DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Centers for Medicare & Medicaid Services 

42 CFR Parts 409, 417, 422, 423, and 424 

[CMS-4159-P] 

RIN 0938-AR37 

Medicare Program; Contract Year 2015 Policy and Technical Changes to the 

Medicare Advantage and the Medicare Prescription Drug Benefit Programs 

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

ACTION: Proposed rule. 

SUMMARY: The proposed rule would revise the Medicare Advantage (MA) program 

(Part C) regulations and prescription drug benefit program (Part D) regulations to 

implement statutory requirements; strengthen beneficiary protections; exclude plans that 

perform poorly; improve program efficiencies; and clarify program requirements. The 

proposed rule also includes several provisions designed to improve payment accuracy. 

DATES: To be assured consideration, comments must be received at one of the 

addresses provided below, no later than 5 p.m. on March 7, 2014. 

ADDRESSES: In commenting, please refer to file code CMS-4159-P. Because of staff 

and resource limitations, we cannot accept comments by facsimile (FAX) transmission. 

 You may submit comments in one of four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit electronic comments on this regulation to 

http://www.regulations.gov. Follow the "Submit a comment" instructions. 

 2. By regular mail. You may mail written comments to the following address 
 2 

ONLY: 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

Attention: CMS-4159-P, 

P.O. Box 8013, 

Baltimore, MD 21244-8013. 

Please allow sufficient time for mailed comments to be received before the close 

of the comment period. 

3. By express or overnight mail. You may send written comments to the 

following address ONLY: 

 Centers for Medicare & Medicaid Services, 

 Department of Health and Human Services, 

 Attention: CMS-4159-P, 

 Mail Stop C4-26-05, 

 7500 Security Boulevard, 

Baltimore, MD 21244-1850.

4. By hand or courier. Alternatively, you may deliver (by hand or courier) your 

written comments ONLY to the following addresses prior to the close of the comment 

period: 

a. For delivery in Washington, DC-- 
 3 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

Room 445-G, Hubert H. Humphrey Building, 

 200 Independence Avenue, SW., 

 Washington, DC 20201 

(Because access to the interior of the Hubert H. Humphrey 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.) 

b. For delivery in Baltimore, MD-- 

 Centers for Medicare & Medicaid Services, 

Department of Health and Human Services, 

7500 Security Boulevard, 

Baltimore, MD 21244-1850. 

If you intend to deliver your comments to the Baltimore address, call telephone 

number (410) 786-9994 in advance to schedule your arrival with one of our staff 

members. 

 Comments erroneously mailed to the addresses indicated as appropriate for hand 

or courier delivery may be delayed and received after the comment period. 

For information on viewing public comments, see the beginning of the 

"SUPPLEMENTARY INFORMATION" section. 
 4 

FOR FURTHER INFORMATION CONTACT: 

Christopher McClintick, (410) 786-4682, Part C issues. 

Marie Manteuffel, (410) 786-3447, Part D issues. 

Kristy Nishimoto, (206) 615-2367, Part C and D enrollment and appeals issues. 

Whitney Johnson, (410) 786-0490, Part C and D payment issues. 

Clarisse Owens, (410) 786-0880, Part C and D compliance issues. 

Frank Whelan, (410) 786 1302, Part D improper prescribing issues. 

SUPPLEMENTARY INFORMATION: 

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. We post all comments 

received before the close of the comment period on the following website as soon as 

possible after they have been received: http://www.regulations.gov. Follow the search 

instructions on that website to view public comments. 

 Comments received timely will also 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 

1-800-743-3951. 

Table of Contents 

I. Executive Summary 
 5 

 A. Purpose 

 B. Summary of the Major Provisions 

 1. Eligibility of Enrollment for Individuals Not Lawfully Present in the United States 

 2. Modifying the Agent/Broker Requirements, Specifically Agent/Broker 

Compensation 

 3. Drug Categories or Classes of Clinical Concern

 4. Improving Payment Accuracy 

 5. Risk Adjustment Data Requirements (§422.310) 

 C. Summary of Costs and Benefits

II. Background 

III. Provisions of the Proposed Regulations 

 A. Clarifying Various Program Participation Requirements 

 1. Closing Cost Contract Plans to New Enrollment (§422.2 and §422.503) 

 2. Two-year Limitation on Submitting a New Bid in an Area Where an MA has been 

Required to Terminate a Low-enrollment MA Plan (§422.504(a)(19)) 

 3. Authority to Impose Intermediate Sanctions and Civil Money Penalties (§422.752, 

§423.752, §422.760 and §423.760) 

 4. Contract Termination Notification Requirements and Contract Termination Basis 

(§422.510 and §423.509) 

 5. Reducing the Burden of the Compliance Program Training Requirements 

(§422.503(b)(4)(vi)(C) and §423.504(b)(4)(vi)(C)) 
 6 

6. Changes to Audit and Inspection Authority (§ 422.503(d)(2) and § 423.504(d)(2 )) 7. 

 Procedures for Imposing Intermediate Sanctions and Civil Money Penalties Under Parts 

C and D (§422.756 and §423.756) 

 8. Timely Access to Mail Order Services (§423.120) 

 9. Collections of Premiums and Cost Sharing (§423.294) 

 10. Enrollment Eligibility for Individuals Not Lawfully Present in the United States 

(§§ 417.2, 417.420, 417.422, 417.460, 422.1, 422.50, 422.74, 423.1, 423.30, and 423.44) 

 a. Basic Enrollment Requirements 

 b. Medicare Eligibility and Lawful Presence 

 c. Alignment of MA, PDP, and cost plan eligibility with FFS payment exclusion policy 

 11. Part D Notice of Changes (§423.128(g)) 

 12. Separating the Annual Notice of Change (ANOC) from the Evidence of Coverage 

(EOC) (§ 422.111(a)(3) and §423.128(a)(3)) 

 13. Agent/Broker Requirements, Particularly Compensation (§422.2274 and 

§423.2274). 

 14. Drug Categories or Classes of Clinical Concern and Exceptions (§423.120(b)(2)(v) 

and (vi)) 

 a Categories or Classes of Clinical Concern 

 b. Criteria Necessary to Identify Categories and Classes of Clinical Concern 

 c. Exceptions 

 d. Analysis and Identification of the Categories or Classes of Clinical Concern 

 15. Medication Therapy Management Program (MTMP) under Part D (§423.153(d)) 
 7 

 a. Multiple Chronic Diseases 

 b. Multiple Part D Drugs 

 c. Annual Cost Threshold 

 16. Business Continuity for MA Organizations and PDP Sponsors (§422.504(o) and 

§423.505(p)) 

 17. Requirement for Applicants or their Contracted First Tier, Downstream, or Related 

Entities to Have Experience in the Part D Program Providing Key Part D Functions 

 18. Requirement for Applicants for Stand Alone Part D Plan Sponsor Contracts to Be 

Actively Engaged in the Business of the Administration of Health Insurance Benefits 

(§423.504(b)(9)) 

 19. Limit Parent Organizations to One Prescription Drug Plan (PDP) Sponsor Contract 

Per PDP Region 

 20. Limit Stand-Alone Prescription Drug Plan Sponsors to Offering No More Than 

Two Plans Per PDP Region 

 21. Efficient Dispensing in Long Term Care Facilities and Other Changes (§423.154) 

 a. Prohibition on Payment Arrangements that Penalize the Offering and Adoption of 

More Efficient LTC Dispensing Techniques (§423.154) 

 b. Misinterpretation of Language as Requiring the Proration of Dispensing Fees (§ 

423.154) 

 c. Additional Waiver for LTC Pharmacies using Restock and Reuse Dispensing 

Methodologies under Certain Conditions (§423.154) 
 8 

 d. Technical Change to Eliminate Requirement that PDP Sponsors Report on the 

Nature and Quantity of Unused Brand and Generic Drugs (§423.154) 

 22. Applicable Cost-Sharing for Transition Supplies: Transition Process Under Part D 

§423.120(b)(3) 

 23. Medicare Coverage Gap Discount Program and Employer Group Waiver Plans 

(§423.2325) 

 24. Interpreting Non Interference Provision (§423.10) 

 25. Pharmacy Price Concessions in Negotiated Prices (§423.100) 

 26. Payments to PDP Plan Sponsors For Qualified Prescription Drug Coverage 

(§423.308) and Payments to Sponsors of Retiree Prescription Drug Plans (§423.882) 

 27. Preferred Cost Sharing (§423.100 and §423.120) 

 28. Prescription Drug Pricing Standards and Maximum Allowable Cost 

(§423.505(b)(21)) 

 29. Any Willing Pharmacy Standard Terms & Conditions (§423.120(a)(8)) 

 a. Preferred Cost Sharing 

 b. Extended Days' Supply 

 c. Mail Order Cost Sharing 

 30. Enrollment Requirements for the Prescribers of Part D Covered Drugs 

(§423.120(c)(5) and (6)) 

 31. Improper Prescribing Practices and Patterns 

 a. Background and Program Integrity Concerns 

 b. Drug Enforcement Administration (DEA) Certification of Registration 
 9 

 c. Proposed Provisions 

 (1) DEA Certificate and State Authority 

 (2) Patterns or Practices of Prescribing 

 (a) Grounds for Revocation 

 (b) Criteria to Be Considered 

32. Transfer of TrOOP Between PDP Sponsors Due to Enrollment Changes during the 

Coverage Year (§423.464) 

 a. Exclusion from TrOOP of Increased Cost Sharing Amounts Incurred due to 

Secondary COB (§423.100) 

 b. Transfer of TrOOP between PDP Sponsors Due to Enrollment Changes During the 

Coverage Year (§423.464) 

