 

the monthly base beneficiary premium 

is decreased by the amount of the 

excess. 

(2) Increase for supplemental 

prescription drug benefits. The portion 

of the PDP or MA–PD plan approved bid 

that is attributable to supplemental 

prescription drug benefits increases the 

beneficiary premium. This 

supplemental portion of the bid may be 

adjusted to reflect the average risk score 

of the plan by multiplying by the plan 

average risk score provided in 

§ 423.265(d)(5). 

(3) Increase for late enrollment 

penalty. The base beneficiary premium 

is increased on a monthly basis by the 

amount of any late enrollment penalty. 

(i) Late Enrollment Penalty Amount. 

The penalty amount for a Part D eligible 

individual for a continuous period of 

eligibility (as provided in § 423.46(a)) is 

the greater of—

(A) An amount that CMS determines 

is actuarially sound for each uncovered 

month in the same continuous period of 

eligibility; or 

(B) 1 percent of the base beneficiary 

premium (computed under paragraph 

(c) of this section) for each uncovered 

month in the period. 

(ii) Special rule for 2006 and 2007. In 

2006 and 2007 the penalty amount 

discussed in paragraph (d)(3) will equal 

the amount referenced in paragraph 

(d)(3)(i)(B) of this section unless another 

amount is specified in a separate 

issuance based on available analysis or 

other information as determined by the 

Secretary. 

(e) Decrease in monthly beneficiary 

premium for low-income assistance. The 

monthly beneficiary premium may be 

eliminated or decreased in the case of a 

subsidy-eligible individual under 

§ 423.780. 

(f) Special rules for fallback plans. 

The monthly beneficiary premium 

charged under a fallback plan is 

calculated under § 423.867(a). 

§ 423.293 Collection of monthly 

beneficiary premium. 

(a) General rule. Subject to paragraphs 

(c) and (d) of this section, the provisions 

of section 1854(d) of the Act (as 

specified in § 422.262(b) on the 

consolidated monthly premium and 

paragraph (f) of this section on 

beneficiary payment options), apply to 

PDP sponsors and premiums (and any 

late enrollment penalty) under this part 

in the same manner as they apply to MA 

organizations and beneficiary premiums 

under Part C except that any reference 

to a Trust Fund is deemed for this 

purpose a reference to the Medicare 

Prescription Drug Account. 

(b) Crediting of late enrollment 

penalty. CMS estimates and specifies 

the portion of the late enrollment 

penalty imposed under § 423.286(d)(3) 

attributable to increased actuarial costs 

assumed by the PDP sponsor or MA 

organization (and not taken into account 

through risk adjustment provided under 

§ 423.329(b)(1) or through reinsurance 

payments under § 423.329(c)) as a result 

of the late enrollment. 

(c) Collection of late enrollment 

penalty. 

(1) Collection through withholding. In 

the case of a late enrollment penalty that 

is collected from a Part D eligible 

individual in the manner described in 

§ 422.262(f)(1), CMS pays only the 

portion of the late enrollment penalty 

described in paragraph (b) of this 

section to the PDP sponsor or MA 

organization offering the Part D plan in 

which the individual is enrolled 

(2) Collection by plan. In the case of 

a late enrollment penalty collected from 

a Part D eligible individual in a manner 

other than the manner described in 

§ 422.262(f)(1), CMS reduces payments 

otherwise made to the PDP sponsor or 

MA organization by an amount equal to 

this portion of the late enrollment 

penalty. 

(d) Special rule for fallback plans. 

The collection requirements of this 

section do not apply to fallback 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46827 

prescription drug plans. The fallback 

plans follow the requirements set forth 

in § 423.867(b). 

Subpart G—Payments to PDP 

Sponsors and MA Organizations 

Offering MA–PD Plans For All Medicare 

Beneficiaries For Qualified 

Prescription Drug Coverage 

§ 423.301 Scope. 

This section sets forth rules for the 

calculation and payment of CMS direct 

and reinsurance subsidies for 

prescription drug plans and MA–PD 

plans; the application of risk corridors 

and risk-sharing adjustments to 

payments; and retroactive adjustments 

and reconciliations to actual enrollment 

and interim payments. 

§ 423.308 Definitions and terminology. 

For the purposes of this part, the 

following definitions apply—

Actually paid means that the costs 

must be actually incurred by the 

sponsor and must be net of any direct 

or indirect remuneration (including 

discounts, chargebacks or average 

percentage 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 (including manufacturers, 

pharmacies, enrollees, or any other 

person) that would serve to decrease the 

costs incurred by the sponsor for the 

drug. 

Allowable reinsurance costs means 

the subset of gross covered prescription 

drug costs that are attributable to basic 

or standard benefits only and that are 

actually paid by the sponsor or 

organization or by (or on behalf of) an 

enrollee under the plan. The costs for 

any plan offering enhanced alternative 

coverage must be adjusted not only to 

exclude any costs attributable to 

benefits beyond basic coverage, but also 

to exclude any basic coverage costs 

determined to be attributable to 

increased utilization over the standard 

benefit as the result of the insurance 

effect of enhanced alternative coverage 

in accordance with CMS guidelines on 

actuarial valuation. 

Allowable risk corridor costs means 

the subset of prescription drug costs 

(not including administrative costs, but 

including costs directly related to the 

dispensing of covered Part D drugs 

during the year) that are attributable to 

basic or standard benefits only and that 

are incurred and actually paid by the 

sponsor or organization under the plan. 

Costs may be based upon imposition of 

the maximum amount of copayments 

permitted under § 423.782. The costs for 

any plan offering enhanced alternative 

coverage must be adjusted not only to 

exclude any costs attributable to 

benefits beyond basic coverage, but also 

to exclude any basic coverage costs 

determined to be attributable to 

increased utilization over the standard 

benefit as the result of the insurance 

effect of enhanced alternative coverage 

in accordance with CMS guidelines on 

actuarial valuation. 

Coverage year means a calendar year 

in which covered Part D drugs are 

dispensed if the claim for those drugs 

(and payment on the claim) is made not 

later than 3 months after the end of the 

year. 

Gross covered prescription drug costs 

means those costs incurred under a Part 

D plan, excluding administrative costs, 

but including costs related to the 

dispensing of covered Part D drugs 

during the year and costs relating to the 

deductible. They equal—

(1) All reimbursement paid by a PDP 

sponsor or an MA organization offering 

an MA–PD plan to a pharmacy (or other 

intermediary) or to indemnify an 

enrollee when the reimbursement is 

associated with an enrollee obtaining 

drugs under the plan; plus 

(2) All amounts paid under the plan 

by or on behalf of an enrollee (such as 

the deductible, coinsurance, costsharing, or amounts between the initial 

coverage limit and the out-of-pocket 

threshold) in order to obtain drugs 

covered under the plan. These costs are 

determined regardless of whether the 

coverage under the plan exceeds basic 

prescription drug coverage. 

Target amount for any prescription 

drug plan or MA–PD plan equals the 

total amount of payments (from CMS 

and enrollees) to that plan for the year 

for all standardized bid amounts as risk 

adjusted under § 423.329(b)(1), less the 

administrative expenses (including 

return on investment) assumed in the 

standardized bids. 

§ 423.315 General payment provisions. 

(a) Source of payments. CMS 

payments under this section are made 

from the Medicare Prescription Drug 

Account. 

(b) Monthly payments. CMS provides 

a direct subsidy in the form of advance 

monthly payments equal to the plan’s 

standardized bid, risk adjusted for 

health status as provided in 

§ 423.329(b), minus the beneficiary 

monthly premium as determined in 

§ 423.286. 

(c) Reinsurance subsidies. CMS 

provides reinsurance subsidy payments 

described in § 423.329(c) through 

payments of amounts on an as-incurred 

basis as provided under 

§ 423.329(c)(2)(i) and final 

reconciliation to actual allowable 

reinsurance costs as provided in 

§ 423.343(c). 

(d) Low-income subsidies. CMS makes 

payments for premium and cost sharing 

subsidies, including additional coverage 

above the initial coverage limit, on 

behalf of certain subsidy-eligible 

enrollees as provided in § 423.780 and 

§ 423.782. CMS provides low-income 

cost-sharing subsidy payments 

described in § 423.782 through interim 

payments of amounts as provided under 

§ 423.329(d)(2)(i) and reconciliation to 

actual allowable reinsurance costs as 

provided in § 423.343(d). 

(e) Risk-sharing arrangements. CMS 

may issue lump-sum payments or adjust 

monthly payments in the following 

payment year based on the relationship 

of the plan’s adjusted allowable risk 

corridor costs to predetermined risk 

corridor thresholds in the coverage year 

as provided in § 423.336. 

(f) Retroactive adjustments and 

reconciliations. CMS reconciles 

payment year disbursements with 

updated enrollment and health status 

data, actual low-income cost-sharing 

costs and actual allowable reinsurance 

costs as provided in § 423.343. 

(g) Special rules for private fee-forservice plans. 

(1) Application of reinsurance. For 

private fee-for-service plans, CMS 

determines the amount of reinsurance 

payments as provided under 

§ 423.329(c)(3). 

(2) Exemption from risk corridor 

provisions. The provisions of § 423.336 

regarding risk sharing do not apply. 

(h) Special rules for fallback plans. In 

lieu of the amounts otherwise payable 

under § 423.329, the amount payable to 

a PDP sponsor offering a fallback 

prescription drug plan is the amount 

determined under the contract for the 

plan in accordance with § 423.871(e). 

§ 423.322 Requirement for disclosure of 

information. 

(a) Payment conditional upon 

provision of information. Payments to a 

PDP sponsor or MA organization are 

conditioned upon provision of 

information to CMS that is necessary to 

carry out this subpart, or as required by 

law. 

(b) Restriction on use of information. 

Officers, employees and contractors of 

the Department of Health and Human 

Services may use the information 

disclosed or obtained in accordance 

with the provisions of this subpart only 

for the purposes of, and to the extent 

necessary in, carrying out this subpart 

46828 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

including, but not limited to, 

determination of payments and 

payment-related oversight and program 

integrity activities. This restriction does 

not limit OIG authority to conduct 

audits and evaluations necessary for 

carrying out these regulations. 

§ 423.329 Determination of payment. 

(a) Subsidy payments. (1) Direct 

subsidy. CMS makes a direct subsidy 

payment for each eligible beneficiary 

enrolled in a prescription drug plan or 

MA–PD plan for a month equal to the 

amount of the plan’s approved 

standardized bid, adjusted for health 

status (as determined under 

§ 423.329(b)(1)), and reduced by the 

base beneficiary premium for the plan 

(as determined under § 423.286(c) and 

adjusted in § 423.286(d)(1)). 

(2) Subsidy through reinsurance. CMS 

makes reinsurance subsidy payments as 

provided under paragraph (c) of this 

section. 

(3) Low-income cost-sharing subsidy. 

CMS makes low-income cost-sharing 

subsidy payments as provided under 

paragraph (d) of this section. 

(b) Health status risk adjustment. (1) 

Establishment of risk factors. CMS 

establishes an appropriate methodology 

for adjusting the standardized bid 

amount under paragraph (a)(1) of this 

section, to take into account variation in 

costs for basic prescription drug 

coverage among prescription drug plans 

and MA–PD plans based on the 

differences in actuarial risk of different 

enrollees being served. Any risk 

adjustment is designed in a manner so 

as to be budget neutral in the aggregate 

to the risk of the Part D eligible 

individuals who enroll in Part D plans. 

(2) Considerations. In establishing the 

methodology under paragraph (b)(1) of 

this section, CMS takes into account the 

similar methodologies used under 

§ 422.308(c)(1) to adjust payments to 

MA organizations for benefits under the 

original Medicare fee-for-service 

program option. 

(3) Data collection. In order to carry 

out this paragraph, CMS requires—

(i) PDP sponsors to submit data 

regarding drug claims that can be linked 

at the individual level to Part A and Part 

B data in a form and manner similar to 

the process provided under § 422.310 

and other information as CMS 

determines necessary; and 

(ii) MA organizations that offer MA–

PD plans to submit data regarding drug 

claims that can be linked at the 

individual level to other data that the 

organizations are required to submit to 

CMS in a form and manner similar to 

the process provided under § 422.310 

and other information as CMS 

determines necessary. 

(4) Publication. At the time of 

publication of risk adjustment factors 

under § 422.312(a)(1)(ii), CMS publishes 

the risk adjusters established under this 

paragraph of this section for the 

upcoming calendar year. 

(c) Reinsurance payment amount. (1) 

General rule. The reinsurance payment 

amount for a Part D eligible individual 

enrolled in a prescription drug plan or 

MA–PD plan for a coverage year is an 

amount equal to 80 percent of the 

allowable reinsurance costs attributable 

to that portion of gross covered 

prescription drug costs incurred in the 

coverage year after the individual has 

truly incurred out-of-pocket costs that 

exceed the annual out-of-pocket 

threshold specified in 

§ 423.108(b)(4)(iii). 

(2) Payment method. Payments under 

this section are based on a method as 

CMS determines. 

(i) Payments during the coverage year. 

CMS establishes a payment method by 

which monthly payments of amounts 

under this section are made during a 

year based on allowable reinsurance 

costs incurred in each month of the 

coverage year. 

(ii) Final payments. CMS reconciles 

the payments made during the coverage 

year to final actual allowable 

reinsurance costs as provided in 

§ 423.343(c). 

(3) Special rules for private fee-forservice Plans offering prescription drug 

coverage. CMS determines the amount 

of reinsurance payments for private feefor-service plans offering prescription 

drug coverage using a methodology 

that—

(i) Bases the amount on CMS’ estimate 

of the amount of the payments that are 

payable if the plan were an MA–PD plan 

described in section 1851(a)(2)(A)(i); 

and 

(ii) Takes into account the average 

reinsurance payments made under 

§ 423.329(c) for populations of similar 

risk under MA–PD plans described in 

the section. 

(d) Low-income cost sharing subsidy 

payment amount. 

(1) General rule. The low-income costsharing subsidy payment amount on 

behalf of a low-income subsidy eligible 

individual enrolled in a prescription 

drug plan or MA–PD plan for a coverage 

year is the amount described in 

§ 423.782. 

(2) Payment method. Payments under 

this section are based on a method that 

CMS determines. 

(i) Interim payments. CMS establishes 

a payment method by which interim 

payments of amounts under this section 

are made during a year based on the 

low-income cost-sharing assumptions 

submitted with plan bids under 

§ 423.265(d)(2)(iv) and negotiated and 

approved under § 423.272. 

(ii) Final payments. CMS reconciles 

the interim payments to actual incurred 

low-income cost-sharing costs as 

provided in § 423.343(d). 

§ 423.336 Risk-sharing arrangements. 

(a) Portion of total payments to a 

sponsor or organization subject to risk. 

(1) Adjusted allowable risk corridor 

costs. For purposes of this paragraph, 

the term adjusted allowable risk 

corridor costs means—

(i) The allowable risk corridor costs 

for the plan for the coverage year, 

reduced by—

(ii) The sum of—

(A) The total reinsurance payments 

made under § 423.329(c) to the sponsor 

of the plan for the year; and 

(B) The total non-premium subsidy 

payments made under § 423.782 to the 

sponsor of the plan for the coverage 

year. 

(2) Establishment of risk corridors. (i) 

Risk corridors. For each year, CMS 

establishes a risk corridor for each 

prescription drug plan and each MA–PD 

plan. The risk corridor for a plan for a 

year is equal to a range as follows: 

(A) First threshold lower limit. The 

first threshold lower limit of the 

corridor is equal to—

(1) The target amount for the plan; 

minus 

(2) An amount equal to the first 

threshold risk percentage for the plan 

(as determined under paragraph 

(a)(2)(ii)(A) of this section) of the target 

amount. 

(B) Second threshold lower limit. The 

second threshold lower limit of the 

corridor is equal to—

(1) The target amount for the plan; 

minus 

(2) An amount equal to the second 

threshold risk percentage for the plan 

(as determined under paragraph 

(a)(2)(ii)(B) of this section) of the target 

amount. 

(C) First threshold upper limit. The 

first threshold upper limit of the 

corridor is equal to the sum of—

(1) The target amount; and 

(2) An amount equal to the first 

threshold risk percentage for the plan 

(as determined under paragraph 

(a)(2)(ii)(A) of this section) of the target 

amount. 

(D) Second threshold upper limit. The 

second threshold upper limit of the 

corridor is equal to the sum of—

(1) The target amount; and 

(2) An amount equal to the second 

threshold risk percentage for the plan 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46829 

(as determined under paragraph 

(a)(2)(ii)(B) of this section) of the target 

amount. 

(ii) First and second threshold risk 

percentage defined. (A) First threshold 

risk percentage. Subject to paragraph 

(a)(2)(iii) of this section, the first 

threshold risk percentage is for—

(1) 2006 and 2007, and 2.5 percent; 

(2) 2008 through 2011, 5 percent; and 

(3) 2012 and subsequent years, a 

percentage CMS establishes, but in no 

case less than 5 percent. 

(B) Second threshold risk percentage. 

Subject to paragraph (a)(2)(iii) of this 

section, the second threshold risk 

percentage is for—

(1) 2006 and 2007, 5.0 percent; 

(2) 2008 through 2011, 10 percent 

(3) 2012 and subsequent years, a 

percentage CMS establishes that is 

greater than the percent established for 

the year under paragraph (a)(2)(ii)(A)(3) 

of this section, but in no case less than 

10 percent. 

(iii) Reduction of risk percentage to 

ensure two Plans in an area. In 

accordance with § 423.265(e), a PDP 

sponsor may submit a bid that requests 

a decrease in the applicable first or 

second threshold risk percentages or an 

increase in the percents applied under 

paragraph (b) of this section. 

(3) Plans at risk for entire amount of 

supplemental prescription drug 

coverage. A PDP sponsor and MA 

organization that offer a plan that 

provides supplemental prescription 

drug benefits are at full financial risk for 

the provision of the supplemental 

benefits. 

(b) Payment adjustments. (1) No 

adjustment if adjusted allowable risk 

corridor costs within risk corridor. If the 

adjusted allowable risk corridor costs 

for the plan for the year are at least 

equal to the first threshold lower limit 

of the risk corridor (specified in 

paragraph (a)(2)(i)(A) of this section) but 

not greater than the first threshold 

upper limit of the risk corridor 

(specified in paragraph (a)(2)(i)(C) of 

this section) for the plan for the year, 

CMS makes no payment adjustment. 

(2) Increase in payment if adjusted 

allowable risk corridor costs above 

upper limit of risk corridor. 

(i) Costs between first and second 

threshold upper limits. If the adjusted 

allowable risk corridor costs for the plan 

for the year are greater than the first 

threshold upper limit, but not greater 

than the second threshold upper limit, 

of the risk corridor for the plan for the 

year, CMS increases the total of the 

payments made to the sponsor or 

organization offering the plan for the 

year under this section by an amount 

equal to 50 percent (or, for 2006 and 

2007, 75 percent or 90 percent if the 

conditions described in paragraph 

(b)(2)(iii) of this section are met for the 

year) of the difference between the 

adjusted allowable risk corridor costs 

and the first threshold upper limit of the 

risk corridor. 

(ii) Costs above second threshold 

upper limits. If the adjusted allowable 

risk corridor costs for the plan for the 

year are greater than the second 

threshold upper limit of the risk 

corridor for the plan for the year, CMS 

increases the total of the payments made 

to the sponsor or organization offering 

the plan for the year under this section 

by an amount equal to the sum of—

(A) 50 percent (or, for 2006 and 2007, 

75 percent or 90 percent if the 

conditions specified in paragraph 

(b)(2)(iii) of this section are met for the 

year) of the difference between the 

second threshold upper limit and the 

first threshold upper limit; and 

(B) 80 percent of the difference 

between the adjusted allowable risk 

corridor costs and the second threshold 

upper limit of the risk corridor. 

(iii) Conditions for application of 

higher percentage for 2006 and 2007. 

The conditions specified in this 

paragraph are met for 2006 or 2007 if 

CMS determines for the year that—

(A) At least 60 percent of prescription 

drug plans and MA–PD plans to which 

this paragraph applies have adjusted 

allowable risk corridor costs for the plan 

for the year that are more than the first 

threshold upper limit of the risk 

corridor for the plan for the year; and 

(B) The plans represent at least 60 

percent of Part D eligible individuals 

enrolled in any prescription drug plan 

or MA–PD plan. 

(3) Reduction in payment if adjusted 

allowable risk corridor costs below 

lower limit of risk corridor. 

(i) Costs between first and second 

threshold lower limits. If the adjusted 

allowable risk corridor costs for the plan 

for the year are less than the first 

threshold lower limit, but not less than 

the second threshold lower limit, of the 

risk corridor for the plan for the year, 

CMS reduces the total of the payments 

made to the sponsor or organization 

offering the plan for the year under this 

section by an amount (or otherwise 

recovers from the sponsor or 

organization an amount) equal to 50 

percent (or, for 2006 and 2007, 75 

percent) of the difference between the 

first threshold lower limit of the risk 

corridor and the adjusted allowable risk 

corridor costs. 

(ii) Costs below second threshold 

lower limit. If the adjusted allowable 

risk corridor costs for the plan for the 

year are less the second threshold lower 

limit of the risk corridor for the plan for 

the year, CMS reduces the total of the 

payments made to the sponsor or 

organization offering the plan for the 

year under this section by an amount (or 

otherwise recovers from the sponsor or 

organization an amount) equal to the 

sum of—

(A) 50 percent (or, for 2006 and 2007, 

75 percent) of the difference between 

the first threshold lower limit and the 

second threshold lower limit; and 

(B) 80 percent of the difference 

between the second threshold upper 

limit of the risk corridor and the 

adjusted allowable risk corridor costs. 

(c) Payment methods. CMS makes 

payments after a coverage year after 

obtaining all of the cost data 

information in paragraph (c)(1) of this 

section necessary to determine the 

amount of payment. CMS will not make 

payments under this section if the PDP 

sponsor or MA organization fails to 

provide the cost data information in 

paragraph (c)(1) of this section. 

(1) Submission of cost data. Within 6 

months of the end of a coverage year, 

the PDP sponsor or MA organization 

offering a MA–PD plan sponsor must 

provide to CMS the following 

information: 

(i) The gross covered prescription 

drug costs segregated by enrollee and 

date of service. 

(ii) The allowable risk corridor costs 

(defined in § 423.308) for the coverage 

year. 

(iii) The adjusted allowable risk 

corridor costs for the coverage year. 

(iv) Costs incurred for supplemental 

benefits distinguished from those for 

basic coverage. 

(v) Other information stipulated by 

CMS. 

(2) Lump sum and adjusted monthly 

payments. CMS at its discretion makes 

either lump-sum payments or adjusts 

monthly payments in the following 

payment year based on the relationship 

of the plan’s adjusted allowable risk 

corridor costs to the predetermined risk 

corridor thresholds in the coverage year, 

as determined under paragraph (a) of 

this section. 

(d) No effect on monthly premium. No 

adjustment in payments made by reason 

of this section may affect the monthly 

beneficiary premium or the MA 

monthly prescription drug beneficiary 

premium. 

§ 423.343 Retroactive adjustments and 

reconciliations. 

(a) Application of enrollee 

adjustment. The provisions of § 422.308 

apply to payments to PDP sponsors 

under this section in the same manner 

as they apply to payments to MA 

46830 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

organizations under section 1853(a) of 

the Act. 

(b) Health status. CMS makes 

adjustments to payments made under 

§ 423.329(a)(1) to account for updated 

health status risk adjustment data as 

provided under § 422.310(g)(2). CMS 

may recover payments associated with 

health status adjustments if the MA 

organization or PDP sponsor fails to 

provide the information described in 

§ 423.329(b)(3). 

(c) Reinsurance. CMS makes final 

payment for reinsurance after a coverage 

year after obtaining all of the 

information necessary to determine the 

amount of payment. 

(1) Submission of cost data. Within 6 

months after the end of a coverage year, 

the PDP sponsor or MA organization 

offering a MA–PD plan must provide 

CMS the following information: 

(i) The gross covered prescription 

drug costs segregated by enrollee and 

date of service. 

(ii) The allowable reinsurance costs 

segregated by enrollee and date of 

service. 

(iii) The costs incurred by the plan 

delineated separately from those 

incurred by or on behalf of the enrollee 

for purposes of determining out-ofpocket expenditures. 

(iv) Costs incurred for supplemental 

benefits distinguished from those for 

basic coverage. 

(v) Other information stipulated by 

CMS. 

(2) Payments. CMS at its discretion 

either makes lump-sum payments or 

adjusts monthly payments throughout 

the remainder of the payment year 

following the coverage year based on the 

difference between monthly reinsurance 

payments made during the coverage 

year and the amount payable in 

§ 423.329(c) for the coverage year. CMS 

may recover payments made through a 

lump sum recovery or by adjusting 

monthly payments throughout the 

remainder of the coverage year if the 

monthly reinsurance payments made 

during the coverage year exceed the 

amount payable under § 423.329(c) or if 

the PDP sponsor or MA organization 

does not provide the data in paragraph 

(c)(1) of this section. 

(d) Low-income cost-sharing subsidy. 

CMS makes final payment for lowincome cost-sharing subsidies after a 

coverage year after obtaining all of the 

information necessary to determine the 

amount of payment. 

(1) Submission of cost data. Within 6 

months after the end of a coverage year, 

the PDP sponsor or MA organization 

offering a MA–PD plan must provide 

CMS the following information: 

(i) The gross covered prescription 

drug costs segregated by enrollee and 

date of service. 

(ii) The costs incurred by the plan 

delineated separately than those 

incurred by or on behalf of the enrollee 

for purposes of determining out-ofpocket expenditures. 

(iii) Other information stipulated by 

CMS. 

(2) Payments. CMS at its discretion 

either makes lump-sum payments or 

adjusts monthly payments throughout 

the remainder of the payment year 

following the coverage year based on the 

difference between interim low-income 

cost-sharing subsidy payments and total 

low-income cost-sharing subsidy costs 

eligible for subsidy under § 423.782 

submitted by the plan for the coverage 

year. CMS may recover payments made 

through a lump sum recovery or by 

adjusting monthly payments throughout 

the remainder of the coverage year if 

interim low-income cost-sharing 

subsidy payments exceed the amount 

payable under § 423.782 or if the PDP 

sponsor or MA organization does not 

provide the data in paragraph (d)(1) of 

this section. 

§ 423.346 Reopening 

(a) CMS may reopen and revise a final 

payment determination (including a 

determination on the final amount of 

direct subsidy described in 

§ 423.329(a)(1), final reinsurance 

payments described in § 423.329(c), the 

final amount of the low income subsidy 

described in § 423.329(d), or final risk 

corridor payments as described in 

§ 423.336)—

(1) For any reason, within 12 months 

from the date of the notice of the final 

determination to the PDP sponsor or 

MA organization; 

(2) After that 12-month period, but 

within 4 years after the date of the 

notice of the initial determination to the 

individual, upon establishment of good 

cause for reopening; or 

(3) At any time when the 

determination or decision was procured 

by fraud or similar fault of the PDP 

sponsor, MA organization, or any 

subcontractor of such sponsor or 

organization. 

(b) For purposes of this section, CMS 

will find good cause if—

(1) New and material evidence that 

was not readily available at the time the 

final determination was made is 

furnished; 

(2) A clerical error in the computation 

of payments was made; or 

(3) The evidence that was considered 

in making the determination clearly 

shows on its face that an error was 

made. 

(c) For purposes of this section, CMS 

will not find good cause if the only 

reason for reopening is a change of legal 

interpretation or administrative ruling 

upon which the final determination was 

made. 

Subpart I—Organization Compliance 

With State Law and Preemption by 

Federal Law 

§ 423.401 General requirements for PDP 

sponsors. 

(a) General requirements. Each PDP 

sponsor of a prescription drug plan 

must meet the following requirements: 

(1) Licensure. Except in cases where 

there is a waiver as specified at 

§ 423.410, the sponsor is organized and 

licensed under State law as a risk 

bearing entity eligible to offer health 

insurance or health benefits coverage in 

each State in which it offers a 

prescription drug plan. If not 

commercially licensed, the sponsor 

obtains certification from the State that 

the organization meets a level of 

financial solvency and other standards 

as the State may require for it to operate 

as a PDP sponsor. 

(2) Assumption of financial risk for 

unsubsidized coverage. The entity 

assumes financial risk on a prospective 

basis for benefits that it offers under a 

prescription drug plan and that is not 

covered under 1860D–15(b) of the Act. 

(b) Reinsurance permitted. The plan 

sponsor may obtain insurance or make 

other arrangements for the cost of 

coverage provided to any enrollee to the 

extent that the sponsor is at risk for 

providing the coverage. 

(c) Solvency for unlicensed sponsors. 

In the case of a PDP sponsor that is not 

described in § 423.401(a)(1) and for 

which a waiver is approved under 

§ 423.410, the sponsor must meet 

§ 423.420. 

§ 423.410 Waiver of certain requirements 

to expand choice. 

(a) Authorizing waiver. In the case of 

an entity that seeks to offer a 

prescription drug plan in a State, CMS 

waives the licensure requirement at 

§ 423.401(a)(1), which requires that the 

entity be licensed in that State if CMS 

determines, based on the application 

and other evidence presented, that any 

of the grounds for approval of the 

application described in paragraphs (c), 

(d), or (e) of this section are met. 

(b) Application of regional plan 

waiver rule. In addition to the waiver 

available under paragraphs (c), (d) and 

(e) of this section, the following waiver 

may be requested—

(1) In general. Subject to paragraphs 

(b)(2) and (b)(3) of this section, if an 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46831 

applicant seeking to become a PDP 

sponsor operates in more than one State 

in a region, and is licensed as a risk 

bearing entity in at least one State in 

such region, then the applicant may 

receive a regional plan waiver for the 

States in which it is not licensed. 

(2) Filing of application. The 

applicant must demonstrate to the 

satisfaction of CMS that it filed the 

necessary licensure applications with 

each State in the region for which it 

does not already have State licensure, 

except that no such application is 

necessary if CMS determines that the 

State does not have a licensing process 

for potential PDP sponsors. 

(3) Time limit. The waiver will expire 

at the end of the time period that the 

Secretary determines is appropriate for 

timely processing of the application, but 

in no case will a waiver extend beyond 

the end of the calendar year. 

(c) Grounds for approval of waivers. 

Subject to the waiver requirements 

specified in § 423.410(f), waivers may be 

granted under any of the following 

conditions: 

(1) Failure to act on licensure 

application on a timely basis. The State 

failed to complete action on the 

licensing application within 90 days of 

the date that the State received a 

substantially complete application. 

(2) Denial of application based on 

discriminatory treatment. The State 

has—

(i) Denied the license application on 

the basis of material requirements, 

procedures, or standards (other than 

solvency requirements) not generally 

applied by the State to other entities 

engaged in a substantially similar 

business; or 

(ii) Required, as a condition of 

licensure that the organization offer any 

product or plan other than a 

prescription drug plan. 

(3) Denial of application based on 

application of solvency requirements. 

(i) The State has denied the licensure 

application, in whole or in part, on the 

basis of the PDP sponsor’s failure to 

meet solvency requirements that are 

different from the solvency standards 

CMS established under 423.420; or 

(ii) CMS determines that the State has 

imposed, as a condition of licensing, 

any documentation or information 

requirements relating to solvency that 

are different from the standards CMS 

establishes pursuant to § 423.420. 

(4) Grounds other than those required 

by federal law. The application by a 

State of any grounds other than those 

required under Federal law. 

(d) Waiver when licensing process not 

in effect. The grounds for approval 

specified in paragraph(c)(1) of this 

section are deemed met if the State does 

not have a licensing process in effect 

with respect to PDP sponsors. 

(e) Special waiver for plan years 

beginning before January 1, 2008. For 

plan years beginning before January 1, 

2008, if the State has a prescription drug 

plan or PDP sponsor licensing process 

in effect, CMS grants a waiver upon a 

demonstration that a PDP sponsor has 

submitted a substantially complete 

licensure application to the State. 

(f) Waiver requirements. Except for 

the waivers described in paragraph (b) 

of this section, the following rules apply 

to waiver applications or waivers 

granted under this section. 

(1) Treatment of waiver. The waiver 

applies only to that State, is effective 

only for 36 months and cannot be 

renewed. 

(2) Prompt action on application. 

CMS grants or denies a waiver 

application under this section within 60 

days after CMS determines that a 

substantially complete waiver 

application is received by CMS. 

(3) In the case of a State that does not 

have a PDP sponsor licensing process, 

the 36 month deadline on the waiver 

discussed in paragraph (f)(1) of this 

section does not apply, and the waiver 

may continue in effect for a given State 

as long as the State does not have a PDP 

sponsor licensing process in effect. 

§ 423.420 Solvency standards for nonlicensed entities. 

(a) Establishment and publication. 

CMS establishes and publishes 

reasonable financial solvency and 

capital adequacy standards for entities 

specified in paragraph (b) of this 

section. 

(b) Compliance with standards. A 

PDP sponsor that is not licensed by a 

State and for which a waiver application 

is approved by CMS under § 423.410 (b), 

(c), (d), or (e) must maintain reasonable 

financial solvency and capital adequacy 

in accordance with the standards 

established by CMS under paragraph(a) 

of this section. 

§ 423.425 Licensure does not substitute 

for or constitute certification. 

The fact that a PDP sponsor is State 

licensed or has a waiver application 

approved under § 423.410 does not 

deem the sponsor to meet other 

requirements imposed under this part 

for a PDP sponsor. 

§ 423.440 Prohibition of State imposition 

of premium taxes; relation to State laws. 

(a) Federal preemption of State law. 

The standards established under this 

part supersede any State law or 

regulation (other than State licensing 

laws or State laws relating to plan 

solvency) with respect to prescription 

drug plans offered by PDP sponsors and 

MA–PD plans offered by MA 

organizations. 

(b) State premium taxes prohibited. 

(1) Basic rule. No premium tax, fee, or 

other similar assessment may be 

imposed by any State, the District of 

Columbia, the Commonwealth of Puerto 

Rico, the Virgin Islands, Guam, and 

American Samoa, the Mariana Islands or 

any of their political subdivisions or 

other governmental authorities with 

respect to any payment CMS makes on 

behalf of MA–PD plan or prescription 

drug plan enrollees under subpart G of 

this part; or with respect to any payment 

made to prescription drug plans or MA–

PD plans by a beneficiary or by a third 

party on behalf of a beneficiary. 

(2) Construction. Nothing in this 

section shall be construed to exempt 

any PDP sponsor from taxes, fees, or 

other monetary assessments related to 

the net income or profit that accrues to, 

or is realized by, the organization from 

business conducted under this part, if 

that tax, fee, or payment is applicable to 

a broad range of business activity. 

Subpart J—Coordination Under Part D 

With Other Prescription Drug Coverage 

§ 423.452 Scope. 

This section sets forth the application 

of Part D rules to Part C plans, 

establishes waivers for employersponsored group prescription drug 

plans, and establishes requirements for 

coordination of benefits with State 

Pharmaceutical Assistance Programs 

and other providers of prescription drug 

coverage. 

§ 423.454 Definitions and Terminology. 

For purposes of this subpart, the 

following definitions apply—

Part D plan or Medicare Part D plan 

is a prescription drug plan or an MA–

PD plan. 

Employer-sponsored group 

prescription drug plan means a 

prescription drug plan under a contract 

between a PDP sponsor or an MA 

organization offering an MA–PD plan 

and employers, labor organizations, or 

the trustees of funds established by one 

or more employers or labor 

organizations to furnish prescription 

drug benefits under employment-based 

retiree health coverage (as defined in 

§ 423.822). (Published elsewhere in this 

Federal Register.) 

State Pharmaceutical Assistance 

Program (SPAP) means a State program 

(operated by or under contract with a 

State) that meets the requirements 

described under § 423.464(c). 

46832 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

§ 423.458 Application of Part D rules to 

MA–PD plans on and after January 1, 2006. 

(a) Relationship to Part C. Except as 

otherwise provided in this Part, the 

requirements of this Part apply to 

prescription drug coverage provided by 

Medicare Advantage prescription drug 

plans offered by Medicare Advantage 

organizations. 

(b) MA Waiver. CMS waives any 

provision of this Part as applied to MA–

PD plans to the extent CMS determines 

that the provision duplicates, or is in 

conflict with, provisions otherwise 

applicable to the MA organization or 

MA–PD plan under Part C of Medicare 

or as may be necessary in order to 

improve coordination of this part with 

the benefits under Part C. 

(1) Application of Waiver. Any waiver 

or modification granted by CMS under 

this section will apply to any other 

similarly situated organization offering 

or seeking to offer a MA–PD plan that 

meets the conditions of the waiver. 

(2) Request for waivers. Organizations 

offering or seeking to offer a Medicare 

Advantage-Prescription Drug plan may 

request from CMS in writing—

(i) A waiver of those requirements 

under Part D of Medicare that are 

duplicative of, or that are in conflict 

with provisions otherwise applicable to 

the MA–PD plan, or proposed MA–PD 

plan, under Part C of Medicare. 

(ii) A waiver of a requirement under 

Medicare Part D, if such waiver would 

improve coordination of benefits 

provided under Part C of Medicare with 

the benefits under Part D. 

(c) Employer Group Waiver. (1) 

General rule. Prescription drug plans 

may request, in writing, a waiver or 

modification of those requirements 

under Part D of Medicare that hinder the 

design of, the offering of, or the 

enrollment in, an employer-sponsored 

group prescription drug plan. This 

provision applies to prescription drug 

plans in the same manner that the 

provisions of section 1857(i) of the Act 

apply to an MA plan or MA–PD plan in 

relation to employer-sponsored group 

MA plans or MA–PD plans, including 

authorizing the establishment of 

separate premium amounts for enrollees 

of the employer-sponsored group 

prescription drug plan and limitations 

on enrollment in such plan to Part D 

eligible individuals participating in the 

employment-based retiree health 

coverage sponsored by the employer, 

labor organization, or the trustees of a 

fund established by one or more 

employers or labor organizations. 

(2) Use of waiver. Waivers or 

modifications approved by CMS under 

this section apply to any similarly 

situated prescription drug plan meeting 

the conditions of the waiver or 

modification. 

(d) Other Waivers. CMS waives any 

provision of this Part as applied to a 

section 1876 cost HMO/CMP (as defined 

in § 417.401) or PACE organization (as 

defined in § 460.6) that offers qualified 

prescription drug coverage under Part D 

to the extent CMS determines that the 

provision duplicates, or is in conflict 

with, provisions otherwise applicable to 

the 1876 cost HMO/CMP under section 

1876 of the Act or provisions applicable 

to PACE organizations under sections 

1894 and 1934 of the Act or as may be 

necessary in order to improve 

coordination of this Part with the 

benefits offered by 1876 cost HMOs/ 

CMPs or PACE organizations. 

(1) Application of Waiver. Any waiver 

or modification granted by CMS under 

this section will apply to any other 

similarly situated organization offering 

or seeking to offer qualified prescription 

drug coverage as an 1876 cost HMO/ 

CMP or as a PACE organization that 

meets the conditions of the waiver. 

(2) Request for waivers. Section 1876 

cost HMOs/CMPs or PACE 

organizations seeking to offer qualified 

prescription drug coverage may request 

from CMS in writing—

(i) A waiver of those requirements 

under Part D of Medicare that are 

duplicative of, or that are in conflict 

with provisions otherwise applicable to 

1876 cost HMOs/CMPs or PACE 

organizations. 

(ii) A waiver of a requirement under 

Medicare Part D, if such waiver would 

improve coordination of benefits 

provided by the section 1876 cost HMO/ 

CMP or PACE organization with the 

benefits under Part D. 

§ 423.462 Medicare secondary payer 

procedures. 

The provisions of § 422.108 of this 

chapter regarding Medicare secondary 

payer procedures apply to PDP sponsors 

in the same way as they apply to MA 

organizations under Part C of Title XVIII 

of the Act, except all references to MA 

organizations are considered references 

to PDP sponsors. 

§ 423.464 Coordination of Benefits With 

Other Providers of Prescription Drug 

Coverage. 

(a) General rule. A PDP sponsor and 

Medicare Advantage organization 

offering a MA–PD plan must permit 

State Pharmaceutical Assistance 

Programs described in paragraph (e) of 

this section and the plans described in 

paragraph (f) of this section to 

coordinate benefits with the 

prescription drug plan or MA–PD plan 

and must comply with all 

administrative processes and 

requirements established by CMS to 

ensure effective exchange of information 

and coordination between a Part D plan 

and a State pharmaceutical assistance 

program and other plans providing 

prescription drug coverage for—

(1) Payment of premiums and 

coverage; and 

(2) Payment for supplemental 

prescription drug benefits as described 

in § 423.104(g)(1)(ii) (including payment 

to a Medicare Part D plan on a lump 

sum per capita basis) for Part D eligible 

individuals enrolled in the Part D plan 

and the SPAP or other plan. 

(b) Medicare as primary payer. The 

requirements of this subpart do not 

change or affect the primary or 

secondary payor status of a Medicare 

Part D plan and a SPAP or other plan. 

A Medicare Part D plan is always the 

primary payor relative to a State 

Pharmaceutical Assistance Program. 

(c) User fees. CMS may impose user 

fees for the transmittal of information 

necessary for benefit coordination in 

accordance with administrative 

processes and requirements established 

by CMS to ensure effective exchange of 

information and coordination between a 

Part D plan and a State Pharmaceutical 

Assistance Program and other plans 

providing prescription drug coverage in 

a manner similar to the manner in 

which user fees are imposed under 

section 1842(h)(3)(B), except that CMS 

may retain a portion of user fees to 

defray costs in carrying out such 

procedures. CMS will not impose user 

fees under this subpart for a State 

pharmaceutical assistance program. 

(d) Cost management tools. The 

requirements of this subpart do not 

prevent an organization sponsoring a 

Medicare Part D plan from using cost 

management tools (including 

differential payments) under all 

methods of operation. 

(e) Coordination with State 

Pharmaceutical Assistance Programs. 

(1) Requirements to be a State 

Pharmaceutical Assistance Program 

(SPAP). A program operated by or under 

contract with a State will be considered 

to be a State Pharmaceutical Assistance 

Program for purposes of this part if it—

(i) Provides financial assistance for 

the purchase or provision of 

supplemental prescription drug 

coverage or benefits on behalf of Part D 

eligible individuals; 

(ii) Provides assistance to Part D 

eligible individuals in all Part D plans 

without discriminating based upon the 

Part D plan in which an individual 

enrolls; 

(iii) Meets the benefit coordination 

requirements specified in this part; and 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46833 

(iv) Does not follow or adopt rules 

that change or affect the primary payor 

status of a Part D plan. The definition 

of SPAP excludes State Medicaid 

programs, section 1115 demonstration 

programs, and any other program where 

the majority of the funding is from 

Federal grants, awards, contracts, 

entitlement programs, or other Federal 

sources of funding. 

(2) Special treatment under out-ofpocket rule. A PDP sponsor and 

Medicare Advantage organization 

offering a MA–PD plan shall collect 

information on and apply expenditures 

made by SPAPs for costs of covered Part 

D drugs meeting the definition of 

incurred costs (as described in 

§ 423.100) for purposes of reaching the 

out-of-pocket threshold provided under 

§ 423.104(e)(5)(iii). 

(3) Use of a single card. A card that 

is issued under § 423.120(c) for use 

under a Medicare Part D plan may also 

be used in connection with coverage of 

benefits provided under a State 

pharmaceutical assistance program and, 

in such a case, may contain an emblem 

or symbol indicating such connection. 

(4) Construction. Nothing in this 

subpart requires a State Pharmaceutical 

Assistance Program to coordinate with, 

or provide financial assistance to 

enrollees in, any Medicare Part D plan. 

(f) Coordination with other plans. (1) 

Definition of other plans. Other plans 

that provide prescription drug coverage 

include any of the following: 

(i) Medicaid programs. A State plan 

under title XIX of the Act, including 

such a plan operating under a waiver 

under section 1115 of the Act, if it meets 

the requirements of paragraph (e)(1)(ii) 

of this section. 

(ii) Group health plans. An employer 

group health plan as defined in 

§ 411.101. 

(iii) FEHBP. The Federal employees’

health benefits plan under chapter 89 of 

title 5, United States Code. 

(iv) Military coverage (including 

TRICARE). Coverage under chapter 55 

of title 10, United States Code. 

(v) Other health benefit plans or 

programs. Other health benefit plans or 

programs that provide coverage or 

financial assistance for the purchase or 

provision of prescription drug coverage 

on behalf of Medicare Part D eligible 

individuals as CMS may specify. 

(2) Treatment under out-of-pocket 

rule. A PDP sponsor and Medicare 

Advantage organization offering a MA–

PD plan shall exclude expenditures 

made by other plans for costs of covered 

Part D drugs for purposes of reaching 

the out-of-pocket threshold provided 

under § 423.104(e)(5)(iii). 

(3) Imposition of fees. A prescription 

drug plan sponsor or an organization 

offering an MA–PD plan may not 

impose fees on other plans that are 

unrelated to the cost of the coordination 

of benefits. 

Subpart K—Application Procedures 

and Contracts With PDP Sponsors 

§ 423.501 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

Business transaction means any of the 

following kinds of transactions: 

(1) Sale, exchange, or lease of 

property. 

(2) Loan of money or extension of 

credit. 

(3) Goods, services, or facilities 

furnished for a monetary consideration, 

including management services, but not 

including—

(i) Salaries paid to employees for 

services performed in the normal course 

of their employment; or 

(ii) Health services furnished to the 

PDP sponsor’s enrollees by pharmacies 

and other providers, by PDP sponsor 

staff, medical groups, or independent 

practice associations, or by any 

combination of those entities. 

Significant business transaction 

means any business transaction or series 

of transactions of the kind specified in 

the above definition of business 

transaction that, during any fiscal year 

of the PDP sponsor, have a total value 

that exceeds $25,000 or 5 percent of the 

PDP sponsor’s total operating expenses, 

whichever is less. 

Downstream entity means any party 

that enters into an acceptable written 

arrangement below the level of the 

arrangement between a PDP sponsor (or 

contract applicant) and a first tier entity. 

These written arrangements continue 

down to the level of the ultimate 

provider of both health and 

administrative services. 

First tier entity means any party that 

enters into an acceptable written 

arrangement with a PDP sponsor or 

contract applicant to provide 

administrative services or health care 

services for a Medicare eligible 

individual under Part D. 

Party in interest means the following: 

(1) Any director, officer, partner, or 

employee responsible for management 

or administration of a PDP sponsor. 

(2) Any person who is directly or 

indirectly the beneficial owner of more 

than 5 percent of the organization’s 

equity; or the beneficial owner of a 

mortgage, deed of trust, note, or other 

interest secured by and valuing more 

than 5 percent of the organization. 

(3) In the case of a PDP sponsor 

organized as a nonprofit corporation, an 

incorporator or member of the 

corporation under applicable State 

corporation law. 

(4) Any entity in which a person 

specified in paragraphs (1), (2), or (3) of 

this definition—

(i) Is an officer, director, or partner; or 

(ii) Has the kind of interest described 

in paragraphs (1), (2), or (3) of this 

definition. 

(5) Any person that directly or 

indirectly controls, is controlled by, or 

is under common control with the PDP 

sponsor. 

(6) Any spouse, child, or parent of an 

individual specified in paragraphs (1), 

(2), or (3) of this definition. 

Related entity means any entity that is 

related to the PDP sponsor by common 

ownership or control and—

(1) Performs some of the PDP 

sponsor’s management functions under 

contract or delegation; 

(2) Furnishes services to Medicare 

enrollees under an oral or written 

agreement; or 

(3) Leases real property or sells 

materials to the PDP sponsor at a cost 

of more than $2,500 during a contract 

period. 

§ 423.502 Application requirements. 

(a) Scope. This section sets forth 

application requirements for an entity 

that seeks a contract with CMS as a PDP 

sponsor. 

(b) Completion of an application. (1) 

In order to obtain a determination on 

whether it meets the requirements to 

become a PDP sponsor, an entity, or an 

individual authorized to act for the 

entity (the applicant), must complete a 

certified application in the form and 

manner required by CMS, including the 

following: 

(i) Documentation of appropriate State 

licensure or State certification that the 

entity is able to offer health insurance 

or health benefits coverage that meets 

State-specified standards as specified in 

subpart I of this part; or 

(ii) A Federal waiver as specified in 

subpart I of this part. 

(2) The authorized individual must 

describe thoroughly how the entity 

meets, or plans to meet, the 

requirements described in this part. 

(c) Responsibility for making 

determinations. CMS is responsible for 

determining whether an entity qualifies 

as a PDP sponsor and meets the 

requirements of this part. 

(d) Disclosure of application 

information under the Freedom of 

Information Act. An applicant 

submitting material that he or she 

believes is protected from disclosure 

under 5 U.S.C. 552, the Freedom of 

Information Act, or because of 

46834 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

exceptions provided in 45 CFR part 5 

(the Department’s regulations providing 

exceptions to disclosure), must label the 

material ‘‘privileged’’ and include an 

explanation of the applicability of an 

exception specified in 45 CFR part 5. 

§ 423.503 Evaluation and determination 

procedures for applications to be a 

sponsor. 

(a) Basis for evaluation and 

determination. (1) CMS evaluates an 

entity’s application for a contract as a 

PDP sponsor on the basis of information 

contained in the application itself and 

any additional information that CMS 

obtains through on-site visits, publicly 

available information, and any other 

appropriate procedures. 

(2) If the application is incomplete, 

CMS notifies the contract applicant and 

allows 10 days from the date of the 

notice for the contract applicant to 

furnish the missing information. 

(3) After evaluating all relevant 

information, CMS determines whether 

the contract applicant’s application 

meets the applicable requirements 

specified in § 423.504. 

(b) Use of information from a prior 

contracting period. If a PDP sponsor, 

Medicare Advantage Organization, or 

Medicare cost plan fails to comply with 

the terms of a previous year’s contract 

with CMS under title XVIII of the Act, 

or fails to complete a corrective action 

plan during the term of the contract, 

CMS may deny an application from a 

contract applicant based on the contract 

applicant’s failure to comply with that 

prior contract with CMS even if the 

contract applicant meets all of the 

current requirements. 

(c) Notice of determination. CMS 

notifies each applicant that applies for 

a contract as a PDP sponsor, under this 

part, of its determination on the 

application and the basis for the 

determination. The determination may 

be one of the following: 

(1) Approval of application. If CMS 

approves the application, it gives 

written notice to the contract applicant, 

indicating that it meets the requirements 

for a contract as a PDP sponsor. 

(2) Intent to deny. (i) If CMS finds that 

the contract applicant does not appear 

to meet the requirements for a PDP 

sponsor contract, it gives the contract 

applicant notice of intent to deny the 

application for a PDP contract and a 

summary of the basis for this 

preliminary finding. 

(ii) Within 10 days from the date of 

the notice, the contract applicant may 

respond in writing to the issues or other 

matters that were the basis for CMS’s 

preliminary finding and may revise its 

application to remedy any defects CMS 

identified. 

(d) Denial of application. If CMS 

denies the application, it gives written 

notice to the contract applicant 

indicating—

(1) That the contract applicant does 

not meet the contract requirements 

under Part D of title XVIII of the Act; 

(2) The reasons why the contract 

applicant does not meet the contract 

requirements; and 

(3) The contract applicant’s right to 

request reconsideration in accordance 

with the procedures specified in 

§ 423.644. 

(e) Oversight of continuing 

compliance. (1) CMS oversees a PDP 

sponsor’s continued compliance with 

the requirements for a PDP sponsor. 

(2) If a PDP sponsor no longer meets 

those requirements, CMS terminates the 

contract in accordance with § 423.509. 

§ 423.504 General provisions. 

(a) General rule. Subject to the 

provisions at § 423.265(a)(1) concerning 

submission of bids, to enroll 

beneficiaries in any prescription drug 

plan it offers and be paid on behalf of 

Medicare beneficiaries enrolled in those 

plans, a PDP sponsor must enter into a 

contract with CMS. The contract may 

cover more than one prescription drug 

plan. 

(b) Conditions necessary to contract 

as a PDP sponsor. Any entity seeking to 

contract as a PDP sponsor must—

(1) Complete an application as 

described in § 423.502. 

(2) Be organized and licensed under 

State law as a risk bearing entity eligible 

to offer health insurance or health 

benefits coverage in each State in which 

it offers a prescription drug plan, or 

have secured a Federal waiver, as 

described in subpart I of this part. 

(3) Meet the minimum enrollment 

requirements of § 423.512(a) unless 

waived under § 423.512(b) or (c). 

(4) Have administrative and 

management arrangements satisfactory 

to CMS, as demonstrated by at least the 

following: 

(i) A policy making body that 

exercises oversight and control over the 

PDP sponsor’s policies and personnel to 

ensure that management actions are in 

the best interest of the organization and 

its enrollees. 

(ii) Personnel and systems sufficient 

for the PDP sponsor to organize, 

implement, control, and evaluate 

financial and marketing activities, the 

furnishing of prescription drug services, 

the quality assurance, medical therapy 

management, and drug and or 

utilization management programs, and 

the administrative and management 

aspects of the organization. 

(iii) At a minimum, an executive 

manager whose appointment and 

removal are under the control of the 

policy making body. 

(iv) A fidelity bond or bonds, 

procured and maintained by the PDP 

sponsor, in an amount fixed by its 

policymaking body but not less than 

$100,000 per individual, covering each 

officer and employee entrusted with the 

handling of its funds. The bond may 

have reasonable deductibles, based 

upon the financial strength of the PDP 

sponsor. 

(v) Insurance policies or other 

arrangements, secured and maintained 

by the PDP sponsor and approved by 

CMS to insure the PDP sponsor against 

losses arising from professional liability 

claims, fire, theft, fraud, embezzlement, 

and other casualty risks. 

(vi) A compliance plan that consists 

of the following—

(A) Written policies, procedures, and 

standards of conduct articulating the 

organization’s commitment to comply 

with all applicable Federal and State 

standards. 

(B) The designation of a compliance 

officer and compliance committee 

accountable to senior management. 

(C) Effective training and education 

between the compliance officer and 

organization employees. 

(D) Effective lines of communication 

between the compliance officer and the 

organization’s employees. 

(E) Enforcement of standards through 

well-publicized disciplinary guidelines. 

(F) Procedures for internal monitoring 

and auditing. 

(G) Procedures for ensuring prompt 

responses to detected offenses and 

development of corrective action 

initiatives relating to the organization’s 

contract as a PDP sponsor. 

(1) If the PDP sponsor discovers from 

any source evidence of misconduct 

related to payment or delivery of 

prescription drug items or services 

under the contract, it must conduct a 

timely, reasonable inquiry into that 

misconduct; 

(2) If, after reasonable inquiry, the 

PDP sponsor has determined that the 

misconduct may violate criminal, civil 

or administrative law, the sponsor must 

report the existence of the misconduct 

to the appropriate Government authority 

within a reasonable period, but not 

more than 60 days after the 

determination that a violation may have 

occurred. If the potential violation 

relates to Federal criminal law, the civil 

False Claims Act, Federal Anti-Kickback 

provisions, the civil monetary penalties 

authorities (primarily under section 

1128A and 1857 of the Act), or related 

statutes enforced by the HHS Office of 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46835 

Inspector General, the report must be 

made to that Office. 

(3) The PDP sponsor must conduct 

appropriate corrective actions (for 

example, repayment of overpayments 

and disciplinary actions against 

responsible employees) in response to 

the potential violation referenced above. 

(4) The PDP sponsor’s contract must 

not have been non-renewed under 

§ 422.507 within the past 2 years 

unless—

(i) During the 6-month period, 

beginning on the date the organization 

notified CMS of the intention to nonrenew the most recent previous 

contract, there was a change in the 

statute or regulations that had the effect 

of increasing PDP sponsor payments in 

the payment area or areas at issue; or 

(ii) CMS has otherwise determined 

that circumstances warrant special 

consideration. 

(c) Contracting authority. Under 

section 1860D–12 (b)(3)(B) of the Act, 

CMS may enter into contracts under this 

part, or in order to carry out this part, 

without regard to Federal and 

Departmental acquisition regulations set 

forth in Title 48 of the CFR and 

provisions of law or other regulations 

relating to the making, performance, 

amendment, or modification of 

contracts of the United States if CMS 

determines that those provisions are 

inconsistent with the efficient and 

effective administration of the Medicare 

program. Some of the FAR provisions 

may apply to fallback plans. See 

subparts F and Q of this part for any 

contracting provisions unique to 

fallback plans. 

(d) Protection against fraud and 

beneficiary protections. (1) CMS 

annually audits the financial records 

(including, but not limited to, data 

relating to Medicare utilization and 

costs, including allowable reinsurance 

and risk corridor costs as well as low 

income subsidies and other costs) under 

this part of at least one-third of the PDP 

sponsors (including fallback plans) 

offering prescription drug plans. 

(2) Each contract under this section 

must provide that CMS, or any person 

or organization designated by CMS, has 

the right to—

(i) Inspect or otherwise evaluate the 

quality, appropriateness, and timeliness 

of services performed under the PDP 

sponsor’s contract; 

(ii) Inspect or otherwise evaluate the 

facilities of the organization when there 

is reasonable evidence of some need for 

the inspection; and 

(iii) Audit and inspect any books, 

contracts, and records of the PDP 

sponsor that pertain to—

(A) The ability of the organization or 

its first tier or downstream providers to 

bear the risk of potential financial 

losses; or 

(B) Services performed or 

determinations of amounts payable 

under the contract. 

(e) Severability of contracts. The 

contract must provide that, upon CMS’

request—

(1) The contract could be amended to 

exclude any State-licensed entity, or a 

PDP plan specified by CMS; and 

(2) A separate contract for any 

excluded plan or entity must be deemed 

to be in place when a request is made. 

§ 423.505 Contract provisions. 

(a) General rule. The contract between 

the PDP sponsor and CMS must contain 

the provisions specified in paragraph (b) 

of this section. 

(b) Specific provisions. The PDP 

sponsor agrees to comply with the 

following: 

(1) All the applicable requirements 

and conditions set forth in this part and 

in general instructions. 

(2) To accept new enrollments, make 

enrollments effective, process voluntary 

disenrollments, and limit involuntary 

disenrollments, as provided in subpart 

B of this part. 

(3) To comply with the prohibition in 

§ 423.34(a) on discrimination in 

beneficiary enrollment. 

(4) To provide the basic benefits as 

required under § 423.108 and, to the 

extent applicable, supplemental benefits 

under § 423.112. 

(5) To disclose information to 

beneficiaries in the manner and the 

form specified by CMS under § 423.128. 

(6) To operate quality assurance, cost 

and utilization management, medication 

therapy management, and fraud, abuse 

and waste programs as required under 

subpart D of this part. 

(7) To comply with all requirements 

in subpart M of this part governing 

coverage determinations, grievances, 

and appeals. 

(8) To comply with the reporting 

requirements in § 423.514 and the 

requirements in § 423.329(b)(3) for 

submitting drug claims and related 

information to CMS for its use in risk 

adjustment calculations. 

(9) Each contract under this part 

provides that—(i) The PDP sponsor 

offering a prescription drug plan must 

provide CMS with the information CMS 

determines is necessary to carry out 

payment provisions in subpart G of this 

part. 