33. Broadening the Release of Part D Data 

34. Establish Authority to Directly Request Information From First Tier, Downstream, 

and Related Entities (§422.504(i)(2)(i) and §423.505(i)(2)(i)) 

35. Eligibility of Enrollment for Incarcerated Individuals (§417.422, §417.460, §422.74, 

and §423.44) 

 a. Changes in Definition of Service Area for Cost Plans (§417.422(b)) 

 b. Involuntary Disenrollment for Incarcerated Individuals Enrolled in MA, PDP and 

cost plans (§417.460, §422.74, and §423.44) 

36. Rewards and Incentives Program Regulations for Part C Enrollees (§422.134) 

37. Expand Quality Improvement Program Regulations (§422.152) 
 10 

38. Authorization of Expansion of Automatic or Passive Enrollment Non-Renewing 

Dual Eligible SNPs (D-SNPs) to another D-SNP to Support Alignment Procedures 

(§422.60) 

 B. Improving Payment Accuracy 

 1. Implementing Overpayment Provisions of Section 1128J(d) of the Social Security 

Act (§422.326 and §423.360) 

 a. Terminology (§422.326(a) and §423.360(a)) 

 b. General Rules for Overpayments (§ 422.326(a) through (c)and §423.360(a) through 

(c)) 

 c. Look-back Period for Reporting and Returning Overpayments 

 2. Determination of Payments (§423.329) 

 3. Reopening (§423.346) 

 a. Part D Plan Payments Reopening 

 b. Coverage Gap Discount Reconciliation Reopening 

 4. Payment Appeals (§423.350) 

 5. Payment Processes for Part D Sponsors (§423.2320) 

 6. Risk Adjustment Data Requirements (§422.310) 

 7. RADV Appeals 

a. Background 

b. RADV Definitions 

c. Publication of RADV Methodology 

d. Proposal to Update RADV Appeals Terminology (§ 422.311)
 11 

e. Proposal to Simplify the RADV Appeals Process

(1) Issues Eligible for RADV Appeal 

(2) Issues Not Eligible for RADV Appeals 

(3) Manner and Timing of a Request for RADV Appeal 

(4) Reconsideration Stage 

(5) Hearing Stage 

(6) CMS Administrator Review Stage 

f. Proposal to Expand Scope of RADV Audits

g. Proposal to Clarify the RADV Medical Record Review Determination Appeal 

Burden of Proof Standard

h. Proposal to Change RADV Audit Compliance Date 

 8. Recovery Audit Contractor (RAC) Determination Appeals (Proposed Part 422 

Subpart Z and Part 423 Subpart Z) 

 a. Background

 b. Proposed RAC Appeals Process 

 (1) Reconsiderations (§422.2605 and §423.2605) 

 (2) Hearing Official Determinations (§422.2610 and §423.2610) 

 (3) Administrator Review (§422.2615 and §423.2615) 

 C. Strengthening Beneficiary Protections 

 1. Providing High Quality Health Care (§422.504(a)(3) and §423.505(b)(27)) 

 2. MA-PD Coordination Requirements for Drugs Covered Under Parts A, B, and D 

(§422.112) 
 12 

 3. Good Cause Processes (§417.460, §422.74 and §423.44) 

 4. Definition of Organization Determination (§422.566) 

 5. MA Organizations May Extend Adjudication Timeframes for Organization 

Determinations and Reconsiderations (§422.568, §422.572, §422.590, §422.618, and 

§422.619) 

 D. Strengthening Our Ability to Distinguish Stronger Applicants for Part C and D 

Program Participation and to Remove Consistently Poor Performers 

 1. Two-Year Prohibition When Organizations Terminate Their Contracts (§422.502, 

§422.503, §422.506, §422.508, and §422.512) 

 2. Withdrawal of Stand-Alone Prescription Drug Plan Bid Prior to Contract Execution 

(§423.503) 

 3. Essential Operations Test Requirement for Part D (§ 423.503(a) and (c), 

§423.504(b)(10), §423.505(b)(28), and §423.509) 

 a. Failing Essential Operations Test as Cause for Immediate Termination 

 b. Failing Essential Operations Test as Failure of a Qualification to Contract and 

Grounds for Nullification of Approval 

 4. Termination of the Contracts of Medicare Advantage Organizations Offering Part D 

for Failure for Three Consecutive Years to Achieve Three Stars on Both Part C and Part 

D Summary Star Ratings in the Same Contract Year (§422.510) 

 E. Implementing Other Technical Changes 

 1. Requirements for Urgently Needed Services (§422.113) 

 2. Skilled Nursing Facility Stays (§422.101 and §422.102) 
 13 

 3. Agent and Broker Training and Testing Requirements (§422.2274 and §423.2274) 

 4. Deemed Approval of Marketing Materials (§422.2266 and §423.2266) 

 5. Cross-Reference Change in the Part C Disclosure Requirements (§422.111) 

 6. Managing Disclosure and Recusal in P&T Conflicts of Interest: [Formulary] 

Development and Revision by a Pharmacy and Therapeutics Committee under PDP 

(§423.120(b)(1)) 

 7. Definition of a Part D Drug (§423.100) 

 a. Combination Products 

 b. Barbiturates and Benzodiazepines 

 c. Medical Foods 

 8. Thirty-six-Month Coordination of Benefits (COB) Limit (§423.466(b)) 

 9. Application and Calculation of Daily Cost-Sharing Rates (§423.153) 

 10. Technical Change to Align Regulatory Requirements for Delivery of the 

Standardized Pharmacy Notice (§423.562) 

 11. Special Part D Access Rules During Disasters or Emergencies (§423.126) 

 12. MA Organization Responsibilities in Disasters and Emergencies (§422.100) 

 13. Termination of a Contract Under Parts C and D (§422.510 and §423.509) 

 a. Cross-reference Change (§423.509(d)) 

 b. Terminology Changes (§422.510 and §423.509) 

 c. Technical Change to Align Paragraph Headings (§422.510(b)(2)) 

 d. Terminology Change (§423.509(b)(2)(C)(ii)) 
 14 

 14. Technical Changes to Align Part C and Part D Contract Determination Appeal 

Provisions (§422.641 and §422.644) 

 a. Technical Changes (§422.641) 

 b. Technical Changes (§422.644(a) and(b)) 

 15. Technical Changes to Align Parts C and D Appeal Provisions (§422.660 and 

§423.650) 

 16. Technical Changes Regarding Intermediate Sanctions and Civil Money Penalties 

(§422.756 and §423.756) 

a. Technical Changes to Intermediate Sanctions Notice Receipt Provisions 

(§422.756(a)(2) and §423.756(a)(2)) 

 b. Cross-reference Changes (§422.756(b)(4) and §423.756(b)(4)) 

 c. Technical Changes (§422.756(d) and §423.756(d)) 

 d. Technical Changes to Align the Civil Money Penalty Provision with the Authorizing 

Statute (§422.760(a)(3) and §423.760(a)(3)) 

 e. Technical Changes to Align the Civil Money Penalty Notice Receipt Provisions 

(§422.1020(a)(2), §423.1020(a)(2), §422.1016(b)(1), and §423.1016(b)(1)) 

 17. Technical Change to the Restrictions on use of Information under Part D 

(§423.322) 

IV. Collection of Information Requirements 

 A. ICRs Related to Eligibility of Enrollment for Individuals Not Lawfully Present in 

the United States (§ 417.2, § 417.420, § 417.422, § 417.460, § 422.1, § 422.50, § 422.74, 

§ 423.1, § 423.30, and § 423.44) 
 15 

 B. ICRs Related to Improper Prescribing Practices and Patterns (§424.535(a)(13) and 

(14)) 

 C. ICRs Related to Applicants or their Contracted First Tier, Downstream, or Related 

Entities to Have Experience in the Part D Program Providing Key Part D Functions 

(§423.504(b)(8)(i) through (iii)) 

 D. ICRs Related to Eligibility of Enrollment for Incarcerated Individuals 

 E. ICRs Related to Rewards and Incentives Program Regulations for Part C Enrollees 

(§422.134) 

 F. ICRs Related to Expanding Quality Improvement Program Regulations (§422.152) 

 G. ICRs Related to Good Cause Processes (§417.460, §422.74 and §423.44) 

 H. ICRs Related to the Definition of Organization Determination (§422.566) 

 I. ICRs Related to Skilled Nursing Facility Stays (§422.101 and §422.102) 

 J. ICRs Related to MA Organization Responsibilities in Disasters and Emergencies 

(§422.100) 

 K. ICR Related to Recovery Audit Contractor Determinations (Part 422, Subpart Z and 

Part 423, Subpart Z) 

V. Response to Comments 

VI. Regulatory Impact Analysis 

 A. Statement of Need 

 B. Overall Impact 

 C. Anticipated Effects 

1. Effects of Closing Cost Contract Plans to New Enrollment 
 16 

2. Effects of the Two-year Limitation on Submitting a New Bid in an Area Where an 

MA has been Required to Terminate a Low-enrollment MA Plan 

3. Effects of the Authority to Impose Intermediate Sanctions and Civil Money 

Penalties 

4. Effects of Contract Termination Notification Requirements and Contract 

Termination Basis 

5. Effects of Reducing the Burden of the Compliance Program Training Requirements 

6. Effects of Audit and Inspection Authority 

7. Effects of the Procedures for Imposing Intermediate Sanctions and Civil Money 

Penalties under Parts C and D 

8. Effects of Timely Access to Mail Order Services 

9. Effects of the Collections of Premiums and Cost Sharing 

10. Effects of Enrollment Eligibility for Individuals Not Lawfully Present in the United 

States 

11. Effects of Part D Notice of Changes 

12. Effects of Separating the Annual Notice of Change (ANOC) from the Evidence of 

Coverage (EOC) 