(ii) CMS has the right, as applied 

under section 1860D–12(b)(3)(C) of the 

Act and in accordance with section 

1857(d)(2)(B) of the Act, to inspect and 

audit any books and records of a PDP 

sponsor that pertain to the information 

regarding costs provided to CMS under 

paragraph(9)(i) of this section. 

(10) To be paid under the contract in 

accordance with the payment rules in 

subpart G of this part. 

(11) To submit its bid, including all 

required information on premiums, 

benefits, and cost-sharing, by the due 

date, as provided in subpart F of this 

part. 

(12) That its contract may not be 

renewed or may be terminated in 

accordance with this subpart and 

subpart N of this part. 

(13) To comply with the 

confidentiality and enrollee record 

accuracy specified in § 423.136. 

(14) To comply with State law and 

preemption by Federal law 

requirements described in subpart I of 

this part. 

(15) To comply with the coordination 

requirements with plans and programs 

that provide prescription drug coverage 

as described in subpart J of this part. 

(16) To provide benefits by means of 

point of service systems to adjudicate 

drug claims, except when necessary to 

provide access in underserved areas, I/ 

T/U pharmacies (as defined in 

§ 423.100), and long-term care 

pharmacies. 

(c) Communication with CMS. The 

PDP sponsor must have the capacity to 

communicate with CMS electronically 

in accordance with CMS requirements. 

(d) Maintenance of records. The PDP 

sponsor agrees to maintain, for 6 years, 

books, records, documents, and other 

evidence of accounting procedures and 

practices that—

(1) Are sufficient to do the following: 

(i) Accommodate periodic auditing of 

the financial records (including data 

related to Medicare utilization, costs, 

and computation of the bid of PDP 

sponsors). 

(ii) Enable CMS to inspect or 

otherwise evaluate the quality, 

appropriateness, and timeliness of 

services performed under the contract 

and the facilities of the organization. 

(iii) Enable CMS to audit and inspect 

any books and records of the PDP 

sponsor that pertain to the ability of the 

organization to bear the risk of potential 

financial losses, or to services 

performed or determinations of amounts 

payable under the contract. 

(iv) Properly reflect all direct and 

indirect costs claimed to have been 

incurred and used in the preparation of 

the PDP sponsor’s bid and necessary for 

the calculation of gross covered 

prescription drug costs, allowable 

reinsurance costs, and allowable risk 

corridor costs (as defined in § 423.308). 

46836 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(v) Establish the basis for the 

components, assumptions, and analysis 

used by the PDP in determining the 

actuarial valuation of standard, basic 

alternative, or enhanced alternative 

coverage offered in accordance with the 

CMS guidelines specified in 

§ 423.265(b)(3). 

(2) Include records of the following: 

(i) Ownership and operation of the 

PDP sponsor’s financial, medical, and 

other record keeping systems. 

(ii) Financial statements for the 

current contract period and 6 prior 

periods. 

(iii) Federal income tax or 

informational returns for the current 

contract period and 6 prior periods. 

(iv) Asset acquisition, lease, sale, or 

other action. 

(v) Agreements, contracts, and 

subcontracts. 

(vi) Franchise, marketing, and 

management agreements. 

(vii) Matters pertaining to costs of 

operations. 

(viii) Amounts of income received by 

source and payment. 

(ix) Cash flow statements. 

(x) Any financial reports filed with 

other Federal programs or State 

authorities. 

(xi) All prescription drug claims for 

the current contract period and 6 prior 

periods. 

(xii) All price concessions (including 

concessions offered by manufacturers) 

for the current contract period and 6 

prior periods accounted for separately 

from other administrative fees. 

(e) Access to facilities and records. 

The PDP sponsor agrees to the 

following: 

(1) HHS, the Comptroller General, or 

their designee may evaluate, through 

inspection or other means—

(i) The quality, appropriateness, and 

timeliness of services furnished to 

Medicare enrollees under the contract; 

(ii) The facilities of the PDP sponsor; 

and 

(iii) The enrollment and 

disenrollment records for the current 

contract period and 6 prior periods. 

(2) HHS, the Comptroller General, or 

their designees may audit, evaluate, or 

inspect any books, contracts, medical 

records, patient care documentation, 

and other records of the PDP sponsor, 

related entity(s), contractor(s), 

subcontractor(s), or its transferee that 

pertain to any aspect of services 

performed, reconciliation of benefit 

liabilities, and determination of 

amounts payable under the contract, or 

as the Secretary may deem necessary to 

enforce the contract. 

(3) The PDP sponsor agrees to make 

available, for the purposes specified in 

paragraph (d) of this section, its 

premises, physical facilities and 

equipment, records relating to its 

Medicare enrollees, and any additional 

relevant information that CMS may 

require. 

(4) HHS, the Comptroller General, or 

their designee’s right to inspect, 

evaluate, and audit extends through 6 

years from the end of the final contract 

period or completion of audit, 

whichever is later unless—

(i) CMS determines there is a special 

need to retain a particular record or 

group of records for a longer period and 

notifies the PDP sponsor at least 30 days 

before the normal disposition date; 

(ii) There is a termination, dispute, or 

allegation of fraud or similar fault by the 

PDP sponsor, in which case the 

retention may be extended to 6 years 

from the date of any resulting final 

resolution of the termination, dispute, 

or fraud or similar fault; or 

(iii) CMS determines that there is a 

reasonable possibility of fraud or similar 

fault, in which case CMS may inspect, 

evaluate, and audit the PDP sponsor at 

any time. 

(f) Disclosure of information. The PDP 

sponsor agrees to submit to CMS—

(1) Certified financial information that 

must include the following: 

(i) Information as CMS may require 

demonstrating that the organization has 

a fiscally sound operation. 

(ii) Information as CMS may require 

pertaining to the disclosure of 

ownership and control of the PDP 

sponsor. 

(2) All information to CMS that is 

necessary for CMS to administer and 

evaluate the program and to 

simultaneously establish and facilitate a 

process for current and prospective 

beneficiaries to exercise choice in 

obtaining prescription drug coverage. 

This information includes, but is not 

limited to: 

(i) The benefits covered under a 

prescription drug plan. 

(ii) The PDP monthly basic 

beneficiary premium and PDP monthly 

supplemental beneficiary premium, if 

any, for the plan. 

(iii) The service area of each plan. 

(iv) Plan quality and performance 

indicators for the benefits under the 

plan including—

(A) Disenrollment rates for Medicare 

enrollees electing to receive benefits 

through the plan for the previous 2 

years; 

(B) Information on Medicare enrollee 

satisfaction; 

(C) The recent records regarding 

compliance of the plan with 

requirements of this part, as determined 

by CMS; and 

(D) Other information determined by 

CMS to be necessary to assist 

beneficiaries in making an informed 

choice regarding PDP plans. 

(v) Information about beneficiary 

appeals and their disposition. 

(vi) Information regarding all formal 

actions, reviews, findings, or other 

similar actions by States, other 

regulatory bodies, or any other 

certifying or accrediting organization. 

(vii) Any other information deemed 

necessary to CMS for the administration 

or evaluation of the Medicare program. 

(3) To its enrollees, all informational 

requirements under § 423.128(b) and, 

upon an enrollee’s request, the financial 

disclosure information required under 

§ 423.128(c)(4). 

(g) Beneficiary financial protections. 

The PDP sponsor agrees to comply with 

the following requirements: 

(1) Each PDP sponsor must adopt and 

maintain arrangements satisfactory to 

CMS to protect its enrollees from 

incurring liability for payment of any 

fees that are the legal obligation of the 

PDP sponsor. To meet this requirement, 

the PDP sponsor must—

(i) Ensure that all contractual or other 

written arrangements prohibit the 

organization’s contracting agents from 

holding any beneficiary enrollee liable 

for payment of any such fees; and 

(ii) Indemnify the beneficiary enrollee 

for payment of any fees that are the legal 

obligation of the PDP sponsor for 

covered prescription drugs furnished by 

non-contracting pharmacists, or that 

have not otherwise entered into an 

agreement with the PDP sponsor, to 

provide services to the organization’s 

beneficiary enrollees. 

(2) In meeting the requirements of this 

paragraph, other than the provider 

contract requirements specified in 

paragraph (g)(1)(i) of this section, the 

PDP sponsor may use—

(i) Contractual arrangements; 

(ii) Insurance acceptable to CMS; 

(iii) Financial reserves acceptable to 

CMS; or 

(iv) Any other arrangement acceptable 

to CMS. 

(h) Requirements of other laws and 

regulations. The PDP sponsor agrees to 

comply with—

(1) Title VI of the Civil Rights Act of 

1964 as implemented by regulations at 

45 CFR part 84. 

(2) The Age Discrimination Act of 

1975 as implemented by regulations at 

45 CFR part 91. 

(3) The Rehabilitation Act of 1973. 

(4) The Americans with Disabilities 

Act. 

(5) HIPAA Administrative 

Simplification rules at 45 CFR Parts 160, 

162, and 164. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46837 

(6) Other laws applicable to recipients 

of Federal funds. 

(7) All other applicable laws and 

rules. 

(8) PDP sponsors receiving Federal 

payments under PDP sponsor contracts, 

and related entities, contractors, and 

subcontractors paid by a PDP sponsor to 

fulfill its obligations under its contract 

with CMS, are subject to certain laws 

that are applicable to individuals and 

entities receiving Federal funds. PDP 

sponsors must inform all related 

entities, contractors and subcontractors 

that payments they receive are, in whole 

or in part, from Federal funds. 

(i) PDP sponsor relationship with 

related entities, contractors, and 

subcontractors. (1) Notwithstanding any 

relationship(s) that the PDP sponsor 

may have with related entities, 

contractors, or subcontractors, the PDP 

sponsor maintains ultimate 

responsibility for adhering to and 

otherwise fully complying with all 

terms and conditions of its contract with 

CMS. 

(2) The PDP sponsor agrees to require 

all related entities, contractors, or 

subcontractors to agree that—

(i) HHS, the Comptroller General, or 

their designees have the right to inspect, 

evaluate, and audit any pertinent 

contracts, books, documents, papers, 

and records of the related entity(s), 

contractor(s), or subcontractor(s) 

involving transactions related to CMS’

contract with the PDP sponsor; and 

(ii) HHS’, the Comptroller General’s, 

or their designee’s right to inspect, 

evaluate, and audit any pertinent 

information for any particular contract 

period exists through 6 years from the 

final date of the contract period or from 

the date of completion of any audit, 

whichever is later. 

(3) All contracts or written 

arrangements between PDP sponsors 

and providers, related entities, 

contractors, subcontractors, first tier and 

downstream entities must contain the 

following: 

(i) Enrollee protection provisions that 

provide, consistent with paragraph 

(g)(1) of this section, arrangements that 

prohibit pharmacies from holding an 

enrollee liable for payment of any fees 

that are the obligation of the PDP 

sponsor. 

(ii) Accountability provisions that 

indicate that the PDP sponsor may only 

delegate activities or functions to a 

pharmacy, related entity, contractor, or 

subcontractor in a manner consistent 

with requirements set forth at paragraph 

(i)(4) of this section. 

(iii) A provision requiring that any 

services or other activity performed by 

a related entity, contractor, 

subcontractor, or first-tier or 

downstream entity in accordance with a 

contract or written agreement are 

consistent and comply with the PDP 

sponsor’s contractual obligations. 

(4) If any of the PDP sponsors’

activities or responsibilities under its 

contract with CMS is delegated to other 

parties, the following requirements 

apply to any related entity, contractor, 

subcontractor, or pharmacy: 

(i) Written arrangements must specify 

delegated activities and reporting 

responsibilities. 

(ii) Written arrangements must either 

provide for revocation of the delegation 

activities and reporting requirements or 

specify other remedies in instances 

when CMS or the PDP sponsor 

determine that the parties have not 

performed satisfactorily. 

(iii) Written arrangements must 

specify that the PDP sponsor on an 

ongoing basis monitors the performance 

of the parties. 

(iv) All contracts or written 

arrangements must specify that the 

related entity, contractor, or 

subcontractor must comply with all 

applicable Federal laws, regulations, 

and CMS instructions. 

(5) If the PDP sponsor delegates 

selection of its prescription drug 

providers to another organization, the 

PDP sponsor’s written arrangements 

with that organization must state that 

the CMS-contracting PDP sponsor 

retains the right to approve, suspend, or 

terminate any such arrangement. 

(j) Additional contract terms. The PDP 

sponsor agrees to include in the contract 

other terms and conditions as CMS may 

find necessary and appropriate in order 

to implement requirements in this part. 

(k) Severability of contracts. The 

contract must provide that, upon CMS’s 

request—

(1) The contract is amended to 

exclude any State-licensed entity, or 

PDP sponsor specified by CMS; and 

(2) A separate contract for any 

excluded plan or entity is deemed to be 

in place when the request is made. 

(l) Certification of data that determine 

payment. (1) General rule. As a 

condition for receiving a monthly 

payment under subpart G of this part, 

the PDP sponsor agrees that its chief 

executive officer (CEO), chief financial 

officer (CFO), or an individual delegated 

the authority to sign on behalf of one of 

these officers, and who reports directly 

to the officer, must request payment 

under the contract on a document that 

certifies (based on best knowledge, 

information, and belief) the accuracy, 

completeness, and truthfulness of all 

data related to payment. The data may 

include specified enrollment 

information, claims data, bid 

submission data, and other data that 

CMS specifies. 

(2) Certification of enrollment and 

payment information. The CEO, CFO, or 

an individual delegated the authority to 

sign on behalf of one of these officers, 

and who reports directly to the officer, 

must certify (based on best knowledge, 

information, and belief) that each 

enrollee for whom the organization is 

requesting payment is validly enrolled 

in a program offered by the organization 

and the information CMS relies on in 

determining payment is accurate, 

complete, and truthful and acknowledge 

that this information will be used for the 

purposes of obtaining Federal 

reimbursement. 

(3) Certification of claims data. The 

CEO, CFO, or an individual delegated 

with the authority to sign on behalf of 

one of these officers, and who reports 

directly to the officer, must certify 

(based on best knowledge, information, 

and belief) that the claims data it 

submits under § 423.329(b)(3) are 

accurate, complete, and truthful and 

acknowledge that the claims data will 

be used for the purpose of obtaining 

Federal reimbursement. If the claims 

data are generated by a related entity, 

contractor, or subcontractor of a PDP 

sponsor, the entity, contractor, or 

subcontractor must similarly certify 

(based on best knowledge, information, 

and belief) the accuracy, completeness, 

and truthfulness of the data and 

acknowledge that the claims data will 

be used for the purposes of obtaining 

Federal reimbursement. 

(4) Certification of bid submission 

information. The CEO, CFO, or an 

individual delegated the authority to 

sign on behalf of one of these officers, 

and who reports directly to the officer, 

must certify (based on best knowledge, 

information, and belief) that the 

information in its bid submission and 

assumptions related to projected 

reinsurance and low income cost 

sharing subsidies is accurate, complete, 

and truthful and fully conforms to the 

requirements in § 423.265. 

(5) Certification of allowable costs for 

risk corridor and reinsurance 

information. The CEO, CFO, or an 

individual delegated the authority to 

sign on behalf of one of these officers, 

and who reports directly to the officer, 

must certify (based on best knowledge, 

information, and belief) that the 

information provided for purposes of 

supporting allowable costs, as defined 

in § 423.308, is accurate, complete, and 

truthful and fully conforms to the 

requirements in § 423.336(c) and 

§ 423.343(c) and acknowledge that this 

information will be used for the 

46838 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

purposes of obtaining Federal 

reimbursement. 

(6) Certification of Accuracy of Data 

for Price Comparison. The CEO, CFO, or 

an individual delegated the authority to 

sign on behalf of one of these officers, 

and who reports directly to the officer, 

must certify (based on best knowledge, 

information, and belief) that the 

information provided for purposes of 

price comparison is accurate, complete, 

and truthful. 

§ 423.506 Effective date and term of 

contract. 

(a) Effective date. The contract is 

effective on the date specified in the 

contract between the PDP sponsor and 

CMS. 

(b) Term of contract. Each contract is 

for a period of 12 months. The contract 

period for a fallback plan is specified in 

§ 423.871(b). 

(c) Renewal of contract. In accordance 

with § 423.507 of this subpart, contracts 

are renewed annually only if—

(1) CMS informs the PDP sponsor that 

it authorizes a renewal; and 

(2) The PDP sponsor has not provided 

CMS with a notice of intention not to 

renew. 

§ 423.507 Nonrenewal of Contract. 

(a) Nonrenewal by a PDP sponsor. (1) 

A PDP sponsor may elect not to renew 

its contract with CMS as of the end of 

the term of the contract for any reason 

provided it meets the timeframes for 

doing so set forth in paragraphs (a)(2) 

and (a)(3) of this section. 

(2) If a PDP sponsor does not intend 

to renew its contract, it must notify—

(i) CMS in writing by the first Monday 

of June in the year in which the contract 

ends; 

(ii) Each Medicare enrollee, at least 90 

days before the date on which the 

nonrenewal is effective. This notice 

must include a written description of 

alternatives available for obtaining 

Medicare prescription drug services 

within the PDP region, including MA–

PDs, and other PDPs, and must receive 

CMS approval prior to issuance; and 

(iii) The general public, at least 90 

days before the end of the current 

calendar year, by publishing a notice in 

one or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

service area. 

(3) If a PDP sponsor does not renew 

a contract under paragraph (a) of this 

section, CMS cannot enter into a 

contract with the organization for 2 

years unless there are special 

circumstances that warrant special 

consideration, as determined by CMS. 

(b) CMS decision not to renew. (1) 

CMS may elect not to authorize renewal 

of a contract for any of the following 

reasons: 

(i) For any of the reasons listed in 

§ 423.509(a) that also permits CMS to 

terminate the contract. 

(ii) The PDP sponsor has committed 

any of the acts in § 423.752 that 

supports the imposition of intermediate 

sanctions or civil money penalties 

under § 423.750. 

(2) Notice of decision. CMS provides 

notice of its decision whether to 

authorize renewal of the contract as 

follows: 

(i) To the PDP sponsor by May 1 of 

the contract year. 

(ii) If CMS decides not to authorize a 

renewal of the contract, to the PDP 

sponsor’s Medicare enrollees by mail at 

least 90 days before the end of the 

current calendar year. 

(iii) If CMS decides not to authorize 

a renewal of the contract, to the general 

public at least 90 days before the end of 

the current calendar year, by publishing 

a notice in one or more newspapers of 

general circulation in each community 

or county located in the PDP sponsor’s 

service area. 

(3) Notice of appeal rights. CMS gives 

the PDP sponsor written notice of its 

right to appeal the decision not to renew 

in accordance with § 423.642(b). 

§ 423.508 Modification or termination of 

contract by mutual consent. 

(a) General rule. A contract may be 

modified or terminated at any time by 

written mutual consent. 

(b) Notification of termination. If the 

contract is terminated by mutual 

consent, the PDP sponsor must provide 

notice to its Medicare enrollees and the 

general public as provided in paragraph 

(c) of this section. 

(c) Notification of modification. If the 

contract is modified by mutual consent, 

the PDP sponsor must notify its 

Medicare enrollees of any changes that 

CMS determines are appropriate for 

notification within timeframes specified 

by CMS. 

§ 423.509 Termination of contract by CMS. 

(a) Termination by CMS. CMS may 

terminate a contract for any of the 

following reasons if the PDP sponsor—

(1) Failed substantially to carry out 

the terms of its contract with CMS; 

(2) Is carrying out its contract with 

CMS in a manner that is inconsistent 

with the effective and efficient 

implementation of this part; 

(3) No longer meets the requirements 

of this part for being a contracting 

organization; 

(4) There is credible evidence that the 

PDP sponsor committed or participated 

in false, fraudulent, or abusive activities 

affecting the Medicare program, 

including submission of false or 

fraudulent data; 

(5) Experiences financial difficulties 

so severe that its ability to provide 

necessary prescription drug coverage is 

impaired to the point of posing an 

imminent and serious risk to the health 

of its enrollees, or otherwise fails to 

make services available to the extent 

that a risk to health exists; 

(6) Substantially fails to comply with 

the requirements in subpart M of this 

part relating to grievances and appeals; 

(7) Fails to provide CMS with valid 

risk adjustment, reinsurance and risk 

corridor related data as required under 

§ 423.329; 

(8) Substantially fails to comply with 

the service access requirements in 

§ 423.120; 

(9) Substantially fails to comply with 

the marketing requirements in 

§ 423.128; 

(10) Substantially fails to comply with 

the coordination with plans and 

programs that provide prescription drug 

coverage as described in subpart J of this 

part; or 

(11) Substantially fails to comply with 

the cost and utilization management, 

quality improvement, medication 

therapy management and fraud, abuse 

and waste program requirements as 

specified in subpart D of this part. 

(b) Notice of termination. If CMS 

decides to terminate a contract for 

reasons other than the grounds specified 

in § 423.509(a)(4) or (a)(5) of this 

section, it gives notice of the 

termination as follows: 

(1) Termination of contract by CMS. 

(i) CMS notifies the PDP sponsor in 

writing 90 days before the intended date 

of the termination. 

(ii) The PDP sponsor notifies its 

Medicare enrollees of the termination by 

mail at least 30 days before the effective 

date of the termination. 

(iii) The PDP sponsor notifies the 

general public of the termination at least 

30 days before the effective date of the 

termination by publishing a notice in 

one or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

service area. 

(2) Immediate termination of contract 

by CMS. (i) For terminations based on 

violations specified in § 423.509(a)(4) or 

§ 423.509(a)(5) of this section, CMS 

notifies the PDP sponsor in writing that 

its contract is terminated effective the 

date of the termination decision by 

CMS. If termination is effective in the 

middle of a month, CMS has the right 

to recover the prorated share of the 

prospective monthly payments made to 

the PDP sponsor covering the period of 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46839 

the month following the contract 

termination. 

(ii) CMS notifies the PDP sponsor’s 

Medicare enrollees in writing of CMS’s 

decision to terminate the PDP sponsor’s 

contract. This notice occurs no later 

than 30 days after CMS notifies the plan 

of its decision to terminate the PDP 

sponsor’s contract. CMS simultaneously 

informs the Medicare enrollees of 

alternative options for obtaining 

prescription drug coverage, including 

alternative PDP sponsors and MA–PDs 

in a similar geographic area. 

(iii) CMS notifies the general public of 

the termination no later than 30 days 

after notifying the plan of CMS’s 

decision to terminate the PDP sponsor’s 

contract. This notice is published in one 

or more newspapers of general 

circulation in each community or 

county located in the PDP sponsor’s 

service area. 

(c) Corrective action plan. (1) General 

rule. Before terminating a contract for 

reasons other than the grounds specified 

in paragraph (a)(4) or (a)(5) of this 

section, CMS provides the PDP sponsor 

with reasonable opportunity to develop 

and receive CMS approval of a 

corrective action plan to correct the 

deficiencies that are the basis of the 

proposed termination. 

(2) Exception. If a contract is 

terminated under § 423.509(a)(4) or 

§ 423.509(a)(5) of this section, the PDP 

sponsor does not have the opportunity 

to submit a corrective action plan. 

(d) Appeal rights. If CMS decides to 

terminate a contract, it sends written 

notice to the PDP sponsor informing it 

of its termination appeal rights in 

accordance with § 423.642. 

§ 423.510 Termination of contract by the 

PDP sponsor. 

(a) Cause for termination. The PDP 

sponsor may terminate its contract if 

CMS fails to substantially carry out the 

terms of the contract. 

(b) Notice of termination. The PDP 

sponsor must give advance notice as 

follows: 

(1) To CMS, at least 90 days before the 

intended date of termination. This 

notice must specify the reasons why the 

PDP sponsor is requesting contract 

termination. 

(2) To its Medicare enrollees, at least 

60 days before the termination effective 

date. This notice must include a written 

description of alternatives available for 

obtaining Medicare drug services within 

the services area, including alternative 

PDPs, MA–PDPs, and original Medicare 

and must receive CMS approval. 

(3) To the general public, at least 60 

days before the termination effective 

date by publishing a CMS-approved 

notice in one or more newspapers of 

general circulation in each community 

or county located in the PDP sponsor’s 

geographic area. 

(c) Effective date of termination. The 

effective date of the termination is 

determined by CMS and is at least 90 

days after the date CMS receives the 

PDP sponsor’s notice of intent to 

terminate. 

(d) CMS’s liability. CMS’s liability for 

payment to the PDP sponsor ends as of 

the first day of the month after the last 

month for which the contract is in 

effect. 

(e) Effect of termination by the 

organization. CMS will not enter into an 

agreement with an organization that has 

terminated its contract within the 

preceding 2 years unless there are 

circumstances that warrant special 

consideration, as determined by CMS. 

§ 423.512 Minimum enrollment 

requirements. 

(a) Basic rule. Except as provided in 

paragraph (b) of this section, CMS will 

not enter into a contract under this 

subpart unless the organization meets 

the following minimum enrollment 

requirement: 

(1) At least 5,000 individuals are 

enrolled for the purpose of receiving 

prescription drug benefits from the 

organization; or 

(2) At least 1,500 individuals are 

enrolled for purposes of receiving 

prescription drug benefits from the 

organization and the organization 

primarily serves individuals residing 

outside of urbanized areas as defined in 

§ 412.62(f) of this chapter; 

(3) Except as provided for in 

paragraph (b) of this section, a PDP 

sponsor must maintain a minimum 

enrollment as defined in paragraphs 

(a)(1) and (a)(2) of this section for the 

duration of its contract. 

(b) Minimum enrollment waiver. CMS 

waives the requirement of paragraphs 

(a)(1) and (a)(2) of this section during 

the first contract year for an 

organization in a region. 

§ 423.514 Reporting requirements. 

(a) Required information. Each PDP 

sponsor must have an effective 

procedure to develop, compile, 

evaluate, and report to CMS, to its 

enrollees, and to the general public, at 

the times and in the manner that CMS 

requires statistics indicating the 

following—

(1) The cost of its operations. 

(2) The patterns of utilization of its 

services. 

(3) The availability, accessibility, and 

acceptability of its services. 

(4) Information demonstrating that the 

PDP sponsor has a fiscally sound 

operation. 

(5) Other matters that CMS may 

require. 

(b) Significant business transactions. 

Each PDP sponsor must report to CMS 

annually, within 120 days of the end of 

its fiscal year (unless, for good cause 

shown, CMS authorizes an extension of 

time), the following: 

(1) A description of significant 

business transactions, as defined in 

§ 423.501, between the PDP sponsor and 

a party in interest, includes the 

following: 

(i) Indication that the costs of the 

transactions listed in paragraph (c) of 

this section do not exceed the costs that 

are incurred if these transactions were 

with someone who is not a party in 

interest; or 

(ii) If they do exceed, a justification 

that the higher costs are consistent with 

prudent management and fiscal 

soundness requirements. 

(2) A combined financial statement 

for the PDP sponsor and a party in 

interest if either of the following 

conditions is met: 

(i) Thirty five percent or more of the 

costs of operation of the PDP sponsor go 

to a party in interest. 

(ii) Thirty five percent or more of the 

revenue of a party in interest is from the 

PDP sponsor. 

(c) Requirements for combined 

financial statements. 

(1) The combined financial statements 

required by paragraph (b)(2) of this 

section must display in separate 

columns the financial information for 

the PDP sponsor and each of the parties 

in interest. 

(2) Inter-entity transactions must be 

eliminated in the consolidated column. 

(3) The statements must be examined 

by an independent auditor in 

accordance with generally accepted 

accounting principles and must include 

appropriate opinions and notes. 

(4) Upon written request from a PDP 

sponsor showing good cause, CMS may 

waive the requirement that the 

organization’s combined financial 

statement include the financial 

information required in this paragraph 

(c) of this section for a particular entity. 

(d) Reporting and disclosure under 

Employee Retirement Income Security 

Act of 1974 (ERISA). (1) For any 

employees’ health benefits plan that 

includes a PDP sponsor in its offerings, 

the PDP sponsor must furnish, upon 

request, the information the plan needs 

to fulfill its reporting and disclosure 

obligations (for the particular PDP 

sponsor) under the Employee 

46840 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Retirement Income Security Act of 1974 

(ERISA). 

(2) The PDP sponsor must furnish the 

information to the employer or the 

employer’s designee, or to the plan 

administrator, as the term 

‘‘administrator’’ is defined in ERISA. 

(e) Loan information. Each 

organization must notify CMS of any 

loans or other special financial 

arrangements it makes with contractors, 

subcontractors and related entities. 

(f) Enrollee access to information. 

Each PDP sponsor must make the 

information reported to CMS under this 

section available to its enrollees upon 

reasonable request. 

§ 423.516 Prohibition of midyear 

implementation of significant new 

regulatory requirements. 

CMS may not implement, other than 

at the beginning of a calendar year, 

regulations under this section that 

impose new, significant regulatory 

requirements on a PDP sponsor or a 

prescription drug plan. 

Subpart L—Effect of Change of 

Ownership or Leasing of Facilities 

During Term of Contract 

§ 423.551 General provisions. 

(a) Change of ownership. The 

following constitute a change of 

ownership: 

(1) Partnership. The removal, 

addition, or substitution of a partner, 

unless the partners expressly agree 

otherwise as permitted by applicable 

State law, constitutes a change of 

ownership. 

(2) Asset sale. Transfer of 

substantially all the assets of the 

sponsor to another party constitutes a 

change of ownership. 

(3) Corporation. The merger of the 

PDP sponsor’s corporation into another 

corporation or the consolidation of the 

PDP sponsor’s organization with one or 

more other corporations, resulting in a 

new corporate body. 

(b) Change of ownership, exception. 

Transfer of corporate stock or the merger 

of another corporation into the PDP 

sponsor’s corporation, with the PDP 

sponsor surviving, does not ordinarily 

constitute change of ownership. 

(c) Advance notice requirement. (1) A 

PDP sponsor that has a Medicare 

contract in effect under § 423.502 and is 

considering or is negotiating a change in 

ownership must notify CMS at least 60 

days before the anticipated effective 

date of the change. The PDP sponsor 

must also provide updated financial 

information and a discussion of the 

financial and solvency impact of the 

change of ownership on the surviving 

organization. 

(2) If the PDP sponsor fails to give 

CMS the required notice in a timely 

manner, it continues to be liable for 

payments that CMS makes to it on 

behalf of Medicare enrollees after the 

date of change of ownership. 

(d) Novation agreement defined. A 

novation agreement is an agreement 

among the current owner of the PDP 

sponsor, the prospective new owner, 

and CMS—

(1) That is embodied in a document 

executed and signed by all 3 parties; 

(2) That meets the requirements of 

§ 423.552; and 

(3) Under which CMS recognizes the 

new owner as the successor in interest 

to the current owner’s Medicare 

contract. 

(e) Effect of change of ownership 

without novation agreement. Except to 

the extent provided in paragraph (c)(2) 

of this section, the effect of a change of 

ownership without a novation 

agreement is that—

(1) The existing contract becomes 

invalid; and 

(2) If the new owner wishes to 

participate in the Medicare program, it 

must apply for, and enter into, a 

contract in accordance with subpart K of 

this part. 

(f) Effect of change of ownership with 

novation agreement. If the PDP sponsor 

submits a novation agreement that 

meets the requirements of § 423.552 and 

CMS signs it, the new owner becomes 

the successor in interest to the current 

owner’s Medicare contract under 

§ 423.502. 

§ 423.552 Novation agreement 

requirements. 

(a) Conditions for CMS approval of a 

novation agreement. CMS approves a 

novation agreement if the following 

conditions are met: 

(1) Advance notification. The PDP 

sponsor notifies CMS at least 60 days 

before the date of the proposed change 

of ownership. The PDP sponsor also 

provides CMS with updated financial 

information and a discussion of the 

financial and solvency impact of the 

change of ownership on the surviving 

organization. 

(2) Advance submittal of agreement. 

The PDP sponsor submits to CMS, at 

least 30 days before the proposed 

change of ownership date, three signed 

copies of the novation agreement 

containing the provisions specified in 

paragraph (b) of this section, and one 

copy of other relevant documents 

required by CMS. 

(3) CMS’s determination. When 

reviewing a novation agreement, CMS 

makes a determination concerning the 

following—

(i) The proposed new owner is in fact 

a successor in interest to the contract. 

(ii) Recognition of the new owner as 

a successor in interest to the contract is 

in the best interest of the Medicare 

program. 

(iii) The successor organization meets 

the requirements to qualify as a PDP 

sponsor under subpart K of this part. 

(b) Provisions of a novation 

agreement. A valid novation agreement 

requires the following: 

(1) Assumption of contract 

obligations. The new owner must 

assume all obligations under the 

contract. 

(2) Waiver of right to reimbursement. 

The previous owner must waive its 

rights to reimbursement for covered 

services furnished during the rest of the 

current contract period. 

(3) Guarantee of performance. The 

previous owner must—

(i) Guarantee performance of the 

contract by the new owner during the 

contract period; or 

(ii) Post a performance bond that is 

satisfactory to CMS. 

(4) Records access. The previous 

owner must agree to make its books and 

records and other necessary information 

available to the new owner and to CMS 

to permit an accurate determination of 

costs for the final settlement of the 

contract period. 

§ 423.553 Effect of leasing of a PDP 

sponsor’s facilities. 

(a) General effect of leasing. If a PDP 

sponsor leases all or part of its facilities 

to another entity, the other entity does 

not acquire PDP sponsor status under 

section 1860D–12(b) of the Act. 

(b) Effect of lease of all facilities. (1) 

If a PDP sponsor leases all of its 

facilities to another entity, the contract 

terminates. 

(2) If the other entity wishes to 

participate in Medicare as a PDP 

sponsor, it must apply for and enter into 

a contract in accordance with § 423.502. 

(c) Effect of partial lease of facilities. 

If the PDP sponsor leases part of its 

facilities to another entity, its contract 

with CMS remains in effect while CMS 

surveys the PDP sponsor to determine 

whether it continues to be in 

compliance with the applicable 

requirements and qualifying conditions 

specified in subpart K of this part. 

Subpart M—Grievances, Coverage 

Determinations, and Appeals 

§ 423.560 Definitions. 

As used in this subpart, unless the 

context indicates otherwise—

Appeal means any of the procedures 

that deal with the review of adverse 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46841 

coverage determinations made by the 

PDP sponsor on the benefits under a 

prescription drug plan the enrollee 

believes he or she is entitled to receive, 

including delay in providing or 

approving the drug coverage (when a 

delay would adversely affect the health 

of the enrollee), or on any amounts the 

enrollee must pay for the drug coverage, 

as defined in § 423.566(b). These 

procedures include redeterminations by 

the PDP sponsor, and if necessary, 

appeals to an independent review 

entity, hearings before ALJs, review by 

the Medicare Appeals Council (MAC), 

and judicial review. An appeal does not 

include a grievance or a request for an 

exception to a tiered cost-sharing 

structure or formulary. 

Authorized representative means an 

individual authorized by an enrollee, or 

under State law, to act on his or her 

behalf in obtaining a coverage 

determination or in dealing with any of 

the levels of the appeals process, subject 

to the rules described in part 422, 

subpart M of this chapter, to the extent 

they are appropriate, unless otherwise 

stated in this subpart. 

Drug Use means an enrollee is 

receiving the drug in the course of 

treatment, including time off if it is part 

of the treatment. 

Enrollee means a Part D eligible 

individual, or his or her authorized 

representative, who has elected a 

prescription drug plan offered by a PDP 

sponsor. 

Grievance means any complaint or 

dispute, other than one that involves a 

coverage determination, expressing 

dissatisfaction with any aspect of a PDP 

sponsor’s operations, activities, or 

behavior, regardless of whether 

remedial action is requested. 

Physician has the meaning given the 

term in section 1861(r) of the Act. 

Reconsideration means a review of an 

adverse coverage determination by an 

independent review entity (IRE), the 

evidence and findings upon which it 

was based, and any other evidence the 

enrollee submits or the IRE obtains. 

Redetermination means a review of an 

adverse coverage determination by a 

PDP sponsor, the evidence and findings 

upon which it is based, and any other 

evidence the enrollee submits or the 

PDP sponsor obtains. 

§ 423.562 General provisions. 

(a) Responsibilities of the PDP 

sponsor. A PDP sponsor must meet all 

of the following requirements. 

(1) A PDP sponsor, for each 

prescription drug plan that it offers, 

must establish and maintain—

(i) A grievance procedure as described 

in § 423.564 for addressing issues that 

do not involve coverage determinations; 

(ii) A procedure for making timely 

coverage determinations; 

(iii) A procedure for handling 

exceptions to a tiered cost-sharing 

structure; 

(iv) A procedure for handling 

exceptions to a formulary; and 

(v) Redetermination and appeal 

procedures that meet the requirements 

of this subpart for issues that involve 

coverage determinations. 

(2) A PDP sponsor must ensure that 

all enrollees receive written information 

about the—

(i) Grievance and appeal procedures 

that are available to them through the 

PDP sponsor; and 

(ii) Complaint process available to the 

enrollee under the QIO process as set 

forth under section 1154(a)(14) of the 

Act. 

(3) In accordance with subpart K of 

this part, if the PDP sponsor delegates 

any of its responsibilities under this 

subpart to another entity or individual 

through which the sponsor provides 

covered benefits, the PDP sponsor is 

ultimately responsible for ensuring that 

the entity or individual satisfies the 

relevant requirements of this subpart. 

(b) Rights of PDP enrollees. In 

accordance with the provisions of this 

subpart, enrollees have all of the 

following rights in relation to PDP 

sponsors: 

(1) The right to have grievances 

between the enrollee and the PDP 

sponsor heard and resolved by the 

sponsor, as described in § 423.564. 

(2) The right to a timely coverage 

determination by the sponsor, as 

specified in § 423.566. 

(3) The right to request from the 

sponsor an expedited coverage 

determination, as specified in § 423.570. 

(4) The right to request from the 

sponsor an exception to a PDP’s tiered 

cost-sharing structure or formulary, as 

specified in § 423.578. 

(5) If dissatisfied with any part of a 

coverage determination, all of the 

following appeal rights: 

(i) The right to a redetermination of 

the adverse coverage determination by 

the PDP sponsor, as specified in 

§ 423.580. 

(ii) The right to request an expedited 

redetermination, as provided under 

§ 423.584. 

(iii) If, as a result of a redetermination, 

a PDP sponsor affirms, in whole or in 

part, its adverse coverage determination, 

the right to a reconsideration by an 

independent review entity (IRE) 

contracted by CMS, as specified in 

§ 423.600. 

(iv) The right to an ALJ hearing if the 

amount in controversy meets the 

requirements in § 423.610 and part 422, 

subpart M of this chapter. 

(v) The right to request MAC review 

of the ALJ hearing decision, as specified 

in § 423.620. 

(vi) The right to judicial review of the 

hearing decision if the amount in 

controversy meets the requirements in 

§ 423.630 and part 422, subpart M of 

this chapter. 

(c) Limits on when this subpart 

applies. (1) If an enrollee has no further 

liability to pay for prescription drugs 

furnished through a PDP, a 

determination regarding these items or 

services is not subject to appeal. 

(2) If an enrollee seeks coverage of 

prescription drugs received from a nonnetwork provider (that is, a non-network 

pharmacy), except in those situations in 

which, under subpart C of this part, the 

PDP is obligated to cover such drugs, a 

determination regarding the 

prescription drugs is not subject to 

appeal. 

(d) When other regulations apply. 

Unless this subpart provides otherwise, 

the regulations in part 422, subpart M of 

this chapter (concerning the 

administrative review and hearing 

processes under titles II and XVIII, and 

representation of parties under title 

XVIII of the Act) and any interpretive 

rules or CMS rulings issued under these 

regulations, apply under this subpart to 

the extent they are appropriate. 

§ 423.564 Grievance procedures. 

(a) General rule. Each PDP sponsor 

must provide meaningful procedures for 

timely hearing and resolving grievances 

between enrollees and the sponsor or 

any other entity or individual through 

whom the sponsor provides covered 

benefits under any PDP it offers. 

(b) Distinguished from appeals. 

Grievance procedures are separate and 

distinct from appeal procedures, which 

address coverage determinations as 

defined in § 423.566(b). Upon receiving 

a complaint, a PDP sponsor must 

promptly determine and inform the 

enrollee whether the complaint is 

subject to its grievance procedures or its 

appeal procedures. 

(c) Distinguished from the quality 

improvement organization complaint 

process. Under section 1154(a)(14) of 

the Act, the quality improvement 

organization (QIO) must review 

enrollees’ written complaints about the 

quality of services they have received 

under the Medicare program. This 

process is separate and distinct from the 

grievance procedures of the PDP 

sponsor. For quality of care issues, an 

enrollee may file a grievance with the 

46842 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

PDP sponsor, file a written complaint 

with the QIO, or both. For any 

complaint submitted to a QIO, the PDP 

sponsor must cooperate with the QIO in 

resolving the complaint. 

(d) Expedited grievances. A PDP 

sponsor must respond to an enrollee’s 

grievance within 24 hours if—

(1) The complaint involves a PDP 

sponsor’s decision to invoke an 

extension relating to a coverage 

determination or redetermination. 

(2) The complaint involves a PDP 

sponsor’s refusal to grant an enrollee’s 

request for an expedited coverage 

determination under § 423.570 or 

expedited redetermination under 

§ 423.584, and the enrollee has not yet 

purchased or received the drug that is 

in dispute. 

(e) Record keeping. The PDP sponsor 

must have an established process to 

track and maintain records on all 

grievances received both orally and in 

writing, including, at a minimum, the 

date of receipt, final disposition of the 

grievance, and the date that the PDP 

sponsor notified the enrollee of the 

disposition. 

§ 423.566 Coverage determinations. 

(a) Responsibilities of the PDP 

sponsor. Each PDP sponsor must have a 

procedure for making timely coverage 

determinations in accordance with the 

requirements of this subpart regarding 

the prescription drug benefits an 

enrollee is entitled to receive under a 

PDP, including basic coverage as 

specified in § 423.108 and supplemental 

coverage as specified in § 423.112, and 

the amount, if any, that the enrollee is 

required to pay for a drug. The PDP 

sponsor must have a standard procedure 

for making determinations, in 

accordance with § 423.568, and an 

expedited procedure for situations in 

which applying the standard procedure 

may seriously jeopardize the enrollee’s 

life, health, or ability to regain 

maximum function, in accordance with 

§ 423.570. 

(b) Actions that are coverage 

determinations. The following actions 

by a PDP sponsor are coverage 

determinations: 

(1) Failure to provide or pay for a 

covered Part D drug (including failure to 

pay because the drug is not on the 

plan’s formulary, because the drug is 

determined not to be medically 

necessary, because the drug is furnished 

by an out-of-network pharmacy, or 

because the sponsor determines that the 

drug is otherwise excluded under 

section 1862(a) of the Act) that the 

enrollee believes may be furnished by 

the PDP. 

(2) Failure to provide a coverage 

determination in a timely manner, when 

a delay would adversely affect the 

health of the enrollee. 

(3) A decision on the amount of cost 

sharing for a drug. 

(4) A decision on whether a drug is a 

preferred drug for an enrollee. 

(c) Who can request a coverage 

determination. Individuals who can 

request a standard or expedited 

coverage determination are—

(1) The enrollee, including his or her 

authorized representative; or 

(2) The prescribing physician, on 

behalf of the enrollee. 

§ 423.568 Standard timeframe and notice 

requirements for coverage determinations. 

(a) Timeframe for requests for drug 

benefits. 

(1) When a party makes a request for 

a drug benefit, the PDP sponsor must 

notify the enrollee of its determination 

as expeditiously as the enrollee’s health 

condition requires, but no later than 14 

calendar days after receipt of the 

request. 

(2) The PDP sponsor may extend the 

timeframe by up to 14 calendar days 

under the following circumstances: 

(i) If the enrollee requests the 

extension. 

(ii) If the sponsor justifies a need for 

additional information and explains 

how the delay is in the interest of the 

enrollee (for example, the receipt of 

additional medical evidence may 

change a sponsor’s decision to deny). 

(3) If the PDP sponsor extends the 

timeframe, it must notify the enrollee in 

writing of the reasons for the delay, and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the sponsor’s decision to 

invoke an extension. 

(4) For extensions, the PDP sponsor 

must notify the enrollee of its 

determination as expeditiously as the 

enrollee’s health condition requires, but 

no later than upon expiration of the 

extension. 

(b) Timeframe for requests for 

payment. When a party makes a request 

for payment, the PDP sponsor must 

notify the enrollee of its determination 

no later than 30 calendar days after 

receipt of the request. 

(c) Written notice for PDP sponsor 

denials. If a PDP sponsor decides to 

deny a drug benefit, in whole or in part, 

it must give the enrollee written notice 

of the determination. 

(d) Form and content of the denial 

notice. The notice of any denial under 

paragraph (c) of this section must—

(1) Use approved notice language in a 

readable and understandable form; 

(2) State the specific reasons for the 

denial; 

(3) Inform the enrollee of his or her 

right to a redetermination; 

(i) For drug coverage denials, describe 

both the standard and expedited 

redetermination processes, including 

the enrollee’s right to, and conditions 

for, obtaining an expedited 

redetermination and the rest of the 

appeal process; 

(ii) For payment denials, describe the 

standard redetermination process and 

the rest of the appeal process; and 

(4) Comply with any other notice 

requirements specified by CMS. 

(e) Effect of failure to provide timely 

notice. If the PDP sponsor fails to 

provide the enrollee with timely notice 

of a coverage determination as specified 

in subparagraph (a) of this section, this 

failure itself constitutes an adverse 

determination and may be appealed. 

§ 423.570 Expediting certain coverage 

determinations. 

(a) Request for expedited 

determination. An enrollee or an 

enrollee’s prescribing physician may 

request that a PDP sponsor expedite a 

coverage determination involving issues 

described in § 423.566(b). This does not 

include requests for payment of 

prescription drugs already furnished. 

(b) How to make a request. (1) To ask 

for an expedited determination, an 

enrollee or an enrollee’s prescribing 

physician on behalf of the enrollee must 

submit an oral or written request 

directly to the PDP sponsor, or if 

applicable, to the entity responsible for 

making the determination, as directed 

by the PDP sponsor. 

(2) A prescribing physician may 

provide oral or written support for an 

enrollee’s request for an expedited 

determination. 

(c) How the PDP sponsor must process 

requests. The PDP sponsor must 

establish and maintain the following 

procedures for processing requests for 

expedited determinations: 

(1) An efficient and convenient means 

for individuals to submit oral or written 

requests. 

(2) Documentation of all oral requests 

in writing and maintain the 

documentation in the case file. 

(3) Prompt decisions on expediting a 

determination, based on the following 

requirements: 

(i) For a request made by an enrollee, 

provide an expedited determination if it 

determines that applying the standard 

timeframe for making a determination 

may seriously jeopardize the life or 

health of the enrollee or the enrollee’s 

ability to regain maximum function. 

(ii) For a request made or supported 

by an enrollee’s prescribing physician, 

provide an expedited determination if 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46843 

the physician indicates that applying 

the standard timeframe for making a 

determination may seriously jeopardize 

the life or health of the enrollee or the 

enrollee’s ability to regain maximum 

function. 

(d) Actions following denial. If a PDP 

sponsor denies a request for expedited 

determination, it must take the 

following actions: 

(1) Automatically transfer the request 

to the standard timeframe and make the 

determination within the 14-calendar 

day timeframe established in 

§ 423.568(a) for a standard 

determination. The 14-calendar day 

period begins with the day the PDP 

sponsor receives the request for 

expedited determination. 

(2) Give the enrollee prompt oral 

notice of the denial and subsequently 

deliver, within 3 calendar days, a 

written letter that—

(i) Explains that the PDP sponsor 

must process the request using the 14- 

calendar day timeframe for standard 

determinations; 

(ii) Informs the enrollee of the right to 

file an expedited grievance if he or she 

disagrees with the PDP sponsor’s 

decision not to expedite; 

(iii) Informs the enrollee of the right 

to resubmit a request for an expedited 

determination with the prescribing 

physician’s support; and 

(iv) Provides instructions about the 

grievance process and its timeframes. 

(e) Actions on accepted requests for 

expedited determination. If a PDP 

sponsor grants a request for expedited 

determination, it must make the 

determination and give notice in 

accordance with § 423.572. 

§ 423.572 Timeframes and notice 

requirements for expedited coverage 

determinations. 

(a) Timeframe for determinations and 

notification. Except as provided in 

paragraph (b) of this section, a PDP 

sponsor that approves a request for 

expedited determination must make its 

determination and notify the enrollee 

(and the prescribing physician involved, 

as appropriate) of its decision, whether 

adverse or favorable, as expeditiously as 

the enrollee’s health condition requires, 

but no later than 72 hours after 

receiving the request. 

(b) Extensions of timeframe. (1) 

General rule. The PDP sponsor may 

extend the 72-hour timeframe by up to 

14 calendar days if the enrollee requests 

the extension or if the sponsor justifies 

a need for additional information and 

how the delay is in the interest of the 

enrollee (for example, the receipt of 

additional medical evidence may 

change a PDP sponsor’s decision to 

deny). 

(2) Notification of extension. When 

the PDP sponsor extends the deadline, 

it must notify the enrollee in writing of 

the reasons for the delay and inform the 

enrollee of the right to file an expedited 

grievance if he or she disagrees with the 

sponsor’s decision to invoke an 

extension. 

(3) Timeframe for notification of 

extension. The PDP sponsor must notify 

the enrollee of its determination as 

expeditiously as the enrollee’s health 

condition requires, but no later than 

upon expiration of the extension. 

(c) Confirmation of oral notice. If the 

PDP sponsor first notifies an enrollee of 

an adverse expedited determination 

orally, it must mail written confirmation 

to the enrollee within 3 calendar days 

of the oral notification. 

(d) Content of the notice of expedited 

determination. 

(1) The notice of any expedited 

determination must state the specific 

reasons for the determination in 

understandable language. 

(2) If the determination is not 

completely favorable to the enrollee, the 

notice must—

(i) Inform the enrollee of his or her 

right to a redetermination; 

(ii) Describe both the standard and 

expedited redetermination processes, 

including the enrollee’s right to request, 

and conditions for obtaining, an 

expedited redetermination, and the rest 

of the appeal process; and 

(iii) Comply with any other 

requirements specified by CMS. 

(e) Effect of failure to provide a timely 

notice. If the PDP sponsor fails to 

provide the enrollee with timely notice 

of an expedited coverage determination 

as specified in this section, this failure 

constitutes an adverse coverage 

determination and may be appealed. 

§ 423.576 Effect of a coverage 

determination. 

The coverage determination is 

binding on the PDP sponsor and the 

enrollee unless it is reconsidered under 

§ 423.580 through § 423.630 or is 

reopened and revised under § 423.634. 

§ 423.578 Exceptions process. 

(a) Requests for exceptions to a PDP’s 

tiered cost-sharing structure. Each PDP 

sponsor that provides prescription drug 

benefits for Part D drugs and manages 

this benefit through the use of a tiered 

formulary must establish and maintain 

an exceptions process. 

(1) The sponsor’s exceptions process 

must address each of the following 

circumstances: 

(i) The enrollee is using a drug and 

the applicable tiered cost-sharing 

structure changes mid-year; 

(ii) The enrollee is using a drug and 

the applicable tiered cost-sharing 

structure changes at the beginning of a 

new plan year; or 

(iii) There is no pre-existing use of the 

drug by the enrollee. 

(2) A PDP sponsor’s exception criteria 

must include, but are not limited to—

(i) A description of the criteria a PDP 

sponsor uses to evaluate a 

determination made by the enrollee’s 

prescribing physician under paragraph 

(a)(3) of this section. 

(ii) Consideration of the cost 

difference between the preferred drug 

and the requested prescription drug that 

is the subject of the exceptions request. 

(iii) Consideration of whether the 

requested prescription drug that is the 

subject of the exceptions request is the 

therapeutic equivalent of any other drug 

on the sponsor’s formulary. For 

purposes of this subpart, drug products 

evaluated as ‘‘therapeutically 

equivalent’’ can be expected to have 

equal effect and no difference when 

substituted for the requested drug. 

(iv) Consideration of the number of 

drugs on the sponsor’s formulary that 

are in the same class and category as the 

requested prescription drug that is the 

subject of the exceptions request. 

(3) An enrollee, the enrollee’s 

authorized representative, or the 

enrollee’s prescribing physician may file 

a request for an exception. 

(4) A PDP sponsor may require a 

written certification from the enrollee’s 

prescribing physician that the preferred 

drug on the sponsor’s formulary is not 

as effective for the enrollee as the 

requested drug that is the subject of the 

requested exception, or that the 

preferred drug on the sponsor’s 

formulary may have adverse effects for 

the enrollee, or both. 

(5) The PDP sponsor may require the 

written certification to include only the 

following information: 

(i) The enrollee’s name, group or 

contract number, subscriber number or 

other information necessary to identify 

the enrollee. 

(ii) The enrollee’s patient history. 

(iii) The primary diagnosis related to 

the requested prescription drug that is 

the subject of the exceptions request. 

(iv) Why the ‘‘preferred drug’’ is not 

acceptable for the enrollee. 

(v) Why the prescription drug that is 

the subject of the exceptions request is 

needed for the enrollee. 

(vi) Any other information reasonably 

necessary to evaluate the medical 

necessity of the exceptions request. 

(b) Request for exceptions involving a 

nonformulary drug. Each PDP sponsor 

46844 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

that provides prescription drug benefits 

for Part D drugs and manages this 

benefit through the use of a formulary 

must establish and maintain an 

exceptions process. Formulary use 

includes the application of a dose 

restriction that causes a particular drug 

not to be covered for the number of 

doses prescribed or a step therapy 

requirement that causes a particular 

drug not to be covered until the 

requirements of the sponsor’s coverage 

policy are met. 

(1) The sponsor’s exceptions process 

must address each of the following 

circumstances: 

(i) Coverage of a prescription drug 

that is not covered based on the PDP 

sponsor’s formulary. 

(ii) Continued coverage of a particular 

prescription drug that the sponsor is 

discontinuing coverage on the formulary 

for reasons other than safety or because 

the prescription drug cannot be 

supplied by or was withdrawn from the 

market by the drug’s manufacturer. 

(iii) An exception to a sponsor’s 

coverage policy that causes a 

prescription drug not to be covered until 

the step therapy requirement is satisfied 

or not to be covered at the prescribed 

number of doses. 

(2) A PDP sponsor’s exception 

procedures must include, but are not 

limited to—

(i) A description of the criteria a PDP 

sponsor uses to evaluate a prescribing 

physician’s determination made under 

paragraph (b)(3) of this section; 

(ii) A process for comparing 

applicable medical and scientific 

evidence on the safety and effectiveness 

of the requested nonformulary drug 

with the formulary drug for the enrollee; 

and 

(iii) A description of the cost-sharing 

scheme that will be applied when 

coverage is provided for a nonformulary drug. 

(iv) If the sponsor covers a nonformulary drug, the cost(s) incurred by 

the enrollee for that drug are treated as 

being included for purposes of 

calculating and meeting the annual outof-pocket threshold. 

(3) An enrollee, the enrollee’s 

authorized representative, or the 

prescribing physician (on behalf of the 

enrollee) may file a request for an 

exception request. 

(4) A PDP sponsor may require a 

written certification from the enrollee’s 

prescribing physician that the requested 

prescription drug is medically necessary 

to treat the enrollee’s disease or medical 

condition because—

(i) There is not a prescription drug 

listed on the formulary to treat the 

enrollee’s disease or medical condition 

that is an acceptable clinical alternative; 

(ii) The prescription drug 

alternative(s) listed on the formulary or 

required to be used in accordance with 

step therapy requirements—

(A) Has been ineffective in the 

treatment of the enrollee’s disease or 

medical condition or, based on both 

sound clinical evidence and medical 

and scientific evidence and the known 

relevant physical or mental 

characteristics of the enrollee and 

known characteristics of the drug 

regimen, is likely to be ineffective or 

adversely affect the drug’s effectiveness 

or patient compliance; or 

(B) Has caused or based on sound 

clinical evidence and medical and 

scientific evidence is likely to cause an 

adverse reaction or other harm to the 

enrollee; or 

(iii) The number of doses that is 

available under a dose restriction for the 

prescription drug has been ineffective in 

the treatment of the enrollee’s disease or 

medical condition or, based on both 

sound clinical evidence and medical 

and scientific evidence and the known 

relevant physical or mental 

characteristics of the enrollee and 

known characteristics of the drug 

regimen, is likely to be ineffective or 

adversely affect the drug’s effectiveness 

or patient compliance. 

(5) The PDP sponsor may require the 

written certification to include only the 

following information: 

(i) The enrollee’s name, group or 

contract number, subscriber number or 

other information necessary to identify 

the enrollee. 

(i) Patient history. 

(iii) The primary diagnosis related to 

the requested prescription drug that is 

the subject of the exceptions request. 

(iv) Based on paragraph (b)(4) of this 

section, the reason—

(A) Why the formulary drug is not 

acceptable for the enrollee; 

(B) If the medical exceptions request 

involves a step therapy requirement, 

why the prescription drug required to be 

used is not acceptable for the enrollee; 

or 

(C) If the medical exceptions request 

involves a dose restriction, why the 

available number of doses for the 

prescription drug is not acceptable for 

the enrollee; 

(D) The reason why the prescription 

drug that is the subject of the exceptions 

request is needed for the enrollee; and 

(E) Any other information reasonably 

necessary to evaluate the medical 

necessity of the medical exceptions 

request. 

(c) PDP sponsor requirements for 

exceptions determinations. (1) General 

rule. A PDP sponsor’s decision 

concerning an exceptions request under 

this section constitutes a PDP coverage 

determination as specified at § 423.566. 

(2) When a sponsor does not make a 

timely decision. If the PDP sponsor fails 

to make a decision on an exceptions 

request for continued coverage of a drug 

the sponsor is removing from its 

formulary (for reasons other than safety 

or because the drug cannot be supplied 

or is withdrawn from the market by the 

manufacturer) and to provide notice of 

the decision within the timeframe 

required under § 423.568(a)—

(i) The enrollee is entitled to have 

coverage for up to 1 month’s supply of 

the prescription drug that is the subject 

of the request; and 

(ii) The PDP sponsor must make a 

decision on the exceptions request 

before the enrollee’s completion of the 

supply in paragraph (c)(2)(i) of this 

section. 

(iii) If the PDP sponsor fails to make 

a decision on the exceptions request and 

provide notice of the decision before to 

the enrollee’s completion of the supply 

provided in paragraph (c)(2)(i) of this 

section, the sponsor must maintain 

coverage, as specified in paragraph 

(c)(2)(i) of this section, unless—

(A) There is a material change in the 

enrollee’s terms of coverage or the 

applicable benefit limits have been 

exhausted; 

(B) The drug is no longer prescribed 

for the enrollee or is not considered safe 

for the treatment of the enrollee’s 

disease or medical condition; or 

(C) A decision is made on the 

exceptions request and notice of that 

decision is provided. 

(3) When an exceptions request is 

approved. Whenever an exceptions 

request made under § 423.578 is 

approved, the PDP sponsor must 

provide coverage for the approved 

prescription drug and must not—

(i) Require the enrollee to request 

approval for a refill or a new 

prescription to continue using the 

prescription drug after the refills for the 

initial prescription are exhausted, as 

long as—

(A) The enrollee’s prescribing 

physician continues to prescribe the 

drug; and 

(B) The drug continues to be 

considered safe for treating the 

enrollee’s disease or medical condition. 