13. Effects of the Modification of the Agent/Broker Compensation Requirements 

14. Effects of Drug Categories or Classes of Clinical Concern and Exceptions 

15. Effects of the Medication Therapy Management Program (MTMP) under Part D 

16. Effects of the Business Continuity for MA Organizations and Part D Sponsors 

17. Effects of the Requirement for Applicants or their Contracted First Tier, 
 17 

Downstream, or Related Entities to Have Experience in the Part D Program Providing 

Key Part D Functions 

18. Effects of Requirement for Applicants for Stand Alone Part D Plan Sponsor 

Contracts to Be Actively Engaged in the Business of the Administration of Health 

Insurance Benefits 

19. Effects of Limit Parent Organizations to One Prescription Drug Plan (PDP) 

Sponsor Contract per PDP Region 

20. Effects of Limit Stand-Alone Prescription Drug Plan Sponsors to Offering No 

More Than Two Plans per PDP Region 

21. Effects of Efficient Dispensing and in Long Term Care Facilities and Other 

Changes 

22. Effects of Applicable Cost-Sharing for Transition Supplies: Transition Process 

Under Part D 

23. Effects of Medicare Coverage Gap Discount Program and Employer Group Waiver 

Plans 

24. Effects of Interpreting the Non-Interference Provision 

25. Effects of Pharmacy Price Concessions in Negotiated Prices 

26. Effects of Payments to PDP Plan Sponsors for Qualified Prescription Drug 

Coverage and Payments to Sponsors of Retiree Prescription Drug Plans 

27. Effects of Preferred Cost Sharing 

28. Effects of Maximum Allowable Cost Pricing Standard 

29. Effects of Any Willing Pharmacy Standard Terms & Conditions 
 18 

30. Effects of Enrollment Requirements for the Prescribers of Part D Covered Drugs 

31. Effects of Improper Prescribing Practices and Patterns 

32. Effects of the Transfer of TrOOP Between Part D Sponsors Due to Enrollment 

Changes during the Coverage Year 

33. Effects of Broadening the Release of Part D Data 

35. Effects of Eligibility of Enrollment for Incarcerated Individuals 

36. Effects of Rewards and Incentives Program Regulations for Part C Enrollees 

37. Effects of Expand Quality Improvement Program Regulations 

38. Effects of Authorization of Expansion of Automatic or Passive Enrollment NonRenewing Dual-Eligible SNPs (D- SNPs) to Another D- SNP to Support Alignment 

Procedures 

39. Effects of Improving Payment Accuracy: Reporting Overpayments, RADV 

Appeals, Part D Payment Reopening, LIS Cost Sharing, and Coverage Gap Discount 

Program 

40. Effects of Part C and Part D RAC Determination Appeals 

41. Effects of Requirement to Provide High Quality Health Care 

42. Effects of MA-PD Coordination Requirements for Drugs Covered under Part D 

43. Effects of Revisions to Good Cause Processes 

44. Effects of the Definition of Organization Determination 

45. Effects of MA Organization Extension of Adjudication Timeframes for 

Organization Determinations and Reconsiderations 

46. Effects of the Two-Year Prohibition When Organizations Terminate Their 
 19 

Contracts 

47. Effects of the Withdrawal of Stand Alone Prescription Drug Plan Bid Prior to 

Contract Execution 

48. Effects of Essential Operations Test Requirement for Part D 

50. Effects of the Requirements for Urgently Needed Services 

51. Effects of Skilled Nursing Facility Stays 

52. Effects of Agent and Broker Training and Testing Requirements 

53. Effects of Deemed Approval of Marketing Materials 

54. Effects of Part C Disclosure Requirements 

55. Effects of Managing Disclosure and Recusal in P&T Conflicts of Interest: 

Formulary Development and Revision by a Pharmacy and Therapeutics Committee 

under Part D 

56. Effects of the Technical Changes to the Definition of a Part D Drug 

57. Effects of the Thirty-Sixth Month Coordination of Benefits (COB) Limit 

58. Effects of Application and Calculation of Daily Cost-Sharing Rates 

59. Effects of the Technical Change to Align Regulatory Requirements for Delivery of 

the Standardized Pharmacy Notice 

60. Effects of the Special Part D Access Rules During Disasters 

61. Effects of the MA Organization Responsibilities in Disasters and Emergencies 

62. Effects of the Technical Changes Regarding the Termination of a Contract, 

Contract Determination and Other Appeals, and Intermediate Sanctions and Civil 

Money Penalties Under Parts C and D 
 20 

63. Effects of the Technical Change to the Restrictions on use of Information under 

Part D 

 D. Expected Benefits 

 1. Drug Categories or Classes of Clinical Concerns and Exceptions 

 2. Medication Therapy Management Program under Part D 

 E. Alternatives Considered 

 1. Separating the Annual Notice of Change from the Evidence of Coverage 

 2. Modifying the Agent/Broker Compensation Requirements 

 3. Medicare Coverage Gap Discount Program and Employer Group Waiver Plans 

 4. Prescription Drug Pricing Standards and Maximum Allowable Cost 

 5. Access to Covered Part D Drugs: Use of Standardized Technology 

 6. Any Willing Pharmacy Standard Terms and Conditions 

 7. Negotiated Prices 

 8. Preferred Cost Sharing 

 9. Transfer of TrOOP between Part D Sponsors Due to Enrollment Changes during the 

Coverage Year 

 10. Part D Notice of Changes 

 11. Special Part D Access Rules During Disasters or Emergencies 

 12. Business Continuity for MAOs and Part D Sponsors 

 13. Drug Categories or Classes of Clinical Concerns and Exceptions 

 14. Medication Therapy Management Program (MTM) Under Part D 

 15. Requirement for Applicants or their Contracted First Tier, Downstream, or Related 
 21 

Entities to have Experience in the Part D Program Providing Key Part D Functions 

F. Accounting Statement and Table 

G. Conclusion 

H pages 

Regulations Text 

Acronyms 

ADS Automatic Dispensing System 

AEP Annual Enrollment Period 

AHFS American Hospital Formulary Service 

AHFS-DI American Hospital Formulary Service-Drug Information 

AHRQ Agency for Health Care Research and Quality 

ALJ Administrative Law Judge 

ANOC Annual Notice of Change 

AO Accrediting Organization 

AOR Appointment of Representative 

BBA Balanced Budget Act of 1997 (Pub. L. 105-33) 

BBRA [Medicare, Medicaid and State Child Health Insurance Program] Balanced 

Budget Refinement Act of 1999 (Pub. L. 106-113) 

BIPA [Medicare, Medicaid, and SCHIP] Benefits Improvement Protection Act 

of 2000 (Pub. L. 106-554) 

BLA Biologics License Application 

CAHPS Consumer Assessment Health Providers Survey 
 22 

CAP Corrective Action Plan 

CCIP Chronic Care Improvement Program 

CC/MCC Complication/Comorbidity and Major Complication/Comorbidity 

CCS Certified Coding Specialist 

CDC Centers for Disease Control 

CHIP Children's Health Insurance Programs 

CMP Civil Money Penalty 

CMR Comprehensive Medical Review 

CMS Centers for Medicare & Medicaid Services 

CMS-HCC CMS Hierarchal Condition Category 

CTM Complaints Tracking Module 

COB Coordination of Benefits 

CORF Comprehensive Outpatient Rehabilitation Facility 

CPC Certified Professional Coder 

CY Calendar year 

DAB Departmental Appeals Board 

DEA Drug Enforcement Administration 

DIR Direct and Indirect Remuneration 

DME Durable Medical Equipment 

DMEPOS Durable Medical Equipment, Prosthetic, Orthotics, and Supplies 

D-SNPs Dual Eligible SNPs 

DOL U.S. Department of Labor 
 23 

DUM Drug Utilization Management 

EAJR Expedited Access to Judicial Review 

EGWP Employer Group/Union-Sponsored Waiver Plan 

EOB Explanation of Benefits 

EOC Evidence of Coverage 

ESRD End-Stage Renal Disease 

FACA Federal Advisory Committee Act 

FDA Food and Drug Administration 

FEHBP Federal Employees Health Benefits Plan 

FFS Fee-For-Service 

FIDE Fully-integrated Dual Eligible 

FIDE SNPs Fully-integrated Dual Eligible Special Needs Plans 

FMV Fair Market Value 

FY Fiscal year 

GAO Government Accountability Office 

HAC Hospital-Acquired Conditions 

HCPP Health Care Prepayment Plans 

HEDIS HealthCare Effectiveness Data and Information Set 

HHS [U.S. Department of] Health and Human Services 

HIPAA Health Insurance Portability and Accountability Act of 1996 

(Pub. L. 104-191) 

HMO Health Maintenance Organization 
 24 

HOS Health Outcome Survey 

HPMS Health Plan Management System 

ICEP Initial Coverage Enrollment Period 

ICL Initial Coverage Limit 

ICR Information Collection Requirement 

ID Identification 

IRE Independent Review Entity 

IRMAA Income-Related Monthly Adjustment Amount 

IVC Initial Validation Contractor 

LCD Local Coverage Determination 

LEP Late Enrollment Penalty 

LIS Low Income Subsidy 

LPPO Local Preferred Provider Organization 

LTC Long Term Care 

MA Medicare Advantage 

MAAA Member of the American Academy of Actuaries 

MA-PD Medicare Advantage-Prescription Drug Plan 

MAC Medicare Appeals Council 

MIPPA Medicare Improvements for Patients and Providers Act of 2008 

(Pub. L. 110-275) 

MOC Medicare Options Compare 

MOOP Maximum Out-of-Pocket 
 25 

MPDPF Medicare Prescription Drug Plan Finder 

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (Pub. L. 108-173) 