(ii) Establish a special formulary tier 

or copayment or other cost-sharing 

requirement that is applicable only to 

prescription drugs approved for 

coverage under this section. 

(d) Nothing in this section will be 

construed to allow an enrollee to use the 

exceptions processes set out in this 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46845 

section to request coverage for a 

prescription drug that is not a covered 

Part D drug. 

§ 423.580 Right to a redetermination. 

An enrollee who has received a 

coverage determination (including one 

that is reopened and revised as 

described in § 423.634) may request that 

it be redetermined under the procedures 

described in § 423.582, which address 

requests for a standard redetermination. 

An enrollee or an enrollee’s prescribing 

physician (acting on behalf of an 

enrollee) may request an expedited 

redetermination specified in § 423.584. 

§ 423.582 Request for a standard 

redetermination. 

(a) Method and place for filing a 

request. An enrollee must ask for a 

redetermination by making an oral or 

written request with the PDP sponsor 

that made the coverage determination. 

(b) Timeframe for filing a request. 

Except as provided in paragraph (c) of 

this section, an enrollee must file a 

request for a redetermination within 60 

calendar days from the date of the 

notice of the coverage determination. 

(c) Extending the time for filing a 

request. (1) General rule. If an enrollee 

shows good cause, the PDP sponsor may 

extend the timeframe for filing a request 

for redetermination. 

(2) How to request an extension of 

timeframe. If the 60-day period in which 

to file a request for a redetermination 

has expired, an enrollee may file a 

request for redetermination and 

extension of time frame with the PDP 

sponsor. The request for 

redetermination and to extend the 

timeframe must—

(i) Be in writing; and 

(ii) State why the request for 

redetermination was not filed on time. 

(d) Withdrawing a request. The person 

who files a request for redetermination 

may withdraw it by filing a written 

request for withdrawal at one of the 

places listed in paragraph (a) of this 

section. 

§ 423.584 Expediting certain 

redeterminations. 

(a) Who may request an expedited 

redetermination. An enrollee or an 

enrollee’s prescribing physician may 

request that a PDP sponsor expedite a 

redetermination that involves the issues 

specified in § 423.566(b)(1) and (b)(2). 

(This does not include requests for 

payment of drugs already furnished.) 

(b) How to make a request. 

(1) To ask for an expedited 

redetermination, an enrollee or a 

prescribing physician acting on behalf 

of an enrollee must submit an oral or 

written request directly to the PDP 

sponsor or, if applicable, to the entity 

responsible for making the 

redetermination, as directed by the PDP 

sponsor. 

(2) A prescribing physician may 

provide oral or written support for an 

enrollee’s request for an expedited 

redetermination. 

(c) How the PDP sponsor must process 

requests. The PDP sponsor must 

establish and maintain the following 

procedures for processing requests for 

expedited redetermination: 

(1) Handling of requests. The PDP 

sponsor must establish an efficient and 

convenient means for individuals to 

submit oral or written requests, 

document all oral requests in writing, 

and maintain the documentation in the 

case file. 

(2) Prompt decision. The PDP sponsor 

must promptly decide on whether to 

expedite the redetermination or follow 

the timeframe for standard 

redetermination based on the following 

requirements: 

(i) For a request made by an enrollee, 

the PDP sponsor must provide an 

expedited redetermination if it 

determines that applying the standard 

timeframe for making a redetermination 

may seriously jeopardize the life or 

health of the enrollee or the enrollee’s 

ability to regain maximum function. 

(ii) For a request made or supported 

by a prescribing physician, the PDP 

sponsor must provide an expedited 

redetermination if the physician 

indicates that applying the standard 

timeframe for conducting a 

redetermination may seriously 

jeopardize the life or health of the 

enrollee or the enrollee’s ability to 

regain maximum function. 

(d) Actions following denial of a 

request. If a PDP sponsor denies a 

request for expedited redetermination, it 

must take the following actions: 

(1) Automatically transfer a request to 

the standard timeframe and make the 

determination within the 30-day 

timeframe established in § 423.590(a). 

The 30-day period begins the day the 

PDP sponsor receives the request for 

expedited redetermination. 

(2) Give the enrollee prompt oral 

notice, and subsequently deliver, within 

3 calendar days, a written letter that—

(i) Explains that the PDP sponsor 

processes the enrollee’s request using 

the 30-day timeframe for standard 

redetermination; 

(ii) Informs the enrollee of the right to 

file an expedited grievance if he or she 

disagrees with the sponsor’s decision 

not to expedite; 

(iii) Informs the enrollee of the right 

to resubmit a request for an expedited 

redetermination with the prescribing 

physician’s support; and 

(iv) Provides instructions about the 

grievance process and its timeframes. 

(e) Action following acceptance of a 

request. If a PDP sponsor grants a 

request for expedited redetermination, it 

must conduct the redetermination and 

give notice in accordance with 

§ 423.590(d). 

§ 423.586 Opportunity to submit evidence. 

The PDP sponsor must provide the 

enrollee or the prescribing physician, as 

appropriate, with a reasonable 

opportunity to present evidence and 

allegations of fact or law, related to the 

issue in dispute, in person as well as in 

writing. In the case of an expedited 

redetermination, the opportunity to 

present evidence is limited by the short 

timeframe for making a decision. 

Therefore, the PDP sponsor must inform 

the enrollee or the prescribing physician 

of the conditions for submitting the 

evidence. 

§ 423.590 Timeframes and responsibility 

for making redeterminations. 

a. Standard redetermination—request 

for covered drug benefits. (1) If the PDP 

sponsor makes a redetermination that is 

completely favorable to the enrollee, the 

PDP sponsor must issue the 

redetermination (and effectuate it in 

accordance with § 423.636(a)(1)) as 

expeditiously as the enrollee’s health 

condition requires, but no later than 30 

calendar days from the date it receives 

the request for a standard 

redetermination. 

(2) If the PDP sponsor makes a 

redetermination that affirms, in whole 

or in part, its adverse coverage 

determination, it must notify the 

enrollee in writing of its 

redetermination as expeditiously as the 

enrollee’s health condition requires, but 

no later than 30 calendar days from the 

date it receives the request for a 

standard redetermination. 

(3) The PDP sponsor may extend the 

timeframe by up to 14 calendar days if 

the enrollee requests the extension or if 

the sponsor justifies a need for 

additional information and how the 

delay is in the interest of the enrollee 

(for example, the receipt of additional 

medical evidence may change a PDP 

sponsor’s decision to deny). 

(4) When the PDP sponsor extends the 

timeframe, it must notify the enrollee in 

writing of the reasons for the delay, and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the PDP sponsor’s 

decision to invoke an extension. 

(5) For extensions, the PDP sponsor 

must issue its determination as 

46846 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

expeditiously as the enrollee’s health 

condition requires, but no later than 

upon expiration of the extension. 

(b) Standard redetermination—

request for payment. (1) If the PDP 

sponsor makes a redetermination that is 

completely favorable to the enrollee, the 

PDP sponsor must issue its 

redetermination to the enrollee (and 

effectuate it in accordance with 

§ 423.636(a)(2)) no later than 60 

calendar days from the date it receives 

the request for redetermination. 

(2) If the PDP sponsor affirms, in 

whole or in part, its adverse coverage 

determination, it must notify the 

enrollee in writing of its 

redetermination no later than 60 

calendar days from the date it receives 

the request for redetermination. 

(c) Effect of failure to meet timeframe 

for standard redetermination. If the PDP 

sponsor fails to provide the enrollee 

with a redetermination within the 

timeframes specified in paragraphs (a) 

or (b) of this section, this failure 

constitutes an affirmation of its adverse 

coverage determination and is subject to 

appeal to the IRE. 

(d) Expedited redetermination. (1) 

Timeframe. Except as provided in 

paragraph (d)(2) of this section, a PDP 

sponsor that approves a request for 

expedited redetermination must 

complete its redetermination and give 

the enrollee (and the prescribing 

physician involved, as appropriate) 

notice of its decision as expeditiously as 

the enrollee’s health condition requires 

but no later than 72 hours after 

receiving the request. 

(2) Extensions. The PDP sponsor may 

extend the 72-hour deadline by up to 14 

calendar days if the enrollee requests 

the extension or if the sponsor justifies 

a need for additional information and 

how the delay is in the interest of the 

enrollee (for example, the receipt of 

additional medical evidence may 

change a PDP sponsor’s decision to 

deny). 

(3) Notification of extension. (i) 

Timeframe. The PDP sponsor must 

notify the enrollee of its determination 

as expeditiously as the enrollee’s health 

condition requires but no later than 

upon expiration of the extension. 

(ii) Content of notification. When the 

PDP sponsor extends the timeframe, it 

must notify the enrollee in writing of 

the reasons for the delay, and inform the 

enrollee of the right to file an expedited 

grievance if he or she disagrees with the 

PDP sponsor’s decision to invoke an 

extension. 

(4) How the PDP sponsor must request 

additional information. If the PDP 

sponsor must receive medical 

information, the PDP sponsor must 

request the necessary information 

within 24 hours of the initial request for 

an expedited redetermination. 

Regardless of whether the PDP sponsor 

must request additional information, the 

PDP sponsor is responsible for meeting 

the timeframe and notice requirements. 

(5) Affirmation of an adverse 

expedited coverage determination. If, as 

a result of its redetermination, the PDP 

sponsor affirms, in whole or in part, its 

adverse expedited coverage 

determination, the PDP sponsor must 

give the enrollee (and the prescribing 

physician involved, as appropriate) 

notice of its decision as expeditiously as 

the enrollee’s health condition requires, 

but no later than 72 hours after 

receiving the request (or no later than 

the expiration of an extension specified 

in paragraph (d)(2) of this section). 

(e) Failure to meet timeframe for 

expedited redetermination. If the PDP 

sponsor fails to provide the enrollee or 

the prescribing physician, as 

appropriate, with the results of its 

expedited redetermination within the 

timeframe described in paragraph (d) of 

this section, this failure constitutes an 

affirmation of its adverse expedited 

coverage determination and is subject to 

appeal to the IRE. 

(f) Who must reconsider an adverse 

coverage determination. (1) A person or 

persons who were not involved in 

making the coverage determination 

must conduct the redetermination. 

(2) When the issue is the denial of 

coverage based on a lack of medical 

necessity (or any substantively 

equivalent term used to describe the 

concept of medical necessity), the 

redetermination must be made by a 

physician with expertise in the field of 

medicine that is appropriate for the 

services at issue. The physician making 

the redetermination need not, in all 

cases, be of the same specialty or 

subspecialty as the prescribing 

physician. 

§ 423.600 Reconsideration by an 

independent review entity (IRE). 

(a) An enrollee who is dissatisfied 

with the redetermination of a PDP 

sponsor has a right to a reconsideration 

by an independent review entity that 

contracts with CMS. An enrollee must 

file a written request for reconsideration 

at one of the places listed in § 423.582(a) 

or with the IRE within 60 days of the 

date of the sponsor’s redetermination. 

(b) When an enrollee files an appeal, 

the IRE is required to solicit the views 

of the prescribing physician. 

(c) In order for an enrollee to request 

an IRE reconsideration of a PDP 

sponsor’s determination not to provide 

for a covered Part D drug that is not on 

the PDP formulary, the prescribing 

physician must determine that all 

covered Part D drugs on any tier of the 

formulary for treatment of the same 

condition is not as effective for the 

individual as the nonformulary drug, 

has adverse effects for the individual, or 

both. 

(d) The independent review entity 

must conduct the reconsideration as 

expeditiously as the enrollee’s health 

condition requires but must not exceed 

the deadlines specified in its contract. 

§ 423.602 Notice of reconsideration 

determination by the independent review 

entity. 

(a) Responsibility for the notice. When 

the IRE makes its reconsideration 

determination, it is responsible for 

mailing a notice of its determination to 

the enrollee and PDP sponsor, and for 

sending a copy to CMS. 

(b) Content of the notice. The notice 

must—

(1) State the specific reasons for the 

IRE’s decision in understandable 

language; 

(2) If the reconsideration 

determination is adverse (that is, does 

not completely reverse the PDP 

sponsor’s adverse coverage 

determination), inform the enrollee of 

his or her right to an ALJ hearing if the 

amount in controversy meets the 

threshold requirement under § 423.610; 

(3) Describe the procedures that must 

be followed to obtain an ALJ hearing; 

and 

(4) Comply with any other 

requirements specified by CMS. 

§ 423.604 Effect of a reconsideration 

determination. 

A reconsideration determination is 

final and binding on the enrollee and 

the PDP sponsor, unless the enrollee 

files a request for a hearing under the 

provisions of § 423.612. 

§ 423.610 Right to an ALJ hearing. 

(a) If the amount remaining in 

controversy after the IRE 

reconsideration meets the threshold 

requirement established annually by the 

Secretary, an enrollee who is 

dissatisfied with the IRE reconsideration 

determination has a right to a hearing 

before an ALJ. 

(b) If the basis for the appeal is the 

PDP sponsor’s refusal to provide drug 

benefits, CMS uses the projected value 

of those benefits to compute the amount 

remaining in controversy. 

(c) Aggregating appeals to meet the 

amount in controversy. (1) Enrollee. 

Two or more appeals may be aggregated 

by an enrollee to meet the amount in 

controversy for an ALJ hearing if—

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46847 

(i) The appeals have previously been 

reconsidered by an IRE; 

(ii) The request for ALJ hearing lists 

all of the appeals to be aggregated and 

is filed within 60 days after all of the 

IRE reconsideration determinations 

being appealed have been received; and 

(iii) The ALJ determines that the 

appeals the enrollee seeks to aggregate 

involve the delivery of prescription 

drugs to a single enrollee. 

(2) Multiple enrollees. Two or more 

appeals may be aggregated by multiple 

enrollees to meet the amount in 

controversy for an ALJ hearing if—

(i) The appeals have previously been 

reconsidered by an IRE; 

(ii) The request for ALJ hearing lists 

all of the appeals to be aggregated and 

is filed within 60 days after all of the 

IRE reconsideration determinations 

being appealed have been received; and 

(iii) The ALJ determines that the 

appeals the enrollees seek to aggregate 

involve the same prescription drug. 

§ 423.612 Request for an ALJ hearing. 

(a) How and where to file a request. 

The enrollee must file a written request 

for a hearing at one of the places 

specified in § 423.582(a) or with the IRE. 

The organizations specified in 

§ 423.582(a) forward the request to the 

independent review entity, which is 

responsible for transferring the case to 

the appropriate ALJ office. 

(b) When to file a request. Except 

when an ALJ extends the timeframe as 

provided in part 422, subpart M of this 

chapter, the enrollee must file a request 

for a hearing within 60 days of the date 

of the notice of an IRE reconsideration 

determination. 

(c) Insufficient amount in controversy. 

(1) If a request for a hearing clearly 

shows that the amount in controversy is 

less than that required under § 423.610, 

the ALJ dismisses the request. 

(2) If, after a hearing is initiated, the 

ALJ finds that the amount in 

controversy is less than the amount 

required under § 423.610, the ALJ 

discontinues the hearing and does not 

rule on the substantive issues raised in 

the appeal. 

§ 423.620 Medicare Appeals Council (MAC) 

review. 

An enrollee who is dissatisfied with 

an ALJ hearing decision may request 

that the MAC review the ALJ’s decision 

or dismissal. The regulations under part 

422, subpart M of this chapter regarding 

MAC review apply to matters addressed 

by this subpart. 

§ 423.630 Judicial review. 

(a) Review of ALJ’s Decision. The 

enrollee may request judicial review of 

an ALJ’s decision if—

(1) The MAC denied the enrollee’s 

request for review; and 

(2) The amount in controversy meets 

the threshold requirement established 

annually by the Secretary. 

(b) Review of MAC decision. The 

enrollee may request judicial review of 

the MAC decision if it is the final 

decision of CMS and the amount in 

controversy meets the threshold 

established in paragraph (a)(2) of this 

section. 

(c) How to request judicial review. In 

order to request judicial review, an 

enrollee must file a civil action in a 

district court of the United States in 

accordance with section 205(g) of the 

Act. (See part 422, subpart M of this 

chapter, for a description of the 

procedures to follow in requesting 

judicial review.) 

§ 423.634 Reopening and revising 

determinations and decisions. 

(a) A coverage determination or 

reconsideration made by a PDP sponsor, 

a reconsideration made by the 

independent review entity specified in 

§ 423.600, or the decision of an ALJ or 

the MAC that is otherwise final and 

binding may be reopened and revised by 

the entity that made the determination 

or decision, under the rules in part 422, 

subpart M of this chapter. 

(b) The filing of a request for 

reopening does not relieve the PDP 

sponsor of its obligation to make 

payment or provide benefits as specified 

in § 423.636 or § 423.638. 

(c) Once an entity issues a revised 

determination or decision, the revisions 

made by the decision may be appealed. 

(d) A decision of a PDP sponsor or 

any other entity not to reopen is not 

subject to review. 

§ 423.636 How a PDP sponsor must 

effectuate standard predeterminations, 

reconsideration determinations, or 

decisions. 

(a) Reversals by the PDP sponsor. (1) 

Requests for benefits. If, on 

redetermination of a request for benefit, 

the PDP sponsor completely reverses its 

coverage determination, the sponsor 

must authorize or provide the benefit 

under dispute as expeditiously as the 

enrollee’s health condition requires, but 

no later than 30 calendar days after the 

date the PDP sponsor receives the 

request for redetermination (or no later 

than upon expiration of an extension 

described in § 423.590(a)(3)). 

(2) Requests for payment. If, on 

redetermination of a request for 

payment, the PDP sponsor completely 

reverses its coverage determination, the 

sponsor must pay for the benefit no later 

than 60 calendar days after the date the 

PDP sponsor receives the request for 

redetermination. 

(b) Reversals by the independent 

review entity. (1) Requests for benefits. 

If, on reconsideration of a request for 

benefit, the PDP sponsor’s 

determination is reversed in whole or in 

part by the independent review entity, 

the PDP sponsor must authorize the 

benefit under dispute within 72 hours 

from the date it receives notice reversing 

the determination, or provide the 

benefit under dispute as expeditiously 

as the enrollee’s health condition 

requires, but no later than 14 calendar 

days from that date. The PDP sponsor 

must inform the independent review 

entity that the sponsor has effectuated 

the decision. 

(2) Requests for payment. If, on 

reconsideration of a request for 

payment, the PDP sponsor’s 

determination is reversed in whole or in 

part by the independent review entity, 

the PDP sponsor must pay for the 

benefit no later than 30 calendar days 

from the date it receives notice reversing 

the coverage determination. The PDP 

sponsor must inform the independent 

review entity that the sponsor has 

effectuated the decision. 

(c) Reversals other than by the PDP 

sponsor or the independent review 

entity. If the IRE’s determination is 

reversed in whole or in part by the ALJ, 

or at a higher level of appeal, the PDP 

sponsor must pay for, authorize, or 

provide the benefit under dispute as 

expeditiously as the enrollee’s health 

condition requires, but no later than 60 

calendar days from the date it receives 

notice reversing the determination. The 

PDP sponsor must inform the 

independent review entity that the 

sponsor has effectuated the decision. 

§ 423.638 How a PDP sponsor must 

effectuate expedited redeterminations or 

reconsidered determinations. 

(a) Reversals by the PDP sponsor. If, 

on redetermination of an expedited 

request for benefits, the PDP sponsor 

completely reverses its coverage 

determination, the PDP sponsor must 

authorize or provide the benefit under 

dispute as expeditiously as the 

enrollee’s health condition requires, but 

no later than 72 hours after the date the 

PDP sponsor receives the request for 

redetermination (or no later than upon 

expiration of an extension specified in 

§ 423.590(d)(2)). 

(b) Reversals by the independent 

review entity. If the PDP sponsor’s 

determination is reversed in whole or in 

part by the independent review entity, 

the PDP sponsor must authorize or 

provide the benefit under dispute as 

expeditiously as the enrollee’s health 

46848 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

condition requires but no later than 72 

hours from the date it receives notice 

reversing the determination. The PDP 

sponsor must inform the independent 

review entity that the sponsor has 

effectuated the decision. 

(c) Reversals other than by the PDP 

sponsor or the independent review 

entity. If the IRE’s expedited 

determination is reversed in whole or in 

part by the ALJ, or at a higher level of 

appeal, the PDP sponsor must authorize 

or provide the benefit under dispute as 

expeditiously as the enrollee’s health 

condition requires, but no later than 60 

days from the date it receives notice 

reversing the determination. The PDP 

sponsor must inform the independent 

review entity that the sponsor has 

effectuated the decision. 

Subpart N—Medicare Contract 

Determinations and Appeals 

§ 423.641 Contract determinations. 

This subpart establishes the 

procedures for making and reviewing 

the following contract determinations: 

(a) A determination that an entity is 

not qualified to enter into a contract 

with CMS under Part D of Title XVIII of 

the Act. 

(b) A determination to terminate a 

contract with a PDP sponsor in 

accordance with § 423.509. 

(c) A determination not to authorize a 

renewal of a contract with a PDP 

sponsor in accordance with 

§ 423.507(b). 

§ 423.642 Notice of contract determination. 

(a) When CMS makes a contract 

determination, it gives the PDP sponsor 

written notice. 

(b) The notice specifies the—

(1) Reasons for the determination; and 

(2) PDP sponsor’s right to request 

reconsideration. 

(c) For CMS-initiated terminations, 

CMS mails notice 90 days before the 

anticipated effective date of the 

termination. For terminations based on 

initial determinations described at 

§ 423.509(a)(4) or (a)(5), CMS 

immediately notifies the PDP sponsor of 

its decision to terminate the 

organization’s PDP contract. 

(d) When CMS determines that it is 

not going to authorize a contract 

renewal, CMS mails the notice to the 

PDP sponsor by May 1 of the current 

contract year. 

§ 423.643 Effect of contract determination. 

The contract determination is final 

and binding unless—

(a) The determination is reconsidered 

in accordance with § 423.644 through 

§ 423.649; 

(b) A timely request for a hearing is 

filed under § 423.651; or 

(c) The reconsideration decision is 

revised as a result of a reopening under 

§ 423.668. 

§ 423.644 Reconsideration: Applicability. 

(a) Reconsideration is the first step for 

appealing a contract determination 

specified in § 423.641. 

(b) CMS reconsiders the specified 

determinations if the contract applicant 

or the PDP sponsor files a written 

request in accordance with § 423.645. 

§ 423.645 Request for reconsideration. 

(a) Method and place for filing a 

request. A request for reconsideration 

must be made in writing and filed with 

any CMS office. 

(b) Time for filing a request. The 

request for reconsideration must be filed 

within 15 days from the date of the 

notice of the initial determination. 

(c) Proper party to file a request. Only 

an authorized official of the contract 

applicant or PDP sponsor that was the 

subject of a contract determination may 

file the request for reconsideration. 

(d) Withdrawal of a request. The PDP 

sponsor or contract applicant who filed 

the request for a reconsideration may 

withdraw it at any time before the 

notice of the reconsidered 

determination is mailed. The request for 

withdrawal must be in writing and filed 

with CMS. 

§ 423.646 Opportunity to submit evidence. 

CMS provides the PDP sponsor or 

contract applicant and the CMS official 

or officials who made the contract 

determination reasonable opportunity, 

not to exceed the timeframe in which a 

PDP sponsor chooses to request a 

hearing as described at § 423.651, to 

present as evidence any documents or 

written statements that are relevant and 

material to the matters at issue. 

§ 423.647 Reconsidered determination. 

A reconsidered determination is a 

new determination that—

(a) Is based on a review of the contract 

determination, the evidence and 

findings upon which that was based, 

and any other written evidence 

submitted before notice of the 

reconsidered determination is mailed, 

including facts relating to the status of 

the PDP sponsor subsequent to the 

contract determination; and 

(b) Affirms, reverses, or modifies the 

initial determination. 

§ 423.648 Notice of reconsidered 

determination. 

(a) CMS gives the PDP sponsor or 

contract applicant written notice of the 

reconsidered determination. 

(b) The notice—

(1) Contains findings for the contract 

applicant’s qualifications to enter into, 

or the PDP sponsor’s qualifications to 

remain under, a contract with CMS 

under Part D of the Act; 

(2) States the specific reasons for the 

reconsidered determination; and 

(3) Informs the PDP sponsor or 

contract applicant of its right to a 

hearing if it is dissatisfied with the 

determination. 

§ 423.649 Effect of reconsidered 

determination. 

A reconsidered determination is final 

and binding unless a request for a 

hearing is filed in accordance with 

§ 423.651 or it is revised in accordance 

with § 423.668. 

§ 423.650 Right to a hearing. 

The following parties are entitled to a 

hearing: 

(a) A contract applicant that is 

determined in a reconsidered 

determination to be unqualified to enter 

into a contract with CMS under Part D 

of title XVIII of the Act. 

(b) A PDP sponsor whose contract 

with CMS is terminated or is not 

renewed as a result of a contract 

determination as provided in § 423.641. 

§ 423.651 Request for hearing. 

(a) Method and place for filing a 

request. A request for a hearing must be 

made in writing and filed by an 

authorized official of the contract 

applicant or PDP sponsor that was the 

party to the determination under appeal. 

The request for a hearing must be filed 

with any CMS office. 

(b) Time for filing a request. A request 

for a hearing must be filed within 15 

days after the date of the reconsidered 

determination. 

(c) Parties to a hearing. The parties to 

a hearing must be—

(1) The parties described in § 423.650; 

(2) At the discretion of the hearing 

officer, any interested parties who make 

a showing that their rights may be 

prejudiced by the decision to be 

rendered at the hearing; and 

(3) CMS. 

§ 423.652 Postponement of effective date 

of a contract determination when a request 

for a hearing for a contract determination is 

filed timely. 

(a) CMS postpones the proposed 

effective date of the contract 

determination to terminate a contract 

with a PDP sponsor until a hearing 

decision is reached and affirmed by the 

Administrator following review under 

§ 423.666 in instances where a PDP 

sponsor requests review by the 

Administrator; and 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46849 

(b) CMS extends the current contract 

at the end of the contract period (in the 

case of a determination not to renew) 

only—

(1) If CMS finds that an extension of 

the contract is consistent with the 

purpose of this part; and 

(2) For the period as CMS and the 

PDP sponsor agree. 

(c) Exception: A contract terminated 

in accordance with § 423.509(a)(4) or 

(a)(5) is immediately terminated and is 

to be postponed if a hearing is 

requested. 

§ 423.653 Designation of hearing officer. 

CMS designates a hearing officer to 

conduct the hearing. The hearing officer 

need not be an ALJ. 

§ 423.654 Disqualification of hearing 

officer. 

(a) A hearing officer may not conduct 

a hearing in a case in which he or she 

is prejudiced or partial to any party or 

has any interest in the matter pending 

for decision. 

(b) A party to the hearing who objects 

to the designated hearing officer must 

notify that officer in writing at the 

earliest opportunity. 

(c) The hearing officer must consider 

the objections, and may, at his or her 

discretion, either proceed with the 

hearing or withdraw. 

(1) If the hearing officer withdraws, 

CMS designates another hearing officer 

to conduct the hearing. 

(2) If the hearing officer does not 

withdraw, the objecting party may, after 

the hearing, present objections and 

request that the officer’s decision be 

revised or a new hearing be held before 

another hearing officer. The objections 

must be submitted in writing to CMS. 

§ 423.655 Time and place of hearing. 

(a) The hearing officer fixes a time 

and place for the hearing, which is not 

to exceed 30 days from the receipt of the 

request for the hearing, and sends 

written notice to the parties. The notice 

also informs the parties of the general 

and specific issues to be resolved and 

information about the hearing 

procedure. 

(b) The hearing officer may, on his or 

her own motion, or at the request of a 

party, change the time and place for the 

hearing. The hearing officer may 

adjourn or postpone the hearing. 

(c) The hearing officer gives the 

parties reasonable notice of any change 

in time or place of hearing, or of 

adjournment or postponement. 

§ 423.656 Appointment of representatives. 

A party may appoint as its 

representative at the hearing anyone not 

disqualified or suspended from acting as 

a representative before the Secretary or 

otherwise prohibited by law. 

§ 423.657 Authority of representatives. 

(a) A representative appointed and 

qualified in accordance with § 423.656, 

on behalf of the represented party—

(1) Gives or accepts any notice or 

request pertinent to the proceedings set 

forth in this subpart; 

(2) Presents evidence and allegations 

as to facts and law in any proceedings 

affecting that party; and 

(3) Obtains information to the same 

extent as the party. 

(b) A notice or request sent to the 

representative has the same force and 

effect as if it is sent to the party. 

§ 423.658 Conduct of hearing. 

(a) The hearing is open to the parties 

and to the public. 

(b) The hearing officer inquires fully 

into all the matters at issue and receives 

in evidence the testimony of witnesses 

and any documents that are relevant 

and material. 

(c) The hearing officer provides the 

parties an opportunity to enter any 

objection to the inclusion of any 

document. 

(d) The hearing officer decides the 

order in which the evidence and the 

arguments of the parties are presented 

and the conduct of the hearing. 

§ 423.659 Evidence. 

The hearing officer rules on the 

admissibility of evidence and may 

admit evidence that is inadmissible 

under rules applicable to court 

procedures. 

§ 423.660 Witnesses. 

(a) The hearing officer may examine 

the witnesses. 

(b) The parties or their representatives 

are permitted to examine their witnesses 

and cross-examine witnesses of other 

parties. 

§ 423.661 Discovery. 

(a) Prehearing discovery is permitted 

upon timely request of a party. 

(b) A request is timely if it is made 

before the beginning of the hearing. 

(c) A reasonable time for inspection 

and reproduction of documents is 

provided by order of the hearing officer. 

(d) The hearing officer’s order on all 

discovery matters is final. 

§ 423.662 Prehearing. 