MS-DRG Medicare Severity Diagnosis Related Group 

MSA Metropolitan Statistical Area 

MSAs Medical Savings Accounts 

MSP Medicare Secondary Payer 

MTM Medication Therapy Management 

MTMP Medication Therapy Management Program 

NAIC National Association Insurance Commissioners 

NCD National Coverage Determination 

NCPDP National Council for Prescription Drug Programs 

NCQA National Committee for Quality Assurance 

NDA New Drug Application 

NDC National Drug Code 

NGC National Guideline Clearinghouse 

NIH National Institutes of Health 

NOMNC Notice of Medicare Non-Coverage 

NPI National Provider Identifier 

OIG Office of Inspector General 

OMB Office of Management and Budget 

OPM Office of Personnel Management 
 26 

OTC Over the Counter 

Part C Medicare Advantage 

Part D Medicare Prescription Drug Benefit Program 

PBM Pharmacy Benefit Manager 

PDE Prescription Drug Event 

PDP Prescription Drug Plan 

PFFS Private Fee For Service Plan 

POA Present on Admission (Indicator) 

POS Point-of-Sale 

PPO Preferred Provider Organization 

PPS Prospective Payment System 

P&T Pharmacy & Therapeutics 

QIC Qualified Independent Contractor 

QIO Quality Improvement Organization 

QRS Quality Review Study 

PACE Programs of All Inclusive Care for the Elderly 

RADV Risk Adjustment Data Validation 

RAPS Risk Adjustment Payment System 

RPPO Regional Preferred Provider Organization 

SEP Special Enrollment Period 

SHIP State Health Insurance Assistance Programs 

SNF Skilled Nursing Facility 
 27 

SNP Special Needs Plan 

SPAP State Pharmaceutical Assistance Programs 

SSA Social Security Administration 

SSI Supplemental Security Income 

T&C Terms and Conditions 

TPA Third Party Administrator 

TrOOP True Out-Of-Pocket 

U&C Usual and Customary 

UPIN Uniform Provider Identification Number 

USP U.S. Pharmacopoeia 

I. Executive Summary 

A. Purpose 

The purpose of this proposed rule is to make revisions to the Medicare 

Advantage (MA) program (Part C) and Prescription Drug Benefit Program (Part 

D) regulations based on our continued experience in the administration of the 

Part C and Part D programs and to implement certain provisions of the 

Affordable Care Act. The proposed changes are necessary to-- (1) clarify various 

program participation requirements; (2) make changes to strengthen beneficiary 

protections; (3) strengthen our ability to identify strong applicants for Part C and 

Part D program participation and remove consistently poor performers; and (4) 

make other clarifications and technical changes. 

B. Summary of the Major Provisions
 28 

1. Eligibility of Enrollment for Individuals Not Lawfully Present in the United States 

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 

makes individuals not lawfully present in the United States ineligible to receive federal 

benefits (such as Medicare), even if they are otherwise entitled to benefits. While we 

would not pay FFS claims for unlawfully present beneficiaries, MA, and Part D 

enrollment rules currently do not prevent the payment of capitation rates for these 

individuals. We are proposing to establish U.S. citizenship and lawful presence as an 

eligibility requirement for enrollment in MA and Part D plans. 

2. Modifying the Agent/Broker Requirements, Specifically Agent/Broker Compensation 

The current compensation structure is comprised of a 6-year cycle and is 

scheduled to end December 31, 2013. MA organizations and PDP sponsors provide an 

initial compensation payment to independent agents for new enrollees (Year 1), and pay a 

renewal rate (equal to 50 percent of the initial year compensation) for Years 2 through 6. 

 This structure has proved to be complicated to implement and monitor, and the current 

structure creates an incentive for agents to move beneficiaries as long as the fair market 

value (FMV) continues to increase each year. To simplify the administration of these 

payments and reduce incentives for agents and brokers to encourage beneficiaries to 

enroll in plans without regard to ensuring plan benefits would meet the beneficiaries' 

health care needs, we are proposing to revise the existing compensation structure. Under 

our proposal, MA organizations and PDP sponsors would continue to have the discretion 

to decide, on an annual basis, whether to pay initial and/or renewal compensation 

payments to their independent agents. Also, for new enrollments, MA organizations and 
 29 

sponsors could make an initial payment that is no greater than the FMV amount, which 

we would set annually in our guidance that interprets these regulations. For renewals in 

Year 2 and subsequent years, the MA organization or sponsor could pay up to 35 percent 

of the FMV amount for that year. We believe that revising the existing compensation 

structure to allow MA organizations or Part D sponsors to pay up to 35 percent of the 

FMV for year 2 and subsequent years is appropriate based on a couple of factors. First, 

we believe that a 2 tiered payment system (that is, initial and renewal) would be 

significantly less complicated than a 3-tiered system (that is, initial, 50 percent renewal 

for years 2 through 6, and 25 percent residual for years 7 and subsequent years), and 

would reduce administrative burden and confusion for plan sponsors. Second, our 

analysis determined that 35 percent is the renewal compensation level at which the 

present value of overall payments under a 2-tiered system would be relatively equal to 

the present value of overall payments under a 3-tiered system (taking into account the 

estimated life expectancy for several beneficiary age cohorts). In addition to revising the 

agent and broker compensation structures, we propose to amend the training and testing 

requirements as well as setting limits on referral fees for agents and brokers. 

3. Drug Categories or Classes of Clinical Concern 

This proposed provision would interpret the Affordable Care Act authority to 

limit protected classes to those for which access to all drugs in a category or class for a 

typical individual with a disease or condition treated by the drugs in the class is required 

within 7 days and more specific formulary requirements would not suffice to meet 

multitude of specific applications of the drugs within the category or class. Instead of 
 30 

mandating coverage of all drug products in a particular class on all Part D formularies, 

we can save costs by identifying more efficient formulary requirements or other 

beneficiary protections in most cases. 

4. Improving Payment Accuracy 

The proposed regulatory provisions would implement the Affordable Care Act 

requirement that MA organizations and Part D sponsors report and return identified 

Medicare overpayments. We would adopt the statutory definition of overpayment for 

both Part C and Part D. 

5. Risk Adjustment Data Requirements 

The proposed rule would strengthen existing regulations at §422.310 on MA plan 

sponsors' accountability for valid risk adjustment data prior to submission. 
31 

C. Summary of Costs and Benefits

TABLE 1: SUMMARY OF COSTS AND BENEFITS 

Provision Description Total Costs 

Changes to Audit and Inspection We estimate that this change would require an 

annual cost of $7.95 million (total cost of $39.75 million) for the time and effort for all auditing organizations to perform the program audit. Additionally, we estimate an annual cost of $950,000 (total cost of 4.75 million) for MA organizations or Part D sponsors with audit results that reveal non-compliance to hire an independent auditor to validate that correction has occurred. 

Eligibility of enrollment for individuals not lawfully present in the U.S. 

N/A We estimate 

save the MA million in 20million in 20over this perPart D progrportion of Mmillion in 20million in 20over this per

Modifying the agent/broker requirements, specifically agent/broker compensation 

N/A 

Drug Categories or Classes of Clinical Concern N/A We estimate 

save the Part Part D portioapproximatelincreasing to (total of $720period). 

Improving Payment Accuracy N/A Risk Adjustment Data Requirements N/A 
32 

Provision Description Total Costs 

Transfer of TrOOP Between Part D Sponsors Due to Enrollment Changes during the Coverage Year N/A Eligibility of Enrollment for Incarcerated Individuals We estimate 

save the MA million in 20million in 20over this perPart D progrportion of Mmillion in 20million in 20over this per

*Projected savings are based upon full implementation of the criteria and do not reflect that changes for the antipsychotic class of drugs are deferred a
 33 

II. Background 

 The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) created a new "Part C" 

in the Medicare statute (sections 1851 through 1859 of the Social Security Act (the Act)) 

which established what is now known as the Medicare Advantage (MA) program. The 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 

(Pub. L. 108-173), enacted on December 8, 2003, added a new "Part D" to the Medicare 

statute (sections 1860D-1 through 42 of the Act) entitled the Medicare Prescription Drug 

Benefit Program (PDP), and made significant changes to the existing Part C program, 

which it named the Medicare Advantage (MA) Program. The MMA directed that 

important aspects of the Part D program be similar to, and coordinated with, regulations 

for the MA program. Generally, the provisions enacted in the MMA took effect 

January 1, 2006. The final rules implementing the MMA for the MA and Part D 

prescription drug programs appeared in the Federal Register on January 28, 2005 

(70 FR 4588 through 4741 and 70 FR 4194 through 4585, respectively). 

 Since the inception of both Parts C and D, we have periodically revised our 

regulations either to implement statutory directives or to incorporate knowledge obtained 

through experience with both programs. For instance, on the September 18, 2008 and 

January 12, 2009 Federal Register (73 FR 54226 and 74 FR 1494, respectively), we 

issued Part C and D regulations to implement provisions in the Medicare Improvement 

for Patients and Providers Act (MIPPA) (Pub. L. 110-275). We promulgated a separate 

interim final rule in January 16, 2009 (74 FR 2881) to address MIPPA provisions related 

to Part D plan formularies. In the final rule that appeared in the April 15, 2010 Federal 
 34 

Register (75 FR 19678), we made changes to the Part C and D regulations which 

strengthened various program participation and exit requirements; strengthened 

beneficiary protections; ensured that plan offerings to beneficiaries included meaningful 

differences; improved plan payment rules and processes; improved data collection for 

oversight and quality assessment; implemented new policies; and clarified existing 

program policy. 