The hearing officer may schedule a 

prehearing conference if he or she 

believes that a conference may more 

clearly define the issues. 

§ 423.663 Record of hearing. 

(a) A complete record of the 

proceedings at the hearing is made and 

transcribed and made available to all 

parties upon request. 

(b) The record may not be closed until 

a hearing decision is issued. 

§ 423.664 Authority of hearing officer. 

In exercising his or her authority, the 

hearing officer must comply with the 

provisions of title XVIII and related 

provisions of the Act, the regulations 

issued by the Secretary, and general 

instructions issued by CMS in 

implementing the Act. 

§ 423.665 Notice and effect of hearing 

decision. 

(a) As soon as practical after the close 

of the hearing, the hearing officer issues 

a written decision that—

(1) Is based upon the evidence of 

record; and 

(2) Contains separately numbered 

findings of fact and conclusions of law. 

(b) The hearing officer provides a 

copy of the hearing decision to each 

party. 

(c) The hearing decision is final and 

binding unless it is reversed or modified 

by the Administrator following review 

under § 423.666, or reopened and 

revised in accordance with § 423.668. 

§ 423.666 Review by the Administrator. 

(a) Request for review by 

Administrator. A PDP sponsor that 

receives a hearing decision upholding a 

contract termination determination may 

request review by the Administrator 

within 15 days of receiving the hearing 

decision as provided under § 423.665(b). 

(b) Review by the Administrator. The 

Administrator must review the hearing 

officer’s decision, and determine, based 

upon this decision, the hearing record, 

and any written arguments submitted by 

the PDP sponsor, whether the 

termination decision must be upheld, 

reversed, or modified. 

(c) Decision by the Administrator. The 

Administrator issues a written decision, 

and furnishes the decision to the PDP 

sponsor requesting review. 

§ 423.667 Effect of Administrator’s 

decision. 

A decision by the Administrator 

under section § 423.666(c) is final and 

binding unless it is reopened and 

revised in accordance with § 423.668. 

§ 423.668 Reopening of contract or 

reconsidered determination or decision of a 

hearing officer or the Administrator. 

(a) Initial or reconsidered 

determination. CMS may reopen and 

revise an initial or reconsidered 

determination upon its own motion 

within 1 year of the date of the notice 

of determination. 

(b) Decision of hearing officer. A 

decision of a hearing officer that is 

46850 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

unfavorable to any party and is 

otherwise final may be reopened and 

revised by the hearing officer upon the 

officer’s own motion within 1 year of 

the notice of the hearing decision. 

Another hearing officer designated by 

CMS may reopen and revise the 

decision if the hearing officer who 

issued the decision is unavailable. 

(c) Decision of Administrator. A 

decision by the Administrator that is 

otherwise final may be reopened and 

revised by the Administrator upon the 

Administrator’s own motion within 1 

year of the notice of the Administrator’s 

decision. 

(d) Notices. (1) The notice of 

reopening and of any revisions 

following the reopening is mailed to the 

parties. 

(2) The notice of revision specifies the 

reasons for revisions. 

§ 423.669 Effect of revised determination. 

The revision of a contract or 

reconsidered determination is binding 

unless a party files a written request for 

hearing of the revised determination in 

accordance with § 423.651. 

§ 423.650 Right to a hearing. 

The following parties are entitled to a 

hearing: 

(a) A contract applicant that is 

determined in a reconsidered 

determination to be unqualified to enter 

into a contract with CMS under Part D 

of title XVIII of the Act. 

(b) A PDP sponsor whose contract 

with CMS is terminated or is not 

renewed as a result of a contract 

determination as provided in § 423.641. 

§ 423.651 Request for hearing. 

(a) Method and place for filing a 

request. A request for a hearing must be 

made in writing and filed by an 

authorized official of the contract 

applicant or PDP sponsor that was the 

party to the determination under appeal. 

The request for a hearing must be filed 

with any CMS office. 

(b) Time for filing a request. A request 

for a hearing must be filed within 15 

days after the date of the reconsidered 

determination. 

(c) Parties to a hearing. The parties to 

a hearing must be—

(1) The parties described in § 423.650; 

(2) At the discretion of the hearing 

officer, any interested parties who make 

a showing that their rights may be 

prejudiced by the decision to be 

rendered at the hearing; and 

(3) CMS. 

§ 423.652 Postponement of effective date 

of a contract determination when a request 

for a hearing for a contract determination is 

filed timely. 

(a) CMS postpones the proposed 

effective date of the contract 

determination to terminate a contract 

with a PDP sponsor until a hearing 

decision is reached and affirmed by the 

Administrator following review under 

§ 423.666 in instances where a PDP 

sponsor requests review by the 

Administrator; and 

(b) CMS extends the current contract 

at the end of the contract period (in the 

case of a determination not to renew) 

only—

(1) If CMS finds that an extension of 

the contract is consistent with the 

purpose of this part; and 

(2) For the period as CMS and the 

PDP sponsor agree. 

(c) Exception: A contract terminated 

in accordance with § 423.509 (a)(4) or 

(a)(5) is immediately terminated and is 

not be postponed if a hearing is 

requested. 

§ 423.653 Designation of hearing officer. 

CMS designates a hearing officer to 

conduct the hearing. The hearing officer 

need not be an ALJ. 

§ 423.654 Disqualification of hearing 

officer. 

(a) A hearing officer may not conduct 

a hearing in a case in which he or she 

is prejudiced or partial to any party or 

has any interest in the matter pending 

for decision. 

(b) A party to the hearing who objects 

to the designated hearing officer must 

notify that officer in writing at the 

earliest opportunity. 

(c) The hearing officer must consider 

the objections, and may, at his or her 

discretion, either proceed with the 

hearing or withdraw. 

(1) If the hearing officer withdraws, 

CMS designates another hearing officer 

to conduct the hearing. 

(2) If the hearing officer does not 

withdraw, the objecting party may, after 

the hearing, present objections and 

request that the officer’s decision be 

revised or a new hearing be held before 

another hearing officer. The objections 

must be submitted in writing to CMS. 

§ 423.655 Time and place of hearing. 

(a) The hearing officer fixes a time 

and place for the hearing, which is not 

to exceed 30 days from the receipt of the 

request for the hearing, and sends 

written notice to the parties. The notice 

also informs the parties of the general 

and specific issues to be resolved and 

information about the hearing 

procedure. 

(b) The hearing officer may, on his or 

her own motion, or at the request of a 

party, change the time and place for the 

hearing. The hearing officer may 

adjourn or postpone the hearing. 

(c) The hearing officer gives the 

parties reasonable notice of any change 

in time or place of hearing, or of 

adjournment or postponement. 

§ 423.656 Appointment of representatives. 

A party may appoint as its 

representative at the hearing anyone not 

disqualified or suspended from acting as 

a representative before the Secretary or 

otherwise prohibited by law. 

§ 423.657 Authority of representatives. 

(a) A representative appointed and 

qualified in accordance with § 423.656, 

on behalf of the represented party—

(1) Gives or accepts any notice or 

request pertinent to the proceedings set 

forth in this subpart; 

(2) Presents evidence and allegations 

as to facts and law in any proceedings 

affecting that party; and 

(3) Obtains information to the same 

extent as the party. 

(b) A notice or request sent to the 

representative has the same force and 

effect as if it is sent to the party. 

§ 423.658 Conduct of hearing. 

(a) The hearing is open to the parties 

and to the public. 

(b) The hearing officer inquires fully 

into all the matters at issue and receives 

in evidence the testimony of witnesses 

and any documents that are relevant 

and material. 

(c) The hearing officer provides the 

parties an opportunity to enter any 

objection to the inclusion of any 

document. 

(d) The hearing officer decides the 

order in which the evidence and the 

arguments of the parties are presented 

and the conduct of the hearing. 

§ 423.659 Evidence. 

The hearing officer rules on the 

admissibility of evidence and may 

admit evidence that is inadmissible 

under rules applicable to court 

procedures. 

§ 423.660 Witnesses. 

(a) The hearing officer may examine 

the witnesses. 

(b) The parties or their representatives 

are permitted to examine their witnesses 

and cross-examine witnesses of other 

parties. 

§ 423.661 Discovery. 

(a) Prehearing discovery is permitted 

upon timely request of a party. 

(b) A request is timely if it is made 

before the beginning of the hearing. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46851 

(c) A reasonable time for inspection 

and reproduction of documents is 

provided by order of the hearing officer. 

(d) The hearing officer’s order on all 

discovery matters is final. 

§ 423.662 Prehearing. 

The hearing officer may schedule a 

prehearing conference if he or she 

believes that a conference may more 

clearly define the issues. 

§ 423.663 Record of hearing. 

(a) A complete record of the 

proceedings at the hearing is made and 

transcribed and made available to all 

parties upon request. 

(b) The record may not be closed until 

a hearing decision is issued. 

§ 423.664 Authority of hearing officer. 

In exercising his or her authority, the 

hearing officer must comply with the 

provisions of title XVIII and related 

provisions of the Act, the regulations 

issued by the Secretary, and general 

instructions issued by CMS in 

implementing the Act. 

§ 423.665 Notice and effect of hearing 

decision. 

(a) As soon as practical after the close 

of the hearing, the hearing officer issues 

a written decision that—

(1) Is based upon the evidence of 

record; and 

(2) Contains separately numbered 

findings of fact and conclusions of law. 

(b) The hearing officer provides a 

copy of the hearing decision to each 

party. 

(c) The hearing decision is final and 

binding unless it is reversed or modified 

by the Administrator following review 

under § 423.666, or reopened and 

revised in accordance with § 423.668. 

§ 423.666 Review by the Administrator. 

(a) Request for review by 

Administrator. A PDP sponsor that 

receives a hearing decision upholding a 

contract termination determination may 

request review by the Administrator 

within 15 days of receiving the hearing 

decision as provided under § 423.665(b). 

(b) Review by the Administrator. The 

Administrator must review the hearing 

officer’s decision, and determine, based 

upon this decision, the hearing record, 

and any written arguments submitted by 

the PDP sponsor, whether the 

termination decision must be upheld, 

reversed, or modified. 

(c) Decision by the Administrator. The 

Administrator issues a written decision, 

and furnishes the decision to the PDP 

sponsor requesting review. 

§ 423.667 Effect of Administrator’s 

decision. 

A decision by the Administrator 

under section § 423.666(c) is final and 

binding unless it is reopened and 

revised in accordance with § 423.668. 

§ 423.668 Reopening of contract or 

reconsidered determination or decision of a 

hearing officer or the Administrator. 

(a) Initial or reconsidered 

determination. CMS may reopen and 

revise an initial or reconsidered 

determination upon its own motion 

within 1 year of the date of the notice 

of determination. 

(b) Decision of hearing officer. A 

decision of a hearing officer that is 

unfavorable to any party and is 

otherwise final may be reopened and 

revised by the hearing officer upon the 

officer’s own motion within 1 year of 

the notice of the hearing decision. 

Another hearing officer designated by 

CMS may reopen and revise the 

decision if the hearing officer who 

issued the decision is unavailable. 

(c) Decision of Administrator. A 

decision by the Administrator that is 

otherwise final may be reopened and 

revised by the Administrator upon the 

Administrator’s own motion within 1 

year of the notice of the Administrator’s 

decision. 

(d) Notices. (1) The notice of 

reopening and of any revisions 

following the reopening is mailed to the 

parties. 

(2) The notice of revision specifies the 

reasons for revisions. 

§ 423.669 Effect of revised determination. 

The revision of a contract or 

reconsidered determination is binding 

unless a party files a written request for 

hearing of the revised determination in 

accordance with § 423.651. 

§ 423.650 Right to a hearing. 

The following parties are entitled to a 

hearing: 

(a) A contract applicant that is 

determined in a reconsidered 

determination to be unqualified to enter 

into a contract with CMS under Part D 

of title XVIII of the Act. 

(b) A PDP sponsor whose contract 

with CMS is terminated or is not 

renewed as a result of a contract 

determination as provided in § 423.641. 

§ 423.651 Request for hearing. 

(a) Method and place for filing a 

request. A request for a hearing must be 

made in writing and filed by an 

authorized official of the contract 

applicant or PDP sponsor that was the 

party to the determination under appeal. 

The request for a hearing must be filed 

with any CMS office. 

(b) Time for filing a request. A request 

for a hearing must be filed within 15 

days after the date of the reconsidered 

determination. 

(c) Parties to a hearing. The parties to 

a hearing must be—

(1) The parties described in § 423.650; 

(2) At the discretion of the hearing 

officer, any interested parties who make 

a showing that their rights may be 

prejudiced by the decision to be 

rendered at the hearing; and 

(3) CMS. 

§ 423.652 Postponement of effective date 

of a contract determination when a request 

for a hearing for a contract determination is 

filed timely. 

(a) CMS postpones the proposed 

effective date of the contract 

determination to terminate a contract 

with a PDP sponsor until a hearing 

decision is reached and affirmed by the 

Administrator following review under 

§ 423.666 in instances where a PDP 

sponsor requests review by the 

Administrator; and 

(b) CMS extends the current contract 

at the end of the contract period (in the 

case of a determination not to renew) 

only—

(1) If CMS finds that an extension of 

the contract is consistent with the 

purpose of this part; and 

(2) For the period as CMS and the 

PDP sponsor agree. 

(c) Exception: A contract terminated 

in accordance with § 423.509(a)(4) or 

(a)(5) is immediately terminated and is 

not be postponed if a hearing is 

requested. 

§ 423.653 Designation of hearing officer. 

CMS designates a hearing officer to 

conduct the hearing. The hearing officer 

need not be an ALJ. 

§ 423.654 Disqualification of hearing 

officer. 

(a) A hearing officer may not conduct 

a hearing in a case in which he or she 

is prejudiced or partial to any party or 

has any interest in the matter pending 

for decision. 

(b) A party to the hearing who objects 

to the designated hearing officer must 

notify that officer in writing at the 

earliest opportunity. 

(c) The hearing officer must consider 

the objections, and may, at his or her 

discretion, either proceed with the 

hearing or withdraw. 

(1) If the hearing officer withdraws, 

CMS designates another hearing officer 

to conduct the hearing. 

(2) If the hearing officer does not 

withdraw, the objecting party may, after 

the hearing, present objections and 

request that the officer’s decision be 

revised or a new hearing be held before 

46852 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

another hearing officer. The objections 

must be submitted in writing to CMS. 

§ 423.655 Time and place of hearing. 

(a) The hearing officer fixes a time 

and place for the hearing, which is not 

to exceed 30 days from the receipt of the 

request for the hearing, and sends 

written notice to the parties. The notice 

also informs the parties of the general 

and specific issues to be resolved and 

information about the hearing 

procedure. 

(b) The hearing officer may, on his or 

her own motion, or at the request of a 

party, change the time and place for the 

hearing. The hearing officer may 

adjourn or postpone the hearing. 

(c) The hearing officer gives the 

parties reasonable notice of any change 

in time or place of hearing, or of 

adjournment or postponement. 

§ 423.656 Appointment of representatives. 

A party may appoint as its 

representative at the hearing anyone not 

disqualified or suspended from acting as 

a representative before the Secretary or 

otherwise prohibited by law. 

§ 423.657 Authority of representatives. 

(a) A representative appointed and 

qualified in accordance with § 423.656, 

on behalf of the represented party—

(1) Gives or accepts any notice or 

request pertinent to the proceedings set 

forth in this subpart; 

(2) Presents evidence and allegations 

as to facts and law in any proceedings 

affecting that party; and 

(3) Obtains information to the same 

extent as the party. 

(b) A notice or request sent to the 

representative has the same force and 

effect as if it is sent to the party. 

§ 423.658 Conduct of hearing. 

(a) The hearing is open to the parties 

and to the public. 

(b) The hearing officer inquires fully 

into all the matters at issue and receives 

in evidence the testimony of witnesses 

and any documents that are relevant 

and material. 

(c) The hearing officer provides the 

parties an opportunity to enter any 

objection to the inclusion of any 

document. 

(d) The hearing officer decides the 

order in which the evidence and the 

arguments of the parties are presented 

and the conduct of the hearing. 

§ 423.659 Evidence. 

The hearing officer rules on the 

admissibility of evidence and may 

admit evidence that is inadmissible 

under rules applicable to court 

procedures. 

§ 423.660 Witnesses. 

(a) The hearing officer may examine 

the witnesses. 

(b) The parties or their representatives 

are permitted to examine their witnesses 

and cross-examine witnesses of other 

parties. 

§ 423.661 Discovery. 

(a) Prehearing discovery is permitted 

upon timely request of a party. 

(b) A request is timely if it is made 

before the beginning of the hearing. 

(c) A reasonable time for inspection 

and reproduction of documents is 

provided by order of the hearing officer. 

(d) The hearing officer’s order on all 

discovery matters is final. 

§ 423.662 Prehearing. 

The hearing officer may schedule a 

prehearing conference if he or she 

believes that a conference may more 

clearly define the issues. 

§ 423.663 Record of hearing. 

(a) A complete record of the 

proceedings at the hearing is made and 

transcribed and made available to all 

parties upon request. 

(b) The record may not be closed until 

a hearing decision is issued. 

§ 423.664 Authority of hearing officer. 

In exercising his or her authority, the 

hearing officer must comply with the 

provisions of title XVIII and related 

provisions of the Act, the regulations 

issued by the Secretary, and general 

instructions issued by CMS in 

implementing the Act. 

§ 423.665 Notice and effect of hearing 

decision. 

(a) As soon as practical after the close 

of the hearing, the hearing officer issues 

a written decision that—

(1) Is based upon the evidence of 

record; and 

(2) Contains separately numbered 

findings of fact and conclusions of law. 

(b) The hearing officer provides a 

copy of the hearing decision to each 

party. 

(c) The hearing decision is final and 

binding unless it is reversed or modified 

by the Administrator following review 

under § 423.666, or reopened and 

revised in accordance with § 423.668. 

§ 423.666 Review by the Administrator. 

(a) Request for review by 

Administrator. A PDP sponsor that 

receives a hearing decision upholding a 

contract termination determination may 

request review by the Administrator 

within 15 days of receiving the hearing 

decision as provided under § 423.665(b). 

(b) Review by the Administrator. The 

Administrator must review the hearing 

officer’s decision, and determine, based 

upon this decision, the hearing record, 

and any written arguments submitted by 

the PDP sponsor, whether the 

termination decision must be upheld, 

reversed, or modified. 

(c) Decision by the Administrator. The 

Administrator issues a written decision, 

and furnishes the decision to the PDP 

sponsor requesting review. 

§ 423.667 Effect of Administrator’s 

decision. 

A decision by the Administrator 

under section § 423.666(c) is final and 

binding unless it is reopened and 

revised in accordance with § 423.668. 

§ 423.668 Reopening of contract or 

reconsidered determination or decision of a 

hearing officer or the Administrator. 

(a) Initial or reconsidered 

determination. CMS may reopen and 

revise an initial or reconsidered 

determination upon its own motion 

within 1 year of the date of the notice 

of determination. 

(b) Decision of hearing officer. A 

decision of a hearing officer that is 

unfavorable to any party and is 

otherwise final may be reopened and 

revised by the hearing officer upon the 

officer’s own motion within 1 year of 

the notice of the hearing decision. 

Another hearing officer designated by 

CMS may reopen and revise the 

decision if the hearing officer who 

issued the decision is unavailable. 

(c) Decision of Administrator. A 

decision by the Administrator that is 

otherwise final may be reopened and 

revised by the Administrator upon the 

Administrator’s own motion within 1 

year of the notice of the Administrator’s 

decision. 

(d) Notices. (1) The notice of 

reopening and of any revisions 

following the reopening is mailed to the 

parties. 

(2) The notice of revision specifies the 

reasons for revisions. 

§ 423.669 Effect of revised determination. 

The revision of a contract or 

reconsidered determination is binding 

unless a party files a written request for 

hearing of the revised determination in 

accordance with § 423.651. 

Subpart O—Intermediate Sanctions 

§ 423.750 Kinds of sanctions. 

(a) The following intermediate 

sanctions and civil money penalties 

may be imposed: 

(1) Civil money penalties ranging 

from $10,000 to $100,000 depending 

upon the violation. 

(2) Suspension of enrollment of 

Medicare beneficiaries. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46853 

(3) Suspension of payment to the PDP 

sponsor for Medicare beneficiaries who 

enroll. 

(4) Suspension of all PDP marketing 

activities to Medicare beneficiaries for 

the MA plan subject to the intermediate 

sanctions. 

(b) The enrollment, payment, and 

marketing sanctions continue in effect 

until CMS is satisfied that the 

deficiency on which the determination 

was based is corrected and is not likely 

to recur. 

§ 423.752 Basis for imposing sanctions. 

(a) All intermediate sanctions. For the 

violations listed below, CMS may 

impose any of the sanctions specified in 

§ 423.750 on any PDP sponsor that has 

a contract in effect. The PDP sponsor 

may also be subject to other applicable 

remedies available under law. 

(1) Fails substantially to provide, to a 

PDP enrollee, medically necessary 

services that the organization is required 

to provide (under law or under the 

contract) to a PDP enrollee, and that 

failure adversely affects (or is 

substantially likely to adversely affect) 

the enrollee. 

(2) Imposes on PDP enrollees 

premiums in excess of the monthly 

basic and supplemental beneficiary 

premiums permitted under section 

1860D of the Act and subpart F of this 

part. 

(3) Acts to expel or refuses to reenroll 

a beneficiary in violation of the 

provisions of this part. 

(4) Engages in any practice that may 

reasonably be expected to have the 

effect of denying or discouraging 

enrollment of individuals whose 

medical condition or history indicates a 

need for substantial future medical 

services. 

(5) Misrepresents or falsifies 

information that it furnishes—

(i) To CMS; or 

(ii) To an individual or to any other 

entity under the Part D drug benefit 

program. 

(6) Employs or contracts with an 

individual or entity who is excluded 

from participation in Medicare under 

section 1128 or 1128A of the Act (or 

with an entity that employs or contracts 

with an individual or entity) for the 

provision of any of the following: 

(i) Health care. 

(ii) Utilization review. 

(iii) Medical social work. 

(iv) Administrative services. 

(b) Suspension of enrollment and 

marketing. If CMS makes a 

determination that could lead to a 

contract termination under § 423.509(a), 

CMS may instead impose the 

intermediate sanctions in § 423.756(c)(1) 

and (c)(3). 

§ 423.756 Procedures for imposing 

sanctions. 

(a) Notice of sanction and opportunity 

to respond. 

(1) Notice of sanction. Before 

imposing the intermediate sanctions 

specified in paragraph (c) of this section 

CMS—

(i) Sends a written notice to the PDP 

sponsor stating the nature and basis of 

the proposed sanction; and 

(ii) Sends the Office of the Inspector 

General a copy of the notice. 

(2) Opportunity to respond. CMS 

allows the PDP sponsor 15 days from 

receipt of the notice to provide evidence 

that it has not committed an act or failed 

to comply with the requirements 

described in § 423.752, as applicable. 

CMS may allow a 15-day addition to the 

original 15 days upon receipt of a 

written request from the PDP sponsor. 

To be approved, the request must 

provide a credible explanation of why 

additional time is necessary and be 

received by CMS before the end of the 

15-day period following the date of 

receipt of the sanction notice. CMS does 

not grant an extension if it determines 

that the PDP sponsor’s conduct poses a 

threat to an enrollee’s health and safety. 

(b) Informal reconsideration. If, 

consistent with paragraph (a)(2) of this 

section, the PDP sponsor submits a 

timely response to CMS’ notice of 

sanction, CMS conducts an informal 

reconsideration that—

(1) Consists of a review of the 

evidence by an CMS official who did 

not participate in the initial decision to 

impose a sanction; and 

(2) Gives the PDP sponsor a concise 

written decision setting forth the factual 

and legal basis for the decision that 

affirms or rescinds the original 

determination. 

(c) Specific sanctions. If CMS 

determines that a PDP sponsor has acted 

or failed to act as specified in § 423.752 

and affirms this determination in 

accordance with paragraph (b) of this 

section, CMS may—

(1) Require the PDP sponsor to 

suspend acceptance of applications 

made by Medicare beneficiaries for 

enrollment in the sanctioned plan 

during the sanction period; 

(2) In the case of a violation under 

§ 423.752(a), suspend payments to the 

PDP sponsor for Medicare beneficiaries 

enrolled in the sanctioned plan during 

the sanction period; and 

(3) Require the PDP sponsor to 

suspend all marketing activities for the 

sanctioned plan to Medicare enrollees. 

(d) Effective date and duration of 

sanctions. (1) Effective date. Except as 

provided in paragraph (d)(2) of this 

section, a sanction is effective 15 days 

after the date that the organization is 

notified of the decision to impose the 

sanction or, if the PDP sponsor seeks 

reconsideration in a timely manner 

under paragraph (b) of this section, on 

the date specified in the notice of CMS’

reconsidered determination. 

(2) Exception. If CMS determines that 

the PDP sponsor’s conduct poses a 

serious threat to an enrollee’s health and 

safety, CMS may make the sanction 

effective on a date before issuance of 

CMS’ reconsidered determination. 

(3) Duration of sanction. The sanction 

remains in effect until CMS notifies the 

PDP sponsor that CMS is satisfied that 

the basis for imposing the sanction is 

corrected and is not likely to recur. 

(e) Termination by CMS. In addition 

to or as an alternative to the sanctions 

described in paragraph (c) of this 

section, CMS may decline to authorize 

the renewal of an organization’s contract 

in accordance with § 423.507(b)(2) and 

(b)(3), or terminate the contract in 

accordance with § 423.509. 

(f) Civil money penalties. (1) If CMS 

determines that a PDP sponsor has 

committed an act or failed to comply 

with a requirement described in 

§ 423.752, CMS notifies the OIG of this 

determination, and also notifies OIG 

when CMS reverses or terminates a 

sanction imposed under this part. 

(2) In the case of a violation described 

in § 423.752(a), or a determination 

under § 423.752(b) based upon a 

violation under § 423.509(a)(4) 

(involving fraudulent or abusive 

activities), in accordance with the 

provisions of part 1005 of this chapter, 

the OIG may impose civil money 

penalties on the PDP sponsor in 

accordance with part 1005 of this 

chapter in addition to, or in place of, the 

sanctions that CMS may impose under 

paragraph (c) of this section. 

(3) In the case of a determination 

under § 423.752(b) other than a 

determination based upon a violation 

under § 423.509(a)(4), in accordance 

with the provisions of part 1005 of this 

chapter, CMS may impose civil money 

penalties on the PDP sponsor in the 

amounts specified in § 423.758 in 

addition to, or in place of, the sanctions 

that CMS may impose under paragraph 

(c) of this section. 

§ 423.758 Maximum amount of civil money 

penalties imposed by CMS. 

If CMS makes a determination under 

§ 423.752(b), based on any 

determination under § 423.509(a) except 

a determination under § 423.509(a)(4), 

CMS may impose civil money penalties 

in the following amounts: 

(a) If the deficiency on which the 

determination is based has directly 

46854 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

adversely affected (or has the substantial 

likelihood of adversely affecting) one or 

more PDP enrollees—up to $25,000 for 

each determination. 

(b) For each week that a deficiency 

remains uncorrected after the week in 

which the PDP sponsor receives CMS’

notice of the determination—up to 

$10,000 per week. 

(c) If CMS makes a determination 

under § 423.752(b) and § 423.756(f)(3), 

based on a determination under 

§ 423.509(a)(1) that a PDP sponsor has 

terminated its contract with CMS in a 

manner other than described under 

§ 423.510—$250 per Medicare enrollee 

from the terminated PDP plan or plans 

at the time the PDP sponsor terminated 

its contract, or $100,000, whichever is 

greater. 

§ 423.760 Other applicable provisions. 

The provisions of section 1128A of 

the Act (except paragraphs (a) and (b)) 

apply to civil money penalties under 

this subpart to the same extent that they 

apply to a civil money penalty or 

procedure under section 1128A of the 

Act. 

Subpart P—Premiums and CostSharing Subsidies for Low-Income 

Individuals 

Note: Regulations concerning the lowincome premium and cost-sharing subsidy 

under Medicaid can be found at Subpart S, 

Special Rules for States—Eligibility 

Determinations for Subsidies and General 

Payment Provisions. 

§ 423.771 Basis and scope. 

(a) Basis. This subpart is based on 

section 1860D–14 of the Act. 

(b) Scope. This subpart sets forth the 

requirements and limitations for 

payments by and on behalf of lowincome Medicare beneficiaries who 

enroll in a prescription drug plan or 

MA-PD plan. 

§ 423.772 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

Family size means the applicant, the 

spouse who is living in the same 

household, if any, and the number of 

individuals who are related to the 

applicant or applicants, who are living 

in the same household and who are 

dependent on the applicant or the 

applicant’s spouse for at least one-half 

of their financial support. 

Federal poverty line (FPL) has the 

meaning given that term in section 

673(2) of the Community Services Block 

Grant Act (42 U.S.C. 9902(2)), including 

any revision required by that section. 

Full benefit dual eligible individual 

means an individual who, for any 

month—

(1) Has coverage for the month under 

a prescription drug plan under Part D of 

title XVIII, or under an MA-PD plan 

under Part C of title XVIII; and 

(2) Is determined eligible by the State 

for medical assistance for full benefits 

under title XIX for the month under any 

eligibility category covered under the 

State plan or comprehensive benefits 

under a demonstration under section 

1115 of the Act. (This does not include 

individuals under Pharmacy Plus 

program demonstrations.) It also 

includes any individual who is 

determined by the State to be eligible for 

medical assistance under section 

1902(a)(10)(C) of the Act (medically 

needy) or section 1902(f) of the Act 

(States that use more restrictive 

eligibility criteria than are used by the 

SSI program) for any month if the 

individual was eligible for medical 

assistance in any part of the month. 

Full subsidy eligible individuals 

means individuals meeting the 

eligibility requirements under 

§ 423.773(b). 

Income means income as described 

under section 1905(p)(1) of the Act 

without use of any more liberal 

disregards under section 1902(r)(2) of 

the Act (that is, as defined by section 

1612 of the Act). This definition 

includes the income of the applicant 

and spouse who is living in the same 

household, if any, regardless of whether 

the spouse is also an applicant. 

Institutionalized individual means a 

full-benefit dual eligible individual who 

is an inpatient in a medical institution 

or nursing facility for which payment is 

made under Medicaid throughout a 

month, as defined under section 

1902(q)(1)(B) of the Act. 

Other subsidy eligible individuals 

means those individuals meeting the 

eligibility requirements under 

§ 423.773(d). 

Personal representatives means—

(1) Individuals who are authorized to 

act on behalf of the applicant; 

(2) If the applicant is incapacitated; or 

incompetent, someone acting 

responsibly on their behalf, or 

(3) An individual of the applicant’s 

choice who is requested by the 

applicant to act as his or her 

representative in the application 

process. 

Resources means liquid resources of 

the individual (and his or her spouse if 

the individual is married, who is living 

in the same household), such as 

checking and savings accounts, stocks, 

bonds, and other resources that can be 

readily converted to cash within 20 

days, that are not excluded from 

resources in section 1613 of the Act, and 

real estate that is not the applicant’s 

primary residence or the land on which 

the primary residence is located. 

State means for purposes of this 

subpart each of the 50 States and the 

District of Columbia. 

Subsidy eligible individuals means 

those individuals meeting the eligibility 

requirements under § 423.773. 

§ 423.773 Requirements for eligibility 

(a) Subsidy eligible individual. A 

subsidy eligible individual is a Part D 

eligible individual residing in a State 

who is enrolled in a prescription drug 

plan or MA–PD plan and meets the 

following requirements: 

(1) Has income below 150 percent of 

the FPL applicable to the individual’s 

family size. 

(2) Has resources at or below the 

resource thresholds set forth in 

§ 423.773(b)(2) or (d)(2). 

(b) Full subsidy eligible individual. A 

full subsidy eligible individual is a 

subsidy eligible individual who—

(1) Has income below 135 percent of 

the FPL applicable to the individual’s 

family size; and 

(2) Has resources that do not exceed—

(i) For 2006, 3 times the amount of 

resources an individual may have and 

still be eligible for benefits under the 

SSI program (including the assets or 

resources of the individual’s spouse). 

(ii) For subsequent years, the amount 

of resources allowable for the previous 

year under this paragraph (b)(2) 

increased by the annual percentage 

increase in the consumer price index 

(all items, U.S. city average) as of 

September of that previous year, 

rounded to the nearest multiple of $10. 

(c) Individuals treated as full subsidy 

eligible. An individual must be treated 

as meeting the eligibility requirements 

for full subsidy eligible individuals 

under paragraph (b) of this section if the 

individual is a—

(1) Full benefit dual eligible 

individual; 

(2) Recipient of SSI benefits under 

title XVI of the Act; or 

(3) Eligible for Medicaid as a 

Qualified Medicare Beneficiary (QMB), 

Specified Low Income Medicare 

Beneficiary (SLMB), or a Qualifying 

Individual (QI) under a State’s plan. The 

State agency must notify an individual 

treated as a full benefit dual eligible that 

the individual is eligible for a full 

subsidy of Part D premiums and 

deductibles and must either enroll with 

a PDP or MA–PD or be randomly 

assigned to a PDP or MA–PD. 

(d) Other low-income subsidy 

individuals. Other low-income subsidy 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46855 

individuals are subsidy eligible 

individuals who—

(1) Have income less than 150 percent 

of the FPL applicable to the individual’s 

family size; and 

(2) Have resources that do not 

exceed—

(i) For 2006, $10,000 if single or 

$20,000 if married (including the assets 

or resources of the individual’s spouse). 

(ii) For subsequent years, the resource 

amount allowable for the previous year 

under this paragraph (d)(2), increased 

by the annual percentage increase in the 

consumer price index (all items, U.S. 

city average) as of September of the 

previous year, rounded to the nearest 

multiple of $10. 

§ 423.774 Eligibility determinations, 

redeterminations, and applications. 

(a) Determinations of whether an 

individual is a subsidy eligible 

individual. Determinations of eligibility 

for subsidies under this section are 

made by the State under its State plan 

under title XIX if the individual applies 

with the Medicaid agency, or if the 

individual applies with SSA, the 

Commissioner of Social Security in 

accordance with the requirements of 

section 1860D–14(a)(3) of the Act. 

(b) Effective date of initial eligibility 

determinations. Eligibility 

determinations are effective beginning 

with the first day of the month in which 

the individual applies, or January 1, 

2006 if the application was taken in 

advance of that date, and remain in 

effect for a period not to exceed 1 year. 

(c) Redeterminations and appeals of 

low-income subsidy eligibility. (1) 

Redeterminations and appeals of lowincome subsidy eligibility 

determinations—eligibility 

determinations made by States. 

Redeterminations and appeals of lowincome subsidy eligibility 

determinations by States must be made 

in the same manner and frequency as 

the redeterminations and appeals are 

made under the State’s plan. 

(2) Redeterminations and appeals of 

low-income subsidy eligibility—

eligibility determinations made by 

Commissioner. Redeterminations and 

appeals of eligibility determinations 

made by the Commissioner must be 

made in the manner specified by the 

Commissioner. 

(d) Application requirements. (1) In 

order for low-income subsidy 

applications to be considered complete, 

individuals applying for the low-income 

subsidy, or personal representatives 

applying on the individual’s behalf, 

must—

(i) Complete all required elements of 

the application; 

(ii) Provide any statements from 

financial institutions, as requested, to 

support information in the application; 

and 

(iii) Certify, under penalty of perjury 

or similar sanction for false statements, 

as to the accuracy of the information 

provided on the application form. 

(d)(2) [Reserved] 

§ 423.780 Premium subsidy. 

(a) Full subsidy eligible individuals. 

Full subsidy individuals are entitled to 

a premium subsidy equal to 100 percent 

of the ‘‘premium subsidy amount,’’ not 

to exceed the basic premium for 

coverage under the prescription drug 

plan selected by the beneficiary, and the 

greater of the low-income benchmark 

premium or the lowest monthly 

beneficiary premium for a prescription 

drug plan that offers basic prescription 

drug coverage in the PDP region. (The 

premium subsidy determined in this 

way applies regardless of whether the 

individual enrolls in a PDP or MA–PD.) 

In the event the low-income benchmark 

premium is less than the lowest 

monthly beneficiary premium for basic 

prescription drug coverage offered by a 

PDP sponsor in a PDP region, in 

accordance with section 1860D–14(b)(3) 

of the Act, the premium subsidy will be 

equal to the lowest monthly beneficiary 

premium for basic prescription drug 

coverage offered by a PDP sponsor in 

the PDP region. The low-income 

benchmark premium amount for a 

region equals either—

(1) If all PDPs in the PDP region are 

offered by the same PDP sponsor, the 

weighted average of the monthly 

beneficiary premiums for basic 

prescription drug coverage; or 

(2) If the PDPs in the region are 

offered by more than one PDP sponsor, 

the weighted average of the monthly 

beneficiary premiums for basic 

prescription drug coverage for all PDP 

and MA–PD plans in the region 

(excluding section 1876 cost plans, 

PACE plans, specialized MA plans for 

special needs individuals, and private 

fee-for-service plans) and the portion of 

the monthly beneficiary premium for 

alternative prescription drug coverage 

attributable to basic prescription drug 

coverage for all PDPs and MA–PD plans 

in the region. Fallback plans will be 

treated the same as risk-bid plans for the 

calculation of the low-income 

benchmark premium. The weighted 

average is determined based on 

enrollment in PDPs and MA–PDs in the 

region. 

(b) Other low-income subsidy eligible 

individuals—sliding scale premium. 

Other low-income subsidy eligible 

individuals are entitled to a premium 

subsidy based on a linear sliding scale 

ranging from 100 percent of the amount 

described in paragraph (a) of this 

section, for individuals with incomes at 

or below 135 percent of the FPL 

applicable to their family size, to 0 

percent for individuals with incomes at 

150 percent of the FPL applicable to 

their family size. 

(c) Premium subsidy for late 

enrollment penalty. Full subsidy eligible 

individuals who are subject to late 

enrollment penalties under § 423.46 are 

entitled to an additional premium 

subsidy equal to 80 percent of the late 

penalty for the first 60 months during 

which the penalty is imposed and 100 

percent of the penalty thereafter. 

§ 423.782 Cost-sharing subsidy. 

(a) Full subsidy eligible individuals. 

Full subsidy eligible individuals are 

entitled to the following: 

(1) Elimination of the annual 

deductible under § 423.104(e)(1). 

(2) Reduction in cost-sharing for all 

covered Part D drugs covered under the 

PDP or MA–PD plan below the out-ofpocket limit (under § 423.104), 

including Part D drugs covered under 

the PDP or MA–PD plan obtained after 

the initial coverage limit (under 

§ 423.104(e)(4)), as follows: 

(i) Except as provided under 

paragraphs (a)(2)(ii) and (a)(2)(iii) of this 

section, copayment amounts not to 

exceed the copayment amounts 

specified in § 423.104. This applies to 

those full benefit dual eligible 

individuals who are not 

institutionalized and who have income 

above 100 percent of the Federal 

poverty line applicable to the 

individual’s family size. 

(ii) Institutionalized individuals have 

no cost-sharing for covered Part D drugs 

covered under their PDP or MA–PD 

plans. 

(iii) Non-institutionalized full benefit 

dual eligible individuals with incomes 

that do not exceed 100 percent of the 

Federal poverty line applicable to the 

individual’s family size are subject to 

cost-sharing for covered drugs equal to 

the lesser of a copayment amount of $1 

for a generic drug or preferred multiple 

source drug of $3 for any other drug, or 

the amount charged to other individuals 

with income below 135 percent of the 

FPL and resources not greater than 3 

times the amount an individual may 

have and still be eligible for benefits 

under the SSI program. These amounts 

are increased each year beginning in 

2007 by the percentage increase in CPI, 

rounded to the nearest multiple of 5 

cents or 10 cents, respectively. 

(iv) Non-institutionalized full benefit 

dual eligible individuals with incomes 

46856 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

that exceed 100 percent of the Federal 

poverty line applicable to the 

individual’s family size are subject to 

cost-sharing for covered drugs equal to 

the lesser of a copayment amount of $2 

for a generic drug or preferred multiple 

source drug or $5 for any other drug, or 

the amount charged to other individuals 

with income below 135 percent of the 

FPL and resources not greater than 3 

times the amount an individual may 

have and still be eligible for benefits 

under the SSI program. 

(3) Elimination of all cost-sharing for 

covered Part D drugs covered under the 

PDP or MA–PD plan above the out-ofpocket limit (under § 423.104(e)(5). 

(b) Other low-income subsidy eligible 

individuals. Other low-income subsidy 

eligible individuals are entitled to the 

following: 

(1) Reduction in the annual 

deductible under § 423.104 to $50. This 

amount is increased each year beginning 

in 2007 by the annual percentage 

increase in average per capita aggregate 

expenditures for covered Part D drugs, 

rounded to the nearest multiple of $1. 

(2) 15 percent coinsurance for all 

covered drugs covered under the 

individual’s PDP or MA–PD plan 

obtained after the initial coverage limit 

(under § 423.104), up to the out-ofpocket limit (under § 423.104). 

(3) For covered drugs above the outof-pocket limit (under § 423.104), 

copayments not to exceed $2 for a 

generic drug or preferred multiple 

source and $5 for any other drug. These 

amounts are increased each year 

beginning in 2007 by the annual 

percentage increase in average per 

capita aggregate expenditures for 

covered Part D drugs, rounded to the 

nearest multiple of 5 cents. 

§ 423.800 Administration of subsidy 

program. 

(a) Notification of eligibility for lowincome subsidy. CMS notifies the PDP 

sponsor offering the PDP or the MA 

organization offering the MA–PD plan, 

in which a subsidy eligible individual is 

enrolled, of the individual’s eligibility 

for a subsidy and the amount of the 

subsidy. 

(b) Reduction of premium or costsharing by PDP sponsor or organization. 

The PDP sponsor offering the PDP, or 

the MA organization offering the MA–

PD plan, in which a subsidy eligible 

individual is enrolled must reduce the 

individual’s premiums and cost-sharing 

as applicable, and provide information 

to CMS on the amount of those 

reductions, in a manner determined by 

CMS. The PDP sponsor and MA–PD 

organization must track the application 

of the low-income cost-sharing 

subsidies to be applied to the out-ofpocket threshold. 

(c) Reimbursement to sponsor or 

organization for the amount of the 

reductions. CMS reimburses sponsors 

and MA organizations for reductions 

under paragraph (b) of this section, or, 

if a PDP sponsor or MA organization 

elects to be paid on a capitated basis 

under paragraph (e) of this section, the 

capitated amounts under paragraph (e) 

of this section, in the manner 

determined by CMS. 

(d) Reimbursement for cost-sharing on 

a capitated basis. Reimbursement for 

cost-sharing subsidies may be computed 

on a capitated basis, taking into account 

the actuarial value of the subsidies and 

making appropriate adjustments to 

reflect differences in the risks actually 

involved. 

(e) Reimbursement for cost-sharing 

paid before notification of eligibility for 

low-income subsidy. The PDP sponsor 

offering the PDP plan, or MA–PD 

organization offering the MA–PD plan, 

must reimburse low-income subsidy 

eligible individuals any out-of-pocket 

costs relating to excess premiums and 

cost-sharing paid before the date the 

individual is notified of subsidy 

eligibility and after the date subsidy 

eligibility is effective. 

Subpart Q—Guaranteeing Access to a 

Choice of Coverage (Fallback Plans) 

§ 423.851 Scope. 

This section sets forth—the rights of 

beneficiaries to a choice of at least two 

sources of prescription drug coverage; 

requirements and limitations on the bid 

submission, review and approval of 

fallback prescription drug plans, and the 

determination of enrollee premium and 

plan payments for these plans. 

§ 423.855 Definitions. 

As used in this subpart, unless 

specified otherwise—

Eligible Fallback Entity or Fallback 

Entity means an entity that, with respect 

to a particular contract period—

(1) meets all the requirements to be a 

PDP sponsor except that it does not 

have to be a risk-bearing entity; and 

(2) does not submit a bid under 

§ 423.265 for any prescription drug plan 

for any PDP region for the first year of 

that contract period. An entity is treated 

as submitting a bid if the entity is acting 

as a subcontractor for an integral part of 

the drug benefit management activities 

of a PDP sponsor. An entity is not 

treated as submitting a bid if it is a 

subcontractor of an MA organization, 

unless that organization is acting as a 

PDP sponsor for a prescription drug 

plan. 

Fallback Prescription Drug Plan 

means a plan offered by a fallback entity 

that—

(1) Offers only actuarially equivalent 

standard prescription drug coverage as 

defined in § 423.100; 

(2) Provides access to negotiated 

prices, including discounts from 

manufacturers; and 

(3) Meets other requirements as 

specified by CMS. 

Qualifying Plan means a full-risk or 

limited-risk prescription drug plan, as 

defined in § 423.258, or an MA plan 

described in section 1851(a)(2)(A)(i) of 

the Act, that either provides basic 

prescription drug coverage, as defined 

in § 423.100, or provides alternative 

prescription drug coverage for no 

additional premium because it applies a 

premium rebate under Part C of 

Medicare as a credit against the 

supplemental coverage premium, as 

described under § 422.266(b)(1). An 

MA–

PD plan must be open for enrollment 

and not operating under a capacity 

waiver to be counted as a qualifying 

plan. 

§ 423.859 Assuring access to a choice of 

coverage. 

(a) Choice of at least 2 qualifying 

plans in each area. Each Part D eligible 

individual must have available a choice 

of enrollment in at least 2 qualifying 

plans (as defined in § 423.855) in the 

area in which the individual resides. 

This requirement is not satisfied if only 

one entity offers all the qualifying plans 

in the area. At least 1 of the 2 qualifying 

plans must be a prescription drug plan. 

(b) Fallback service area. (1) For 

coverage year. Before the start of each 

coverage year CMS determines if Part D 

eligible individuals residing in a PDP 

region have access to a choice of 

enrollment in a minimum of 2 

qualifying plans, as described in 

paragraph (a) of this section. If CMS 

determines that Part D eligible 

individuals in a PDP region, or some 

portion of the region, do not have 

available a choice of enrollment in a 

minimum of two qualified plans, CMS 

designates the region or portion of a 

region as a fallback service area. Each 

Part D eligible individual in a fallback 

service area is given the opportunity to 

enroll in a fallback prescription drug 

plan. 

(2) For mid-year changes. If a contract 

with a qualifying plan is terminated in 

the middle of a contract year (as 

provided for in §§ 423.508, 423.509, or 

423.510), CMS determines if Part D 

eligible individuals residing in the 

affected PDP region still have access to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46857 

a choice of enrollment in a minimum of 

2 qualifying plans. If CMS determines 

that Part D eligible individuals in a PDP 

region, or some portion of the region, no 

longer have available a choice of 

enrollment in a minimum of two 

qualifying plans, CMS designates the 

region or portion of a region as a 

fallback service area. 

(c) Access to coverage in the 

territories. CMS may waive or modify 

the requirements of this part if—

(1) CMS determines that waiver or 

modification is necessary to secure 

access to qualified prescription drug 

coverage for Part D eligible individuals 

residing in a State other than the 50 

States or the District of Columbia; or 

(2) An entity seeking to become a 

prescription drug plan in a State other 

than the 50 States or the District of 

Columbia requests waiver or 

modification of any Part D requirement 

in order to provide qualified 

prescription drug coverage in a State 

other than the 50 States or the District 

of Columbia. 

§ 423.863 Submission and approval of 

bids. 

(a) Submission of Bids. (1) Solicitation 

of bids. Separate from the bidding 

process under § 423.265, CMS solicits 

bids from eligible fallback entities for 

the offering in all fallback service areas 

in one or more PDP regions of a fallback 

prescription drug plan during the 

contract period specified in 

§ 423.871(c). 

(2) Timing of bids. CMS will 

determine when to solicit bids for 2006 

so that potential fallback plans will have 

enough time to prepare a bid. After that, 

bids will be solicited on three-year 

cycles, or annually thereafter as needed 

to replace contractors between 

contracting cycles. 

(3) Format of bid. CMS specifies the 

form and manner in which fallback bids 

are submitted in separate guidance to 

bidders. 

(b) Negotiation and acceptance of 

bids. 

(1) General rule. Except as provided 

in this section, the provisions of 

§ 423.272 apply for the approval or 

disapproval of fallback prescription 

drug plans. CMS enters into contracts 

under this paragraph with eligible 

fallback entities for the offering of 

approved fallback prescription drug 

plans in potential fallback service areas. 

(2) Flexibility in risk assumed and 

application of fallback plan. In order to 

ensure access in an area pursuant to 

§ 423.859(a), CMS may approve limited 

risk plans under § 423.272(c) for that 

area. If the access requirement is still 

not met after applying § 423.272(c), 

CMS provides for the offering of a 

fallback prescription drug plan in that 

area. 

(3) Limitation of 1 Plan for all fallback 

service areas in a PDP region. All 

fallback service areas in any PDP region 

for a contract period must be served by 

the same fallback prescription drug 

plan. 

(4) Competitive procedures. CMS uses 

competitive procedures (as defined in 

section 4(5) of the Office of Federal 

Procurement Policy Act (41 U.S.C. 

403(5)) to enter into a contract under 

this paragraph. The provisions of 

section 1874A(d) of the Act apply to a 

contract under this section in the same 

manner as they apply to a contract 

under that section. 

(5) Timing of contracts. CMS approves 

a fallback prescription drug plan for a 

PDP region in a manner so that, if there 

are any fallback service areas in the 

region for a year, the fallback 

prescription drug plan is offered at the 

same time as prescription drug plans are 

otherwise offered. In the event of midyear changes and as required by 

§ 423.859(b)(2), CMS approves a fallback 

prescription drug plan for a PDP region 

in a manner so that the fallback plan is 

offered within 90 days of notice. 

(6) No national fallback plan. CMS 

may not enter into a contract with a 

single fallback entity for the offering of 

fallback plans throughout the United 

States. 

§ 423.867 Rules regarding premiums. 

(a) Monthly beneficiary premium. 

Except as provided in § 423.286(d)(3) 

(relating to late enrollment penalty) and 

subject to Subpart P (relating to lowincome assistance), the monthly 

beneficiary premium under a fallback 

prescription drug plan must be uniform 

for all fallback service areas in a PDP 

region. It must equal 25.5 percent of 

CMS’s estimate of the average monthly 

per capita actuarial cost, including 

administrative expenses, of providing 

coverage in the region based on similar 

expenses of prescription drug plans that 

are not fallback prescription drug plans. 

(b) Special rule for collection of 

premiums in fallback plans. In the case 

of a fallback prescription drug plan, the 

provisions of § 423.293 (b) concerning 

payments of the late enrollment penalty 

do not apply and the monthly 

beneficiary premium is collected in the 

manner specified in § 422.262(f)(1) (or 

other manner as may be provided under 

section 1840 of the Act in the case of 

monthly premiums under section 1839 

of the Act). 

§ 423.871 Contract terms and conditions. 

(a) General. Except as may be 

appropriate to carry out the 

requirements of this section, the terms 

and conditions of contracts with eligible 

fallback entities offering fallback 

prescription drug plans are the same as 

the terms and conditions of contracts at 

§ 423.504 for prescription drug plans. 

(b) Period of contract. Except as may 

be renewed after a subsequent bidding 

process, a contract with a fallback entity 

for fallback service areas for a PDP 

region is in effect for a period of 3 years. 

However, a fallback prescription drug 

plan may be offered for any year within 

the contract period for a particular area 

only if the area is a fallback service area 

for that year. 

(c) Entity not permitted to market or 

brand fallback prescription drug plans. 

An eligible fallback entity with a 

contract under this part may not engage 

in any marketing or branding of a 

fallback prescription drug plan. 

(d) Performance measures. CMS 

issues guidance establishing 

performance measures for fallback 

prescription drug plans based on the 

following: 

(1) Types of Performance Measures. 

Performance measures include at least 

measures for each of the following: 

(i) Costs. The entity contains costs to 

the Medicare Prescription Drug Account 

and to Part D eligible individuals 

enrolled in a fallback prescription drug 

plan offered by the entity through 

mechanisms such as generic 

substitution and price discounts, 

including discounts from 

manufacturers. 

(ii) Quality programs. The entity 

provides the enrollees with quality 

programs that avoid adverse drug 

reactions and over utilization and 

reduce medical errors. 

(iii) Customer service. The entity 

provides timely and accurate delivery of 

services and pharmacy and beneficiary 

support services. 

(iv) Benefit administration and claims 

adjudication. The entity provides 

efficient and effective benefit 

administration and claims adjudication. 

(2) Development of performance 

measures. CMS establishes detailed 

performance measures for use in 

evaluating fallback entity performance 

and determination of certain 

management fees based on criteria from 

historical performance, application of 

acceptable statistical measures of 

variation to fallback entity and PDP 

sponsor experience nationwide during a 

base period, or changing program 

emphases or requirements. 

46858 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(e) Payment terms. A contract 

approved with a fallback entity includes 

terms for payment for—

(1) The actual costs (taking into 

account negotiated price concessions 

described in § 423.108(d) of covered 

Part D drugs provided to Part D eligible 

individuals enrolled in a fallback 

prescription drug plan offered by the 

entity); and 

(2) Management fees that are tied to 

the performance measures established 

by CMS for the management, 

administration, and delivery of the 

benefits under the contract as provided 

under paragraph (d) of this section. 

(f) Requirement for the submission of 

information. Each contract for a fallback 

prescription drug plan requires an 

eligible fallback entity offering a 

fallback prescription drug plan to 

provide CMS with the information CMS 

determines is necessary to carry out this 

section, or as required by law. Officers, 

employees and contractors of the 

Department of Health and Human 

Services may use any information 

disclosed or obtained in accordance 

with the provisions of this part only for 

the purposes of, and to the extent 

necessary in, carrying out this part. This 

restriction does not limit OIG authority 

to conduct audits and evaluations 

necessary for carrying out these 

regulations. 

(g) Amendment to reflect changes in 

service area. The contract may be 

amended by CMS at any time as needed 

to reflect the exact regions or counties 

to be included in the fallback service 

area(s). 

§ 423.875 Payments to fallback plans. 

The amount payable for a fallback 

prescription drug plan is the amount 

determined under the contract for the 

plan in accordance with § 423.871(e). 

Subpart R—Payments to Sponsors of 

Retiree Prescription Drug Plans 

§ 423.880 Basis and scope. 

(a) Basis. This subpart is based on 

section 1860D–22 of the Act, as 

amended by section 101 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA). 

(b) Scope. This section implements 

the statutory requirement that a subsidy 

payment be made to sponsors of 

qualified retiree prescription drug plans. 

§ 423.882 Definitions. 

For the purposes of this subpart, the 

following definitions apply: 

Allowable retiree costs in accordance 

with section 1860D–22(a)(3)(C)(i) of the 

Act, means gross covered retiree planrelated prescription drug costs between 

the cost threshold and cost limit, as 

defined under § 423.886(b), that are 

actually paid by either the qualified 

retiree prescription drug plan or the 

qualifying covered retiree (or on the 

retiree’s behalf), net of any manufacturer 

or pharmacy discounts, chargebacks, 

rebates, and similar price concessions. 

Covered Part D drug has the same 

meaning as defined in § 423.100. 

Retiree drug subsidy amount means 

the subsidy amount paid to sponsors of 

qualified retiree prescription drug 

coverage under § 423.886(a). 

Employment-based retiree health 

coverage means coverage of health care 

costs under a group health plan based 

on an individual’s status as a retired 

participant in the plan, or as the spouse 

or dependent of a retired participant. 

The term includes coverage provided by 

voluntary insurance coverage, or 

coverage as a result of statutory or 

contractual obligation. 

Gross covered retiree plan-related 

prescription drug costs, or gross retiree 

costs means, for a qualifying covered 

retiree who is enrolled in a qualified 

retiree prescription drug plan during a 

plan year, non-administrative costs 

incurred under the plan for covered Part 

D drugs during the year, whether paid 

for by the plan or the retiree, including 

costs directly related to the dispensing 

of covered Part D drugs. 

Group health plan has the same 

meaning as defined in section 607(1) of 

ERISA, 29 U.S.C. 1167(1). This 

definition also includes the following 

plans: 

(1) Federal and State governmental 

plan means a plan established or 

maintained for its employees by the 

Government of the United States, by the 

government of any State or political 

subdivision of a State, or by any agency 

or instrumentality or any of the 

foregoing, including a health benefits 

plan offered under chapter 89 of title 5, 

United States Code (the Federal 

Employee Health Benefit Plan (FEHBP)). 

(2) Collectively bargained plan means 

a plan established or maintained under 

or by one or more collective bargaining 

agreements. 

(3) Church plan means a plan 

established and maintained for its 

employees or their beneficiaries by a 

church or by a convention or association 

of churches that is exempt from tax 

under section 501 of the Internal 

Revenue Code of 1986 (26 U.S.C. 501). 

Part D eligible individual is defined in 

§ 423.4 of our proposed rule. 

Qualified retiree prescription drug 

plan means employment-based retiree 

health coverage that meets the 

requirements set forth in § 423.884(a) 

through (d) of this chapter for a Part D 

eligible individual who is a participant 

or beneficiary under the coverage. 

Qualifying covered retiree means a 

Part D eligible individual who is a 

participant under the qualified retiree 

prescription drug plan or the spouse or 

dependent of a participant under the 

qualified prescription drug plan, who is 

not enrolled in a Part D prescription 

drug plan or a Medicare AdvantagePrescription Drug (MA–PD) plan. 

Standard Prescription Drug Coverage 

has the same meaning as defined in 

§ 423.100. 

Sponsor is a plan sponsor as defined 

in section 3(16)(B) of the Employee 

Retirement Income Security Act of 1974 

(ERISA), except that, in the case of a 

plan maintained jointly by one 

employer and an employee organization 

and for which the employer is the 

primary source of financing, the term 

means the employer. 

§ 423.884 Requirements for qualified 

retiree prescription drug plans. 

A qualified retiree prescription drug 

plan must meet the requirements of this 

section. 

(a) Actuarial Attestation. The sponsor 

of the plan (or a plan administrator 

designated by the sponsor) provides to 

CMS an attestation that the actuarial 

value of the retiree prescription drug 

coverage under the plan is at least equal 

to the actuarial value of the standard 

prescription drug coverage under Part D. 

The attestation must—

(1) Be provided annually, no later 

than 90 days prior to the start of the 

calendar year, except that for 2006, the 

attestation must be provided by 

September 30, 2005; 

(2) Be provided no later than 90 days 

before the implementation of a material 

change to the drug coverage of the plan 

that impacts the actuarial value of the 

coverage; 

(3) Certify that the values have been 

calculated according to established CMS 

actuarial guidelines based on generally 

accepted actuarial principles; 

(4) Be certified by a qualified actuary 

who is a member of the American 

Academy of Actuaries. Applicants may 

use qualified outside actuaries. 

(5) Be signed under the penalty of 

perjury; 

(6) State that the information 

contained in the attestation is true and 

accurate to the best of the attester’s 

knowledge; 

(7) Contain an acknowledgement that 

the information being provided in the 

attestation is being used to obtain 

Federal funds. 

(b) Sponsor application for the 

subsidy payment. 

(1) Deadlines. The sponsor must 

submit an application for the subsidy, 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46859 

signed by an authorized representative 

of the sponsor, to CMS by no later than 

for: 

(i) The year 2006, September 30, 2005. 