 In a final rule that appeared in the April 15, 2011 Federal Register

(76 FR 21432), we continued our process of implementing improvements in policy 

consistent with those included in the April 2010 final rule, and also implemented changes 

to the Part C and Part D programs made by recent legislative changes. The Patient 

Protection and Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 2010, 

as passed by the Senate on December 24, 2009, and the House on March 21, 2010. The 

Health Care and Education Reconciliation Act (Pub. L. 111-152), which was enacted on 

March 30, 2010, modified a number of Medicare provisions in Pub. L. 111-148 and 

added several new provisions. The Patient Protection and Affordable Care Act 

(Pub. L. 111-148) and the Health Care and Education Reconciliation Act 

(Pub. L. 111-152) are collectively referred to as the Affordable Care Act. The Affordable 

Care Act included significant reforms to both the private health insurance industry and 

the Medicare and Medicaid programs. Provisions in the Affordable Care Act concerning 

the Part C and D programs largely focused on beneficiary protections, MA payments, and 

simplification of MA and Part D program processes. These provisions affected 

implementation of our policies regarding beneficiary cost-sharing, assessing bids for 
 35 

meaningful differences, and ensuring that cost-sharing structures in a plan are transparent 

to beneficiaries and not excessive. In the April 2011 final rule, we revised regulations on 

a variety of issues based on the Affordable Care Act and our experience in administering 

the MA and Part D programs. The rule covered areas such as marketing, including 

agent/broker training; payments to MA organizations based on quality ratings; standards 

for determining if organizations are fiscally sound; low income subsidy policy under the 

Part D program; payment rules for non-contract health care providers; extending current 

network adequacy standards to Medicare medical savings account (MSA) plans that 

employ a network of providers; establishing limits on out-of-pocket expenses for MA 

enrollees; and several revisions to the special needs plan requirements, including changes 

concerning SNP approvals. 

 In a final rule that appeared in the April 12, 2012 Federal Register (77 FR 22072 

through 22175), we made several changes to the Part C and Part D programs required by 

statute, including the Affordable Care Act, as well as made improvements to both 

programs through modifications reflecting experience we have obtained administering 

the Part C and Part D programs. Key provisions of that final rule implemented changes 

closing the Part D coverage gap, or "donut hole," for Medicare beneficiaries who do not 

already receive low-income subsidies from us by establishing the Medicare Coverage 

Gap Discount Program. We also included provisions providing new benefit flexibility 

for fully-integrated dual eligible special needs plans, clarifying coverage of durable 

medical equipment, and combatting possible fraudulent activity by requiring Part D 
 36 

sponsors to include an active and valid prescriber National Provider Identifier on 

prescription drug event records. 
 37 

III. Provisions of the Proposed Regulations 

A. Clarifying Various Program Participation Requirements

1. Closing Cost Contract Plans to New Enrollment (§ 422.2 and § 422.503(b)(5)) 

In implementing the original Part C requirements in our June 26, 1998 final rule, 

entitled, "Medicare Program; Establishment of the Medicare+Choice Program" 

(63 FR 34968 through 35116), we established a requirement in 42 CFR 422.501(b)(4) 

that an "entity seeking to contract as [an Medicare Advantage (MA)] organization must 

not accept new enrollees under a section 1876 reasonable cost contract in any area in 

which it seeks to offer [an MA] plan." We stated our reasons for the policy, specifying in 

the preamble of the interim final rule that, "[o]ur reason for establishing this rule is to 

eliminate the potential for an organization to encourage higher-cost enrollees to enroll 

under its cost contract while healthy enrollees are enrolled in its risk-based [MA] plan. 

This [final] rule is consistent with our long-standing policy that entities not have both a 

risk and cost contract under section 1876 [of the Act] in the same area." (63 FR 35014 

through 35015). 

This provision was recodified at 42 CFR 422.503(b)(5) in regulations 

implementing the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003, but the requirement, as well as the rationale for the requirement, remained intact. 

Since this requirement only precludes "the entity" contracting as an MA 

organization from having a cost contract open to new enrollment, the prohibition does not 

apply to another separate legal entity owned by the same parent organization, such that 

two legal entities owned by the same parent could offer a competing cost contract and 
 38 

MA plan. We do not believe that this result is consistent with the original intent of the 

prohibition because it permits legal entities that are related to each other under a common 

parent organization to offer a cost contract and MA plan in the same service area, 

creating the same potential for the entities to move higher risk enrollees from one plan to 

another in order to take advantage of the differing Medicare payment rules for the two 

plan types or for other reasons that are not related to the enrollees' best interests. 

To ensure that our original intent is realized and to eliminate the potential for 

organizations to move enrollees from one of their plans to another based on financial or 

some other interest, we propose to revise paragraph § 422.503(b)(5) so that an, "entity 

seeking to contract as an MA organization must [n]ot accept, or share a corporate parent 

organization with an entity that accepts, new enrollees under a section 1876 reasonable 

cost contract in any area in which it seeks to offer an MA plan." 

In making the proposed revision to paragraph § 422.503(b), we also propose to 

add the definition of "parent organization" to § 422.2 of the MA program definitions. We 

would specify that, "Parent organization means a legal entity that owns one or more other 

subsidiary legal entities." We are requesting comments on whether a parent organization 

with less than a 100-percent interest in a subsidiary legal entity should trigger the 

prohibition we propose with the amendment at § 422.503(b)(5). Although the MA 

program regulations do not currently define the term "parent organization," our proposed 

definition is consistent with the way the term is currently used in the context of the MA 

program, for example, when assessing an organization's business structure. 

2. Two year Limitation on Submitting a New Bid in an Area Where an MA has been 
 39 

Required to Terminate a Low enrollment MA plan (§ 422.504(a)(19)) 

Under § 422.506(b)(1)(iv), we must non-renew an MA plan that does not have a 

sufficient number of enrollees to establish that it is a viable independent plan option. We 

have currently interpreted the standard of whether the MA plan has a "sufficient number 

of enrollees to establish that it is a viable independent plan option" as meaning that the 

MA plan has fewer than 500 enrollees for non-SNPs and fewer than 100 enrollees for 

SNPs over a specified time period of 3 years. As we determine adjustments are 

appropriate, we will revisit this interpretation as part of annual plan guidance. In cases in 

which an MA plan has been non-renewed on this basis, it would defeat the intent and 

purpose of this rule if the MA organization could simply submit a new bid for the next 

year in the same area for the same type of plan that failed to attract enrollment over a 

number of years. Indeed, the problem addressed in § 422.506(b)(1)(iv) would be 

exacerbated, as the new plan would start out with no MA enrollees. 

In section 3209 of the Affordable Care Act, the Congress added a new section 

1854(a)(5)(C)(1) of the Act that clarified that CMS is not "require[d]. . .to accept any or 

every bid submitted by an MA organization. . . ." Section 1856(b)(1) of the Act further 

provides authority for CMS to establish MA standards by regulation, and section 

1857(e)(1) of the Act also provides authority to impose contract requirements that CMS 

finds "necessary and appropriate." Under the foregoing authority, we propose to revise 

§ 422.504(a) to add a new contract requirement that stipulates that the Medicare 

Advantage Organization (MA organization) agrees not to submit a new bid of the same 

type of plan that has been non-renewed under § 422.506(b)(1)(iv) in the same service 
 40 

area as the non-renewed plan for 2 years after such a non-renewal. 

We believe this requirement will enhance our ongoing efforts to ensure that MA 

organization offerings in a service area present beneficiaries with viable plans that are 

responsive to their needs. 

3. Authority to Impose Intermediate Sanctions and Civil Money Penalties (§ 422.752, 

§ 423.752, § 422.760 and § 423.760) 

Section 1857(a) of the Social Security Act (the Act) provides the Secretary with 

the authority to enter into contracts with MA organizations, and section 1860D-12(b)(1) 

of the Act provides the Secretary with the authority to enter into contracts with Part D 

sponsors. Section 1857(g)(1) of the Act provides a list of contract violations for which 

the potential enforcement response under section 1857(g)(2) of the Act is the imposition 

of intermediate sanctions (sanctions) and/or civil money penalties (CMPs). Section 

1860D-12(b)(3)(E) of the Act applies these provisions to Part D contracts. We codified 

this authority in the June 28, 2000 final rule with comment period entitled, "Medicare 

Program; Medicare+Choice Program (65 FR 40170) for Part C, and the January 28, 2005 

final rule entitled, "Medicare Program; Medicare Prescription Drug Benefit" 

(70 FR 4194) for Part D. The authority was codified at § 422.752 (Part C) and § 423.752 

(Part D). We are proposing two changes to our existing authority to impose sanctions 

and CMPs. 

First, section 6408 of the Affordable Care Act (Pub.L. 111-148) provided the 

Secretary with new authorities to impose sanctions or CMPs for violations of the Part C 

and D marketing and enrollment requirements. Section 6408 amended 1857(g)(1) of the 
 41 

Act by adding new sections (H) through (K). These provisions provide CMS with the 

authority to impose intermediate sanctions on an organization that enrolls an individual 

without prior consent (except in certain limited circumstances) or transfers an individual 

to a new plan without prior consent. They also specifically make it a contract violation to 

violate the Part C and D marketing requirements, and specify that it is a violation of the 

sponsor's Part C or D agreement with CMS for the sponsoring organization to employ or 

contract with any individual or entity who engages in the conduct described in 

paragraphs (A) through (J) of 1857(g)(1) of the Act. 

 We are proposing to revise our regulations to codify the aforementioned 

authorities at § 422.752 (Part C) and § 423.752 (Part D), following the statutory language 

with little modification. 

Second, we are proposing changes to the regulations intended to clarify CMS' 

authority to impose CMPs for the violations contained in section 1857(g)(1) of the Act 

and corresponding regulations at § 422.752 (Part C) and § 423.752 (Part D). Existing 

regulations provide the government with authority to impose CMPs for the listed 

violations. The existing regulations, however, designate the Office of Inspector General 

(OIG) as the sole government agency with the authority to impose CMPs for the 

violations contained in § 422.752 and § 423.752. We are proposing to revise the 

language of these provisions to clarify that either CMS or the OIG may impose CMPs for 

the violations listed at § 422.752(a) and § 423.752(a), except § 422.752(a)(5) and 

§ 423.752(a)(5). Only the OIG will continue to have the authority to impose CMPs for 

the violations at § 422.752(a)(5) and § 423.752(a)(5), regarding the misrepresentation 
 42 

and/ or falsification of information furnished to CMS, an individual or other entity. CMS 

or the OIG will impose the CMPs in accordance with the amounts specified in section 

1857(g)(2) of the Act and § 422.760 and § 423.760 of the corresponding regulations. 

We are proposing to revise the existing regulations at § 422.752, § 423.752, 

§ 422.760, and § 423.760 to effectuate this change. 

4. Contract Termination Notification Requirements and Contract Termination Basis 

(§ 422.510 and § 423.509) 

Sections 1857(c) and 1860D-12(b)(3)(B) of the Act provide us with the authority 

to terminate a Part C or D sponsoring organization's contract at any time if we make a 

determination that the contracting organization is substantially failing to meet contract 

requirements and expectations. Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the 

Act provide us with the procedures necessary to facilitate the termination of contracts 

held between CMS and MA organizations and Part D sponsors, respectively. The Part C 

contract termination authorities and procedures were codified into regulations in the 

June 29, 2000 final rule entitled, "Medicare Program; Medicare+Choice Program" 

(65 FR 40170) at § 422.510. Likewise, the Part D authorities and procedures were 

codified into regulations in the January 28, 2005 final rule entitled, "Medicare Program; 

Medicare Prescription Drug Benefit" (70 FR 4194) at § 423.509. 

We are proposing three revisions to our existing regulations that relate to contract 

termination. First, we are proposing clarification of the scope of our authority to 

terminate Part C and D contracts under § 422.510(a) and § 423.509(a). Section 
 43 

1857(c)(2) of the Act provides us with authority to terminate a Part C or D contract if we 

make a determination that the organization-- 

● Has failed substantially to carry out the contract; 

● Is carrying out the contract in a manner inconsistent with the efficient and 

effective administration of this part; or 

● No longer substantially meets the applicable conditions of this part. 

Existing regulations at § 422.510 and § 423.509 reiterate the three bases for 

termination set forth in the statute, however, over time CMS has also included in 

regulation a number of specific violations within the scope of our statutory authority, that 

is, violations which meet the standard established by the statute. In the June 26, 1998 

proposed rule (63 FR 34968, at 35018), we stated that "[i]n addition to repeating the 

above statutory language, we are implementing this language by identifying specific 

circumstances that we believe constitute examples of [an MA] organization substantially 

failing to carry out either its contract, or carrying out its contract in a manner that is 

inconsistent with the effective and efficient administration." 

However, we have come to believe over time that the inclusion of our broad 

statutory authorities in the regulations, along with the more specific violations, has the 

potential to lead to confusion regarding the scope of our termination authority. 

Terminating a contract is the strongest action that CMS may take in response to an MA 

organization or Part D sponsor's noncompliance. It is imperative that both CMS and 

affected organization understand the standard we apply when CMS has made a 

determination to end the contractual relationship. Therefore, we are proposing to modify 
 44 

the language at § 422.510(a) and § 423.509(a) to clarify our contract termination 

authority by separating the statutory bases from the examples. To effectuate this change 

we will need to renumber the lists of bases contained in § 422.510(a) and § 423.509. 

Because there are cross references using the current numbering scheme, we are also 

proposing to make several corresponding reference changes to reflect the renumbering of 

this section throughout parts 422 and 423. We believe that by making these changes, we 

will improve the clarity of this regulation. 

Second, we are proposing revisions to our contract termination notification 

procedures contained at § 422.510(b)(1) and § 423.509(b)(1). Current regulations state 

that if CMS decides to terminate a Part C or D sponsoring organization's contract, we 

must notify the MA organization/Part D sponsor in writing 90 days before the intended 

date of the termination. We believe that the 90-day timeframe is not in the best interest 

of Medicare beneficiaries, in light of the fact that CMS terminates contracts in 

circumstances where an organization is significantly out of compliance with Part C and D 

requirements. We also think that the 90-day timeframe is unnecessarily long given the 

existing procedural protections and appeal rights provided for MA organizations and Part 

D sponsors. 

The authorizing statute for Part C, at section 1857(h)(1)(B) of the Act (applicable 

to Part D pursuant to section 1860D-12(b)(3)(F) of the Act), states that the Secretary 

must provide reasonable notice and opportunity for hearing regarding the termination 

(including the right to appeal the initial determination); during this hearing process, the 

termination is effectively stayed pursuant to § 422.664 and § 423.652. Therefore, we 
 45 

believe that a 45-day timeframe better balances the need to provide contracting 

organizations with reasonable notice of the impending contract termination with the 

interests of the Medicare beneficiaries who are enrolled in a plan that is deficient enough 

in its adherence to Part C and/or D requirements that contract termination is necessary. 

We also propose to make necessary cross-reference changes in parts 422 and 423 at 

§ 422.644(c)(1) and § 423.642(c)(1). 

Additionally, in an effort to respond to changes in the media and information 

technology landscape, we are proposing a slight modification to the termination 

notification provision for the general public at § 422.510(b)(1)(iii) and 

§ 423.509(b)(1)(iii) by proposing that contracting organizations now release a press 

statement to news media serving the affected community or county and posting the press 

statement prominently on the organization's website instead of publishing the notice in 

applicable newspapers. 

Third, we are proposing minor revisions to the wording of our regulations at 

§ 422.510 and § 423.509 to reflect the authorizing language contained in sections 

1857(c)(2) and 1860D-12 of the Act. Specifically, we are proposing to replace the word 

"fails" with "failed" in the applicable provisions of § 422.510 and § 423.509. In current 

regulations both of the terms failed and fails are used when describing contract violations 

that may be the basis for a contract termination. We would like for this list to read 

consistently, therefore, we are proposing to revise the language as such. The purpose of 

this change is merely to ensure that consistent language is used throughout § 422.510 and 

§ 423.509 and in no way changes the meaning or policy encompassed in these provisions. 
 46 

5. Reducing the Burden of the Compliance Program Training Requirements 

(§ 422.503(b)(4)(vi)(C) and § 423.504(b)(4)(vi)(C)) 

Section 1857(a) of the Act provides the Secretary with the authority to enter into 

contracts with MA Organizations, and section 1860D-12(b)(1) of the Act provides the 

Secretary with the authority to enter into contracts with Part D sponsors. Sections 

1860D-12(b)(3)(D)(i) and 1857(e)(1) of the Act, specify that these contracts shall contain 

other terms and conditions that the Secretary may find necessary and appropriate. When 

we implemented the Part C program, we determined that all Part C contracts (and 

subsequently Part D contracts) would require that the Part C or D organization has the 

necessary administrative and management arrangements to have an effective compliance 

program, as reflected in § 422.503(b)(4)(vi) and § 423.504(b)(4)(iv). 

In the December 5, 2007 Federal Register, we published the "Medicare Program; 

Revisions to the Medicare Advantage and Part D Prescription Drug Contract 

Determinations, Appeals and Intermediate Sanctions Process" final rule (72 FR 68700). 

In that final rule, we established that compliance plans for sponsoring organizations must 

include training and education and effective lines of communication between the 

compliance officer and the sponsoring organization's employees, managers, and directors 

as well as their first-tier, downstream and related entities (FDRs). We reiterated the 

importance of this requirement in the October 22, 2009 proposed rule entitled, 

"Medicare Program; Policy and Technical Changes to the Medicare Advantage and the 

Medicare Prescription Drug Benefit Programs" (74 FR 53634). 
 47 

In the 2009 proposed rule, entitled, "Medicare Program; Policy and Technical 

Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit 

Programs," we addressed concerns about the burden on FDRs such as pharmacies, 

hospitals and physicians as a result of this requirement, given the likelihood that many of 

these entities and individuals contract with multiple contracting organizations. We were 

concerned that these FDRs would potentially have to participate in (largely duplicative) 

training for each organization with whom they contract. We requested public comments 

on how best to ensure that the training requirement continues to be met while not overly 

burdening the contracting organization or its FDRs In response, we received numerous 

comments suggesting that CMS develop its own web-based trainings to lessen this 

burden on sponsors and FDRs (75 FR 19678 at 19688). 

In response to these requests, we have created the CMS Standardized General 

Compliance Program Training and Education Module. Until now, we have offered this 

as an optional training. In this rule, we propose to require that all contracting 

organizations accept a certificate of completion of the CMS training as satisfaction of this 

general compliance program training requirement. We anticipate that this proposal will 

greatly reduce the burden on various sectors of the industry, including, but not limited to, 

insurance providers, hospitals, suppliers, pharmacists, and physicians. 

Under this proposed change, Part D sponsors and Part C organizations would not 

be permitted to develop or implement sponsor specific training or provide supplemental 

training materials to fulfill the general compliance program training requirement; only 

CMS training would suffice. 
 48 

We understand that sponsors often include sponsor specific information (such as 

compliance officer's contact information, compliance reporting processes and 

expectations, hotline number or email address for compliance questions, website 

information for accessing the sponsor's compliance policies and procedures) in the 

training materials provided to the FDRs and will need an appropriate mechanism for 

conveying this information given that the training vehicle will no longer be available. To 

address this issue, a sponsor may choose to include such information in the contract held 

between the sponsor and the FDR. Alternatively, we would allow each sponsor to 

develop a one page information sheet containing this material, to be distributed by the 

sponsor to each of its FDRs. We seek comments concerning this portion of our proposal 

and suggestions on other options we could implement to accomplish the desired outcome. 