(ii) All other years, 90 days prior to 

the start of the year. 

(iii) Plans that begin coverage in the 

middle of a year, 90 days prior to the 

date the coverage begins. 

(iv) New plans that institute coverage 

after September 30, 2005, 150 days prior 

to the start of the new plan. 

(2) Required information. The 

following information must be 

submitted with the application: 

(i) Employer Tax ID Number (if 

applicable). 

(ii) Sponsor name and address. 

(iii) Contact name and email address. 

(iv) Actuarial attestation and 

supporting documentation for each 

qualified retiree prescription drug plan 

for which the sponsor seeks subsidy 

payments. 

(v) Full names of each qualifying 

covered retiree enrolled in each 

prescription drug plan (including 

spouses and dependents, if Medicareeligible), and the following information: 

(A) Health Insurance Claim (HIC) 

number (when available). 

(B) Date of birth. 

(C) Sex. 

(D) Social Security number. 

(E) Relationship to the retired 

employee. 

(3) Terms and conditions. The 

application must specify acceptance of 

the terms and conditions of eligibility to 

receive a subsidy payment. The sponsor 

must—

(i) Agree to comply with all Federal 

laws and regulations, and the terms and 

conditions of eligibility for a subsidy 

payment, including those concerning 

auditing of claims for subsidy payments 

and combating fraud and abuse; 

(ii) Acknowledge that the information 

is being provided to obtain Federal 

funds; 

(iii) Require that all subcontractors, 

including administrators, acknowledge 

that information provided in connection 

with the subcontract is used for 

purposes of obtaining Federal funds; 

(iv) Sign any further certification that 

CMS may require. 

(4) Signature by sponsor. An 

authorized representative of the 

requesting sponsor must sign the 

completed application. The signed 

application constitutes an agreement 

between CMS and the sponsor. 

(5) Updates. The sponsor (or the plan 

administrator designated by the 

sponsor) must provide updates to CMS 

of the information required in paragraph 

(b)(2) of this section in the manner and 

frequency specified by CMS. 

(6) Data match. Once the full 

application for the subsidy payment is 

submitted, CMS—

(i) Matches the names of the 

qualifying covered retirees and the 

identifying information of each retiree 

with the Medicare Data Base (MBD) to 

determine which retirees are qualifying 

covered retirees. 

(ii) Provides to the sponsor (or to a 

plan administrator designated by a 

sponsor) the names, and other 

identifying information if necessary, of 

the sponsor’s qualifying covered 

retirees. 

(c) Disclosure of creditable coverage 

status. The sponsor must disclose to all 

of its retirees and their spouses and 

dependents eligible to participate in its 

plan who are Part D eligible individuals 

whether the coverage is creditable 

coverage under § 423.4 in accordance 

with the notification requirements 

under § 423.56. 

(d) Audits, CMS access to records. 

The sponsor must meet the 

requirements of § 423.888 (d). 

§ 423.886 Retiree drug subsidy amounts. 

(a) Amount of subsidy payment. For 

each qualifying covered retiree enrolled 

with the sponsor of a qualified retiree 

prescription drug plan in a plan year in 

which the retiree’s gross covered retiree 

plan-related prescription drug costs (as 

defined in § 423.882) exceeds the cost 

threshold defined in paragraph (b)(1) of 

this section, the sponsor receives a 

subsidy payment in the amount of 28 

percent of the allowable retiree costs (as 

defined in § 423.882) attributable to the 

gross covered prescription drug costs 

between the cost threshold and the cost 

limit defined in paragraph (b)(2) of this 

section. 

(b) Cost threshold and cost limit. The 

following cost threshold and cost limits 

apply—

(1) Subject to paragraph (b)(3) of this 

section, the cost threshold under this 

section is equal to $250 for calendar 

year 2006. 

(2) Subject to paragraph (b)(3) of this 

section, the cost limit under this section 

is equal to $5,000 for calendar year 

2006. 

(3) The cost threshold and cost limit 

specified in paragraphs (b)(1) and (b)(2) 

of this section, for years after 2006, is 

adjusted in the same manner as the 

annual Part D deductible and the annual 

Part D out-of-pocket threshold are 

adjusted annually under 

§§ 423.104(e)(1)(ii) and (e)(4)(iii)(B), 

respectively. 

§ 423.888 Payment methods, including 

provision of necessary information. 

(a) Basis. The provisions of § 423.301 

through § 423.343, including 

requirement to provide information 

necessary to ensure accurate subsidy 

payments, govern payment under 

§ 423.886. 

(b) Payment. Payment under § 423.886 

is conditioned on provision of accurate 

and truthful information in a form and 

manner specified by CMS. When 

directed by the sponsor of a qualified 

retiree prescription drug plan applying 

for payment under this section, the 

qualified retiree prescription drug plan 

(or an administrator or insurer of the 

qualified retiree prescription drug plan, 

if applicable) must submit in the form 

and manner CMS specifies, the 

information required to CMS. 

(c) Use of information provided. 

Officers, employees and contractors of 

the Department of Health and Human 

Services, including the Office of 

Inspector General (OIG), may use 

information collected under paragraphs 

(a) and (d) of this section only for the 

purposes of, and to the extent necessary 

in, carrying out this subpart including, 

but not limited to, determination of 

payments and payment-related 

oversight and program integrity 

activities, or as otherwise required by 

law. This restriction does not limit OIG 

authority to conduct audits and 

evaluations necessary for carrying out 

these regulations. 

(d) Maintenance of records. (1) The 

sponsor of the qualified retiree 

prescription drug plan and the qualified 

retiree prescription drug plan (or an 

administrator or insurer of the qualified 

retiree prescription drug plan), as 

applicable, must maintain, and furnish 

to CMS or the Office of Inspector 

General (OIG) upon request, the records 

enumerated in paragraph (d)(3) of this 

section. The records must be maintained 

for 6 years after the expiration of the 

plan year in which the costs were 

incurred for the purposes of audits and 

other oversight activities conducted by 

CMS to assure the accuracy of the 

actuarial attestation and the accuracy of 

payments. 

(2) CMS or the OIG may extend the 6- 

year retention requirement in the event 

of an ongoing investigation, litigation or 

negotiation. 

(3) The records that must be retained 

are: 

(i) Reports and working documents of 

the actuaries who wrote the attestation 

submitted in accordance with 

§ 423.884(a). 

(ii) All documentation of costs 

incurred and other relevant information 

utilized for calculating the amount of 

the subsidy payment made in 

accordance with § 423.886, including 

the underlying claims data. 

46860 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

§ 423.890 Appeals. 

(a) Informal written reconsideration. 

(1) Initial determinations. A sponsor is 

entitled to an informal written 

reconsideration of an adverse initial 

determination. An initial determination 

is a determination regarding the 

following: 

(i) The amount of the subsidy 

payment. 

(ii) The actuarial equivalence of the 

sponsor’s retiree prescription drug plan. 

(iii) If an enrollee in a retiree 

prescription drug plan is a qualifying 

covered retiree; or 

(iv) Any other similar determination 

(as determined by CMS) that affects 

eligibility for, or the amount of, a 

subsidy payment. 

(2) Effect of an initial determination 

regarding the retiree drug subsidy. An 

initial determination is final and 

binding unless reconsidered in 

accordance with this paragraph (a). 

(3) Manner and timing for request. A 

request for reconsideration must be 

made in writing and filed with CMS 

within 15 days of the date on the notice 

of adverse determination. 

(4) Content of request. The request for 

reconsideration must specify the 

findings or issues with which the 

sponsor disagrees and the reasons for 

the disagreements. The request for 

reconsideration may include additional 

documentary evidence the sponsor 

wishes CMS to consider. 

(5) Conduct of informal written 

reconsideration. In conducting the 

reconsideration, CMS reviews the 

subsidy determination, the evidence 

and findings upon which it was based, 

and any other written evidence 

submitted by the sponsor or by CMS 

before notice of the reconsidered 

determination is made. 

(6) Decision of the informal written 

reconsideration. CMS informs the 

sponsor of the decision orally or 

through electronic mail. CMS sends a 

written decision to the sponsor on the 

sponsor’s request. 

(7) Effect of CMS informal written 

reconsideration. A reconsideration 

decision, whether delivered orally or in 

writing, is final and binding unless a 

request for hearing is filed in 

accordance with paragraph (b) of this 

section, or it is revised in accordance 

paragraph (d) of this section. 

(b) Right to informal hearing. A 

sponsor dissatisfied with the CMS 

reconsideration decision is entitled to 

an informal hearing as provided in this 

section. 

(1) Manner and timing for request. A 

request for a hearing must be made in 

writing and filed with CMS within 15 

days of the date the sponsor receives the 

CMS reconsideration decision. 

(2) Content of request. The request for 

informal hearing must include a copy of 

the CMS reconsideration decision (if 

any) and must specify the findings or 

issues in the decision with which the 

sponsor disagrees and the reasons for 

the disagreements. 

(3) Informal hearing procedures. (i) 

CMS provides written notice of the time 

and place of the informal hearing at 

least 10 days before the scheduled date. 

(ii) The hearing are conducted by a 

CMS hearing officer who neither 

receives testimony nor accepts any new 

evidence that was not presented with 

the reconsideration request. The CMS 

hearing officer is limited to the review 

of the record that was before CMS when 

CMS made both its initial and 

reconsideration determinations. 

(iii) If CMS did not issue a written 

reconsideration decision, the hearing 

officer may request, but not require, a 

written statement from CMS or its 

contractors explaining CMS’

determination, or CMS or its contractors 

may, on their own, submit the written 

statement to the hearing officer. Failure 

of CMS to submit a written statement 

does not result in any adverse findings 

against CMS and may not in any way be 

taken into account by the hearing officer 

in reaching a decision. 

(4) Decision of the CMS Hearing 

Officer. The CMS hearing officer 

decides the case and sends a written 

decision to the sponsor, explaining the 

basis for the decision. 

(5) Effecting of hearing officer 

decision. The hearing officer decision is 

final and binding, unless the decision is 

reversed or modified by the 

Administrator in accordance with 

paragraph (c) of this section. 

(c) Review by the Administrator. (1) A 

sponsor that has received a hearing 

officer decision upholding a CMS initial 

or reconsidered determination may 

request review by the Administrator 

within 15 days of receipt of the hearing 

officer’s decision. 

(2) The Administrator may review the 

hearing officer’s decision, any written 

documents submitted to CMS or to the 

hearing officer, as well as any other 

information included in the record of 

the hearing officer’s decision and 

determine whether to uphold, reverse or 

modify the hearing officer’s decision. 

(3) The Administrator’s determination 

is final and binding. 

(d) Reopening. (1) Ability to reopen. 

CMS may reopen and revise an initial or 

reconsidered determination upon its 

own motion or upon the request of a 

sponsor: 

(i) Within 1 year of the date of the 

notice of determination for any reason. 

(ii) Within 4 years for good cause. 

(iii) At any time when the underlying 

decision was obtained through fraud or 

similar fault. 

(2) Notice of reopening. (i) Notice of 

reopening and any revisions following 

the reopening are mailed to the sponsor. 

(ii) Notice of reopening specifies the 

reasons for revision. 

(3) Effect of reopening. The revision of 

an initial or reconsidered determination 

is final and binding unless—

(i) The sponsor requests 

reconsideration in accordance with 

paragraph (a) of this section; 

(ii) A timely request for a hearing is 

filed under paragraph (b) of this section; 

(iii) The determination is reviewed by 

the Administrator in accordance with 

paragraph (c) of this section; or 

(iv) The determination is reopened 

and revised in accordance with 

paragraph (d) of this section. 

(4) Good cause. For purposes of this 

section, CMS finds good cause if—

(i) New and material evidence that 

was not readily available at the time the 

initial determination was made is 

furnished; 

(ii) A clerical error in the computation 

of payments was made; or 

(iii) The evidence that was considered 

in making the determination clearly 

shows on its face that an error was 

made. 

(5) For purposes of this section, CMS 

does not find good cause if the only 

reason for reopening is a change of legal 

interpretation or administrative ruling 

upon which the initial determination 

was made. 

§ 423.892 Change in ownership. 

(a) Change of ownership. Any of the 

following constitutes a change of 

ownership: 

(1) Partnership. The removal, 

addition, or substitution of a partner, 

unless the partners expressly agree 

otherwise as permitted by applicable 

State law, constitutes a change of 

ownership. 

(2) Asset sale. Transfer of 

substantially all of the assets of the 

sponsor to another party constitutes a 

change of ownership. 

(3) Corporation. The merger of the 

sponsor’s corporation into another 

corporation or the consolidation of the 

sponsor’s organization with one or more 

other corporations, resulting in a new 

corporate body. 

(b) Change of ownership, exception. 

Transfer of corporate stock or the merger 

of another corporation into the 

sponsor’s corporation, with the sponsor 

surviving, does not ordinarily constitute 

change of ownership. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46861 

(c) Advance notice requirement. A 

sponsor that has a retiree drug subsidy 

agreement in effect under this part and 

is considering or negotiating a change in 

ownership must notify CMS at least 60 

days before the anticipated effective 

date of the change. 

(d) Assignment of agreement. When 

there is a change of ownership as 

specified in paragraph (a) of this 

section, and this results in a transfer of 

the liability for prescription drug costs 

the existing sponsor agreement is 

automatically assigned to the new 

owner. 

(e) Conditions that apply to 

assignment agreements. The new owner 

to whom a sponsor agreement is 

assigned is subject to all applicable 

statutes and regulations and to the terms 

and conditions of the sponsor 

agreement. 

§ 423.894 Construction. 

Nothing in this part must be 

interpreted as prohibiting or 

restricting—

(a) A Part D eligible individual who 

is covered under employment-based 

retiree health coverage, including a 

qualified retiree prescription drug plan, 

from enrolling in a prescription drug 

plan or in a MA–PD plan; 

(b) A sponsor or other person from 

paying all or any part of the monthly 

beneficiary premium (as defined in 

§ 423.286) for a prescription drug plan 

or MA–PD plan on behalf of a retiree (or 

his or her spouse or dependents); 

(c) A sponsor from providing coverage 

to Part D eligible individuals under 

employment-based retiree health 

coverage that is—

(1) Supplemental to the benefits 

provided under a prescription drug plan 

or a MA–PD plan. 

(2) Of higher actuarial value than the 

actuarial value of standard prescription 

drug coverage (as defined in 

§ 423.104(e)); or 

(d) Sponsors from providing for 

flexibility in the benefit design and 

pharmacy network for their qualified 

retiree prescription drug coverage, 

without regard to the requirements 

applicable to PDPs and MA–PD plans 

under § 423.104, as long as the 

requirements under § 423.884 are met. 

Subpart S—Special Rules for States—

Eligibility Determinations for Subsidies 

and General Payment Provisions 

§ 423.900 Basis and scope. 

(a) Basis. This subpart is based on 

sections 1935(a) through (d) of the Act 

as amended by section 103 of the MMA. 

(b) Scope. This subpart specifies State 

agency obligations for the Part D 

prescription drug benefit. 

§ 423.902 Definitions. 

The following definitions apply to 

this subpart: 

Actuarial value of capitated 

prescription drug benefits is the 

estimated actuarial value of prescription 

drug benefits provided under a 

capitated Medicaid managed care plan 

per full-benefit dual eligible individual 

for 2003, as determined using data as 

the Secretary determines appropriate. 

Applicable growth factor for each of 

2004, 2005, and 2006, is the average 

annual percent change (to that year from 

the previous year) of the per capita 

amount of prescription drug 

expenditures (as determined based on 

the most recent National Health 

Expenditure projections for the years 

involved). The growth factor for 2007 

and succeeding years will equal the 

annual percentage increase in average 

per capita aggregate expenditures for 

covered Part D drugs in the United 

States for Part D eligible individuals for 

the 12-month period ending in July of 

the previous year. 

Base year Medicaid per capita 

expenditures is equal to the weighted 

average of: 

(1) The gross base year (calendar year 

2003) per capita Medicaid expenditures 

for prescription drugs, reduced by the 

rebate adjustment factor; and 

(2) The estimated actuarial value of 

prescription drug benefits provided 

under a capitated Medicaid managed 

care plan per full-benefit dual eligible 

for 2003. The per capita payments for 

full benefit dual eligibles with managed 

care and non-managed care are 

weighted by the respective average 

monthly full dual eligible enrollment 

populations. 

Full-benefit dual eligible individual 

means an individual who, for any 

month—

(1) Has coverage for the month under 

a prescription drug plan under Part D of 

title XVIII, or under an MA–PD plan 

under Part C of title XVIII; and 

(2) Is determined eligible by the State 

for medical assistance for full benefits 

under title XIX for the month under any 

eligibility category covered under the 

State plan or comprehensive benefits 

under a demonstration under section 

1115 of the Act. (This does not include 

individuals under Pharmacy Plus 

demonstrations.) It also includes any 

individual who is determined by the 

State to be eligible for medical 

assistance under section 1902(a)(10)(C) 

of the Act (medically needy) or section 

1902(f) of the Act (States that use more 

restrictive eligibility criteria than are 

used by the SSI program) of the Act for 

any month if the individual was eligible 

for medical assistance in any part of the 

month. For the 2003 baseline 

calculations, the full-benefit dual 

eligibles are those individuals having 

Medicaid drug benefit coverage and 

Medicare Part A or Part B coverage. 

Gross base year Medicaid per capita 

expenditures are equal to the 

expenditures, including dispensing fees, 

made by the State during calendar year 

2003 for covered outpatient drugs, 

excluding drugs or classes of drugs, or 

their medical uses, which may be 

excluded from coverage or otherwise 

restricted under section 1860D–2 of the 

Act, other than smoking cessation 

agents determined per full-benefit-dualeligible-individual for the individuals 

not receiving medical assistance for the 

drugs through a Medicaid managed care 

plan. This amount is determined based 

on MSIS drug claims paid during the 

four quarters of calendar year 2003 and 

the associated dual eligibility 

enrollment status of the beneficiary. 

Phased-down State contribution 

factor for a month in 2006 is 90 percent; 

in 2007 is 88 1⁄3 percent; in 2008 is 86 2⁄3 percent; in 2009 is 85 percent; in 

2010 is 83 1⁄3 percent; in 2011 is 81 2⁄3

percent; in 2012 is 80 percent; in 2013 

is 78 1⁄3 percent; in 2014 is 76 2⁄3

percent; or after December 2014, is 75 

percent. 

Phased-down State contribution 

payment refers to the States’ monthly 

payment made to the Federal 

government beginning in 2006 to defray 

a portion of the Medicare drug 

expenditures for full benefit dual 

eligible individuals whose Medicaid 

drug coverage is assumed by Medicare 

Part D. The contribution is calculated by 

1/12th of the product of the base year 

(2003) Medicaid per capita expenditures 

for prescription drugs (that is, covered 

Part D drugs) for full-benefit dual 

eligible individuals, and multiplied by 

the—

(1) State medical assistance 

percentage; 

(2) Applicable growth factor; 

(3) Number of the State’s full-benefit 

dual eligibles for the given month; and 

(4) Phased-down State contribution 

factor. 

Rebate adjustment factor takes into 

account drug rebates and, for a State, is 

equal to the ratio for the State for the 

four quarters of calendar year 2003 of 

aggregate rebate payments received by 

the State under section 1927 of the Act 

to the gross expenditures for covered 

outpatient drugs. 

State Medical Assistance Percentage 

means the proportion equal to 100 

percent minus the State’s Federal 

medical assistance percentage, 

applicable to the State for the fiscal year 

in which the month occurs. 

46862 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

§ 423.904 Eligibility determinations for 

low-income subsidies. 

(a) General rule. The State agency 

must make eligibility determinations 

and redeterminations for low-income 

premium and cost-sharing subsidies in 

accordance with § 423.774. 

(b) Notification to CMS. The State 

agency must inform CMS of cases where 

eligibility is established or 

redetermined, in a manner determined 

by CMS. 

(c) Screening for eligibility for 

Medicare cost-sharing and enrollment 

under the State plan. States must—

(1) Screen individuals who apply for 

subsidies under this part for eligibility 

for Medicaid programs that provide 

assistance with Medicare cost-sharing 

specified in section 1905(p)(3) of the 

Act. 

(2) Offer enrollment for the programs 

under the State plan (or under a waiver 

of the plan) for those meeting the 

eligibility requirements. 

(3) Notify deemed subsidy eligibles of 

their subsidy eligibility in accordance 

with the requirements of § 423.34(d). 

(d) Application form and process. 

(1) Assistance with application. No 

later than July 1, 2005, States must make 

available—

(i) Low-income subsidy application 

forms; 

(ii) Information on the nature of, and 

eligibility requirements for, the 

subsidies under this section; and 

(iii) Assistance with completion of 

low-income subsidy application forms. 

(2) Completion of application. The 

State must require an individual or 

personal representative applying for the 

low-income subsidy to—

(i) Complete all required elements of 

the application and provide documents, 

as necessary, consistent with paragraph 

(3) of this section; and 

(ii) Certify, under penalty of perjury 

or similar sanction for false statements, 

as to the accuracy of the information 

provided on the application form. 

(3) The application process and 

States. 

(i) States may require submission of 

statements from financial institutions 

for an application for low-income 

subsidies to be considered complete; 

and 

(ii) May require that information 

submitted on the application be subject 

to verification in a manner the State 

determines to be most cost-effective and 

efficient. 

(4) Other information. States must 

provide CMS with other information as 

specified by CMS that may be needed to 

carry out the requirements of the Part D 

prescription drug benefit. 

§ 423.906. General payment provisions. 

(a) Regular Federal matching. Regular 

Federal matching applies to the 

eligibility determination and 

notification activities specified in 

§ 423.904(a) and (b). 

(b) Medicare as primary payer. 

Medicare is the primary payer for 

covered drugs for Part D eligible 

individuals. Medicaid assistance is not 

available to full benefit dual eligible 

individuals, including those not 

enrolled in a PDP or MA–PD, for—

(1) Covered Part D drugs; or 

(2) Any cost-sharing obligations under 

Part D relating to covered Part D drugs. 

(3) The effective date of paragraphs 

(b)(1) and (b)(2) of this section is 

January 1, 2006. 

(c) Non-covered drugs. States may 

elect to provide coverage for outpatient 

drugs other than covered Part D drugs 

in the same manner as provided for nonfull benefit dual eligible individuals or 

through an arrangement with a 

prescription drug plan or a MA–PD 

plan. 

§ 423.907 Treatment of territories. 

(a) General rules. (1) Low-income Part 

D eligible individuals who reside in the 

territories are not eligible to receive 

premium and cost-sharing subsidies 

under subpart P of this part. 

(2) A territory may submit a plan to 

the Secretary under which medical 

assistance is to be provided to lowincome individuals for the provision of 

covered Part D drugs. 

(3) Territories with plans approved by 

the Secretary will receive increased 

grants under sections 1108 (h) and (g) of 

the Act as described in (c) of this 

section. 

(b) Plan requirements. Plans 

submitted to the Secretary must include 

the following: 

(1) A description of the medical 

assistance to be provided. 

(2) The low-income population 

(income less than 150 percent of the 

Federal poverty level) to receive 

medical assistance. 

(3) An assurance that no more than 10 

percent of the amount of the increased 

grant will be used for administrative 

expenses. 

(c) Increased grant amounts. The 

amount of the grant provided under 

sections 1108 (h) and (k) of the Act for 

each territory with an approved plan for 

a year shall be the amount in paragraph 

(d) of this section multiplied by the ratio 

of—

(1) The number of individuals who 

are entitled to benefits under Part A or 

enrolled under Part B and who reside in 

the territory (as determined by the 

Secretary based on the most recent 

available data for the beginning of the 

year); and 

(2) The sum of the number of 

individuals in all territories in 

paragraph (c)(1) of this section with 

approved plans. 

(d) Total grant amount. The total 

grant amount is—

(1) For the last three quarters of fiscal 

year 2006, $28,125,000; 

(2) For fiscal year 2007, $37,500,000; 

and 

(3) For each subsequent year, the 

amount for the prior fiscal year 

increased by the annual percentage 

increase described in § 423.104. 

§ 423.908. Phased-down State contribution 

to drug benefit costs assumed by Medicare. 

This subpart sets forth the 

requirements for State contributions for 

Part D drug benefits based on dual 

eligible drug expenditures. 

§ 423.910 Requirements. 

(a) General rule. Each of the 50 States 

and the District of Columbia is required 

to provide for payment to the Secretary 

a phased-down contribution to defray a 

portion of the Medicare drug 

expenditures for individuals whose 

projected Medicaid drug coverage is 

assumed by Medicare Part D. 

(b) State contribution payment. (1) 

Calculation of payment. The State 

contribution payment is calculated by 

the Secretary on a monthly basis, as 

indicated in the chart below. For States 

that do not meet the quarterly reporting 

requirement for the monthly enrollment 

reporting, the state contribution 

payment is calculated using a 

methodology determined by the 

Secretary. 

ILLUSTRATIVE CALCULATION OF STATE PHASED-DOWN MONTHLY CONTRIBUTION FOR 2006 

Item Illustrative value Source 

(i) Gross per capita Medicaid expenditures for prescription drugs for 2003 for fullbenefit dual eligibles not receiving drug coverage through a Medicaid managed 

care plan, excluding drugs not covered by Part D.

$2,000 CY MSIS data. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46863 

ILLUSTRATIVE CALCULATION OF STATE PHASED-DOWN MONTHLY CONTRIBUTION FOR 2006—Continued 

Item Illustrative value Source 

(ii) Aggregate State rebate receipts in calendar year 2003 ....................................... $100,000,000 CMS–64. 

(iii) Gross State Medicaid expenditures for prescription drugs in calendar year 

2003.

$500,000,000 CMS–64. 

(iv) Rebate adjustment factor ..................................................................................... 0.2000 (2) ÷ (3). 

(v) Adjusted 2003 gross per capita Medicaid expenditures for prescription drugs 

for full-benefit dual eligibles not in managed care plans.

$1,600 (1) × [1–(4)]. 

(vi) Estimated actuarial value of prescription drug benefits under capitated managed care plans for full-benefit dual eligibles for 2003.$1,500 To Be Determined. 

(vii) Average number of full-benefit dual eligibles in 2003 who did not receive covered outpatient drugs through Medicaid managed care plans.90,000 CY MSIS data. 

(viii) Average number of full-benefit dual eligibles in 2003 who received covered 

outpatient drugs through Medicaid managed care plans.

10,000 CY MSIS data. 

(ix) Base year State Medicaid per capita expenditures for covered Part D drugs 

for full-benefit dual eligible individuals (weighted average of (5) and (6)).

$1,590 [(7) × (5) + (8) × (6)] ÷ [(7) + (8)]. 

(x) 100 minus Federal Medical Assistance Percentage (FMAP) applicable to 

month of state contribution (as a proportion).

0.4000 FEDERAL REGISTER. 

(xi) Applicable growth factor (cumulative increase from 2003 through 2006) ........... 50.0% NHE projections. 

(xii) Number of full-benefit dual eligibles for the month ............................................. 120,000 State submitted data. 

(xiii) Phased-down State reduction factor for the month ........................................... 0.9000 Specified in statute. 

(xiv) Phased-down State contribution for the month ................................................. $8,586,000 1/12 × (9) × (10) × [1+(11)] × (12) × (13). 

(2) Method of payment. State payment 

must be made in a manner specified by 

the Secretary that is similar to the 

manner in which State payments are 

made under an agreement entered into 

under section 1843 of the Act, except 

that all payments must be deposited 

into the Medicare Prescription Drug 

Account in the Federal Supplementary 

Medical Insurance Trust Fund. 

(3) Failure to pay. If a State fails to 

pay to the Secretary the required 

amount, interest accrues on the amount 

at the rate provided under section 

1903(d)(5) of the Act. The amount so 

owed and applicable interest must be 

immediately offset against amounts 

otherwise payable to the State under 

section 1903(a) of the Act, in accordance 

with the Federal Claims Collection Act 

of 1996 and applicable regulations. 

(c) State Medicaid Statistical 

Information System (MSIS) Reporting. 

Effective with calendar year (CY) 2003 

and all subsequent MSIS data 

submittals, States are required to 

provide accurate and complete coding 

to identify the numbers and types of 

Medicaid and Medicare dual eligibles. 

Calendar year 2003 submittals must be 

complete and must be accepted, based 

on CMS’ data quality review, by 

December 31, 2004. 

(d) State monthly enrollment 

reporting. Effective January 2006, and 

each subsequent month, States must 

submit an electronic file, in a manner 

specified by the Secretary, identifying 

each full benefit dual eligible enrolled 

in the State for each month with Part D 

drug coverage who is also determined to 

be full benefit eligible by the State for 

full Medicaid benefits. The State will 

submit this file to CMS no later than 30 

days after the end of each month. 

(e) Data match. The Secretary 

performs those periodic data matches as 

may be necessary to identify and 

compute the number of full-benefit dual 

eligible individuals needed to establish 

the State contribution payment. 

(f) Rebate adjustment factor. The 

Secretary establishes the rebate 

adjustment factor using total drug 

expenditures made and drug rebates 

received during calendar year 2003 as 

reported on CMS 64 Medicaid 

expenditure reports for the four quarters 

of calendar year 2003 that were received 

by CMS on or before March 31, 2004. 

Rebates include rebates received under 

the national rebate agreement and under 

a State supplemental rebate program, as 

reported on CMS–64 expenditure 

reports for the four quarters of calendar 

year 2003. 

(g) Annual per capita drug 

expenditures. The Secretary notifies 

each State no later than October 15 

before each calendar year, beginning 

October 15, 2005, of their annual per 

capita drug payment expenditure 

amount for the next year. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: July 23, 2004. 

Tommy G. Thompson, 

Secretary. 

[FR Doc. 04–17234 Filed 7–26–04; 12:01 pm] 

BILLING CODE 4120–01–P