We are proposing to modify the regulation text by adding a new 

§ 422.503(b)(vi)(C)(3) and § 423.504(b)(vi)(C)(4) to permit only this CMS training for 

satisfaction of the requirement to train FDRs. 

6. Changes to Audit and Inspection Authority (§ 422.503(d)(2) and § 423.504(d)(2)) 

Sections 1857(d)(2)(A) and 1860D-12(b)(3)(C) of the Act specify that each 

contract under these sections must state that CMS has the right to audit and inspect the 

facilities and records of each organization. We are proposing three changes to our audit 

and inspection authority. First, under section 6408 of the Affordable Care Act new 

authority was provided to the Secretary that now requires that each contract provide the 

right to "timely": (1) inspect or otherwise evaluate the quality, appropriateness, and 

timeliness of services performed under the contract; (2) inspect or otherwise evaluate the 
 49 

facilities of the organization when there is reasonable evidence of some need for such 

inspection; and (3) audit and inspect any books, contracts, and records of the organization 

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. 

Therefore, we are proposing to revise both § 422.503(d)(2) and § 423.504(d)(2) to 

reflect this change. Specifically, we are proposing to insert the word "timely" at the end 

of both of the introductory paragraphs for § 422.503(d)(2) and § 423.504(d)(2). 

Second, we are proposing to add authority that will allow CMS to require MA 

organizations and Part D sponsors to hire an independent auditor to perform full or partial 

program audits to determine compliance with CMS requirements. 

MA organizations and Part D sponsors must adhere to CMS requirements to 

properly administer Part C and Part D benefits. These requirements are contained in 

statute, regulations and in the Part C and Part D sponsor agreements themselves. CMS 

needs assurance that MA organizations and Part D sponsors are substantially adhering to 

Part C and/or D requirements, and that Medicare beneficiaries are receiving the benefits 

to which they are entitled. To determine the extent of MA organization and Part D 

sponsor compliance with program requirements, CMS uses a variety of oversight and 

monitoring tools including CMS-conducted program audits. 

CMS conducts a program audit by examining core operational areas and functions 

and determining the sponsors' level of compliance with these Part C and Part D program 

requirements. CMS may audit any program requirement, but in recent years we have 
 50 

focused on Part C and Part D coverage decisions, appeals, grievances, compliance 

program effectiveness, and formulary administration. CMS reviews a number of targeted 

samples to evaluate MA organizations and Part D sponsors' processes and systems. 

Targeting samples is an efficient way to highlight deficiencies and ensure that they are 

quickly and successfully remediated. The process is primarily designed to be educational 

for the MA organization and/or Part D sponsor as it expands the sponsor's understanding 

of CMS' expectations, and how program requirements are to be applied. It also identifies 

areas of risk or actual non-compliance so sponsors can quickly correct the deficiency. 

This understanding allows the MA organization and/or Part D sponsor to develop and 

implement a robust internal auditing and monitoring program to identify deficiencies 

before they reach a level of substantial non-compliance in the future. An effective 

monitoring program should result in early detection of system and process failures and 

should lead to problems being fixed quickly and steps being implemented to prevent 

future failures. 

Organizations that are chosen for audit fall into at least one of the five following 

categories: High Star rated plans; sponsors with a Low Performing Icon (LPI); high risk 

plans (based on a data driven risk assessment); sponsors not audited in last 3 years, and 

CMS Regional or Central Office referrals. Annually, CMS conducts a risk assessment to 

determine which high-risk organizations to audit. Many of the program audits currently 

being conducted are with organizations whose contract performance or data indicators 

demonstrate the potential risk of failing to perform core program functions that, if not 

complied with, may result in potential beneficiary harm. These audits are a useful tool to 
 51 

help identify systemic deficiencies and failures in meeting CMS requirements and they 

help to promote compliance with those requirements. While these types of audits are 

necessary because these organizations pose the most risk, not all organizations are 

receiving the benefit of having an independent audit of their organization on a regular 

basis. 

CMS is constrained in the number of program audits we can conduct each year, 

due to limited resources. Currently, CMS has close to 300 parent organizations that 

perform MA and/or Part D functions. CMS is only able to audit approximately 30 parent 

organizations per year; or roughly 10 percent of all MA organizations and/or Part D 

sponsors. CMS believes that MA organizations and/or Part D sponsors, their enrollees, 

and the Medicare program all benefit from a regular cycle of independent auditing. 

Therefore, we are proposing to revise our regulations to allow CMS to require MA 

organizations and/or Part D sponsors to hire an independent auditor to conduct regularly 

scheduled program audits in accordance with CMS specifications. 

We currently make all of our program audit protocols available to MA 

organizations and/or Part D sponsors through our website. Pursuant to the proposed new 

regulatory provision, CMS would notify the MA organization and/or Part D sponsor that 

it has been selected to perform a full or partial program audit. The MA organization 

and/or Part D sponsor would then be required to engage an independent auditor to 

perform a full or partial program audit as directed by CMS using the CMS published 

protocols, methodologies, and methods of evaluation. At the conclusion of the audit, at 

the direction of the MA organization and/or Part D sponsor, the independent auditor will 
 52 

provide a draft copy of its findings to CMS and the MA organization and/or Part D 

sponsor. Once the MA organization and/or Part D sponsor has had an opportunity to 

rebut any findings, the independent auditor will provide its final report of findings to 

CMS and the MA organization and/or Part D sponsor. CMS anticipates that additional 

instruction will be necessary to interpret and implement this audit requirement of a 

complete and full independent review. Therefore, we intend to develop and release sub 

regulatory guidance to address, among other things, language and specifications which 

should be included in the contract between the sponsoring organization and the 

independent auditor conducting the audit. The proposed authority will allow CMS to 

better evaluate MA organizations' and Part D plan sponsor's performance. With the 

proposed approach, each MA organization and/or Part D sponsor will be required to 

undergo an independent program audit at least every 3 years. Under this proposal, more 

organizations will be audited each year, which will provide CMS with substantially more 

data to evaluate program-wide performance, improve industry performance and protect 

beneficiaries enrolled in the Medicare Advantage and Prescription Drug Benefit 

programs. This will enhance CMS's oversight and provide us with information that 

enables us to focus our time and resources in the areas most needed to ensure compliance 

with Part C and Part D program requirements. 

CMS will continue to perform program audits in limited scenarios, such as when 

indicated by a risk analysis; and will perform limited "look back" audits to ensure the 

integrity of the independent audit process proposed here. The latter audits will focus on 

reviewing the program audit findings that we receive from the independent auditors 
 53 

engaged by the Part C and Part D organizations, to ensure that the independent auditor 

conducted the audit in accordance with CMS specifications. We think that this additional 

authority will significantly strengthen the Medicare Parts C and D audit and oversight 

program. 

Therefore, we are proposing to add language to § 422.503(d)(2) and 

§ 423.504(d)(2) that will allow us to require a MA organization or Part D sponsor to hire 

an independent auditor, working in accordance with CMS specifications, to perform 

program audits to determine compliance with CMS requirements and provide to CMS an 

attestation affirming that the audit has been completed as required. 

Third and finally, we are proposing to revise our regulations to specifically permit 

CMS to require MA organizations or Part D sponsors with audit results that reveal 

non-compliance with CMS requirements to hire an independent auditor to validate that 

correction has occurred. We may invoke this authority regardless of whether an 

independent auditor or CMS conducted the program audit that identified the 

programmatic deficiencies. 

When program audits are conducted, non-compliance with CMS requirements is 

often found. When CMS finds these deficiencies, it notifies the MA organization or Part 

D sponsor of its non-compliance and requires correction. We do not close out audits 

until we have validated that correction has occurred. While we firmly believe in the 

value of such validation, these efforts are also limited by resources. In order to assist us 

in making the determination that the deficiencies found during the audit have been 

corrected and are not likely to recur, we need to have greater flexibilities in performing 
 54 

validation activities. Therefore, we are proposing that we may require a MA 

organization or Part D sponsor to hire an independent auditor to provide us with 

additional information to determine if the deficiencies found during the course of the 

audit have actually been corrected and are not likely to recur. The independent auditor 

would be hired by the MA organization and/or Part D sponsor and work in accordance 

with our specifications in order to provide accurate and reliable information to CMS. 

CMS often relies on self-disclosed information from the MA organization or Part 

D sponsor, CMS and plan data; in the alternative, we must attempt to engage in a process 

to independently verify that deficiencies have been corrected. Given the nature and 

extent of some compliance deficiencies and the level of skill and experience required to 

conduct an exhaustive verification of correction, we have concluded that an independent 

auditor hired by the MA organization or Part D sponsor would be beneficial for both the 

organization and CMS. 

This proposal is also consistent with our regulatory authority at 42 CFR 422.756 

and 423.756 which permits us to require a sanctioned organization to hire an independent 

auditor to help us determine if a sanction should be lifted. Program experience has 

demonstrated other situations when the expertise of an independent auditor would be 

helpful in determining correction. For example, an independent auditor who specializes 

in complex information technology systems and who has specialized knowledge of how 

those systems interact with each other, in order to be compliant with our requirements, 

may be helpful in ensuring timely and successful correction of complex claims 

processing deficiencies. This is one example of a situation where we may require the 
 55 

MA organization or Part D sponsor to hire an independent auditor in order to assist in 

making the determination that the deficiencies found during the program audit have been 

corrected. 

Therefore, we are proposing to add language to § 422.503(d)(2) and 

§ 423.504(d)(2) that will allow us to require that a sponsoring organization hire an 

independent auditor, working in accordance with CMS specifications, to provide us with 

additional information to determine if the deficiencies that were found during a program 

audit have been corrected. 

7. Procedures for Imposing Intermediate Sanctions and Civil Money Penalties Under 

Parts C and D (§ 422.756 and § 423.756) 

 Sections 1857(g) and 1860D-12(b)(3)(E) of the Act provide the Secretary the 

ability to impose intermediate sanctions on MA organizations and PDP sponsors. 

Intermediate sanctions consist of suspension of enrollment, suspension of marketing and 

suspension of payment. Current regulations governing intermediate sanctions are 

contained in subparts O of part 422 and part 423. Sections 422.756 and 423.756 provide 

specific procedures for imposing intermediate sanctions, and include provisions which 

address the duration of the sanction and the standard that we apply when determining if a 

sanction should be lifted. As specified in the Act and regulations, when intermediate 

sanctions are imposed on sponsoring organizations, the sanctions remain in place until 

we are satisfied that the basis for the sanction determination has been corrected and is not 

likely to recur. 

Because sanctions remain in place until the deficiencies have been corrected and 
 56 

we are assured that they are not likely to recur, we are unable to fully test the contracting 

organization's compliance with certain requirements until the sanction is lifted. 

Therefore, in the October 2009 proposed rule, entitled "Medicare Program; Policy and 

Technical Changes to the Medicare Advantage and the Medicare Prescription Drug 

Benefit Programs" (74 FR 54634), we proposed a rule, later finalized in the 

April 15, 2010 "Medicare Program; Policy and Technical Changes to the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs" (75 FR 19678), that 

allows us to require a plan under a marketing and/or enrollment sanction to engage in a 

test period of marketing or accepting enrollments or both for a limited period of time. As 

we explained in that proposed rule, the purpose of the test period is to assist us in making 

a determination as to whether the deficiencies that are the bases for the intermediate 

sanctions have been corrected and are not likely to recur. The test period provides us 

with the opportunity to observe a sanctioned plan's ability to enroll or market to Medicare 

beneficiaries prior to lifting the sanction. Since finalizing that rule in April 2010 

(75 FR 19678), we have further considered its utility as a result of compliance issues that 

we have encountered over the past 2 years. We are proposing two modifications to this 

existing rule. First, we are proposing to expand the potential applicability of the test 

period requirement to all types of all intermediate sanctions. The existing regulation 

would only allow CMS to require this test period in instances where CMS has imposed a 

marketing and/or enrollment sanction. However, the type of intermediate sanction 

imposed is not necessarily related to the particular violations that form the basis for the 

sanction. Therefore, we are proposing to modify the existing rule to clarify that CMS 
 57 

may require a test period for a sponsoring organization that has had any of the three types 

of intermediate sanctions imposed: marketing, enrollment and/or payment. 

We also want to clarify that our ability to require this test period is not limited to 

sanctions stemming from marketing or enrollment violations. In the preamble language 

for the October 2009 proposed rule, (74 FR 54634), we stated that "[t]he basis for this 

proposal is that we have found that there is often not a satisfactory way to determine if 

marketing and/or enrollment problems have been corrected while a sanction is in place 

and no such activities are permitted." Upon reflection, we are concerned that this 

statement may have given the impression that the test period would only be used in 

instances where the underlying bases for the sanction are marketing and/or enrollment 

deficiencies. Therefore, we are clarifying here that the purpose of the test period is to 

assist us in making a determination as to whether the deficiencies that are the bases for 

the intermediate sanction have been corrected and are not likely to recur. The 

aforementioned deficiencies may be in any operational area, and are not limited or 

restricted to enrollment and/or marketing deficiencies. 

Second, we are proposing to clarify the enrollment parameters for Part D 

contracting organizations that are under the benchmark and would normally participate in 

the annual and monthly auto enrollment process for beneficiaries who receive a low 

income subsidy (LIS) during a test period. During a test period, sanctioned Part D plans 

may not be allowed to receive or process these types of enrollments. 

LIS beneficiaries are a vulnerable population who are particularly sensitive to 

financial instability. It is critical that Part D sponsors correctly identify a beneficiary's 
 58 

LIS status. Our goal when enrolling this particular population is to ensure that these 

vulnerable beneficiaries are best able to access their drugs and services in the manner to 

which they are entitled under the Part D program. We believe that if we allow 

auto-enrollments into a plan that has recently demonstrated substantial non-compliance 

with our regulations as evidenced by the imposition of an intermediate sanction, these 

vulnerable beneficiaries may experience difficulties in accessing prescription drugs. 

 Therefore, we are proposing to make clear that we may determine that a sanctioned plan 

is not available to receive automatically assigned beneficiaries for the entire duration or a 

portion of the testing period. 

We are proposing to modify the regulation text at § 422.756 and § 423.756 to 

reflect these changes. 

8. Timely Access to Mail Order Services (§ 423.120) 

 Section 1860D 12(b)(3) of the Act authorizes the Secretary to include contract 

terms for Part D sponsors, not inconsistent with the Part C and D statutes, as necessary 

and appropriate. Section 423.120(a)(3) specifies that a Part D sponsor's contracted 

network may include non-retail pharmacies, including mail order pharmacies, so long as 

the network access requirements are met. Part D plans are increasingly entering into 

contracts with mail order pharmacies to offer beneficiaries an alternative way to fill 

prescriptions under the Part D benefit, often at much lower cost sharing than is available 

at network retail pharmacies. While mail order pharmacies make up a relatively small 

percentage of total prescriptions filled under the Part D program, we are committed to 

ensuring consistent and reliable beneficiary access to medications, regardless of what 
 59 

type of pharmacy fills the prescriptions. 

Section 1860D-4 of the Act describes the various beneficiary protections in place 

in the Part D program. It is the industry standard in retail and institutional pharmacies to 

fill almost all prescriptions on the same day the prescription is presented. We have 

established a 24 hour fulfillment standard for home infusion drugs covered under Part D 

(§ 423.120(a)(4)(iv)). For mail order pharmacies, the industry standard for delivery 

times appears to range from 7 to 10 business days from the date the prescription was 

received, and Part D sponsors' marketing materials often specify this time frame to 

beneficiaries. Beneficiaries generally choose to fill prescriptions through a mail order 

pharmacy, for lower cost sharing, when it is feasible to wait 7 to 10 days to receive their 

medications. However, if this time frame is disrupted, beneficiaries may experience gaps 

in therapy. 

We are aware of a specific instance in which significant incentives (for example, 

zero cost sharing) caused increased demand for mail order prescriptions sufficient to 

disrupt the delivery time frame, and we are concerned about the adverse effect such 

incentives might have on beneficiaries. When issues with filling a prescription arise in a 

retail setting, the beneficiary often is notified of the problem in real time, or within hours 

of discovery. When issues arise in a mail order setting, the delays in finding, 

communicating, and making the appropriate contacts to resolve the problem may add 

days onto the ultimate delivery date, resulting in a potentially more significant concern 

for mail order beneficiaries if these delays result in gaps in therapy. For this reason, we 

believe it is necessary and appropriate to establish fulfillment requirements for mail order 
 60 

pharmacies as well as home delivery services offered by retail pharmacies, to set 

consistent expectations for beneficiary access to drugs in this growing segment. Many 

beneficiaries may be very well served by this type of pharmacy access, but only if they 

can rely upon efficient processing and turnaround times. Mail order pharmacies 

contracted by Part D sponsors can reasonably be expected to meet minimum performance 

standards for order fulfillment, including convenient order turnaround times, as a 

beneficiary protection and as a component of providing good customer service. Clearly 

stating in beneficiary materials the expected turnaround time for delivery allows the 

beneficiary to better control when they need to reorder to ensure no gaps in medication 

supply. Clarity in expected turnaround times also can prevent needing to address 

customer inquiries into the status of a pending order, setting parameters for when an 

order is or is not delayed and what options become available at that point. We believe 

that established companies that have been providing these services for years have 

generally been meeting these standards in practice already, and that the proposed 

turnaround times are in line with current practices followed by mail order pharmacies 

today. Establishing mail order fulfillment requirements as a contract term would require 

plan sponsors to require that all pharmacies in its network meet the same minimum level 

of service. This would underscore the importance of consistent and reliable access to 

medications, protecting beneficiaries from inconsistent or unreliable practices that may 

otherwise jeopardize timely access to prescriptions. 

 Therefore, we are proposing to amend § 423.120(a)(3) to specify mail order 

fulfillment requirements in line with what we have observed in other markets: 5 business 
 61 

days (from when the pharmacy receives the prescription order to when it is shipped) for 

those prescriptions requiring intervention beyond filling (such as clarifying illegible 

orders, resolving third party rejections, and coordinating with multiple providers as part 

of drug utilization management); and 3 business days (from when the pharmacy receives 

the prescription order to when it is shipped) for those prescriptions not requiring 

intervention. We recognize that some prescription orders may require clarification or 

additional steps to be taken by the provider or beneficiary that will extend beyond the 

proposed period of 5 days. We believe that such cases represent a minority of mail order 

prescriptions, and as such we would anticipate that more than 99 percent of all mail order 

prescriptions processed are filled in compliance with either the 3- or 5-day standard. We 

believe our proposed standards are in alignment with fulfillment requirements already in 

place in the market and as such do not create a new burden or new standard for mail 

order pharmacies to meet. We are soliciting comments not only on the proposed time 

frames, but also on whether there are instances (in addition to those discussed previously) 

in which the proposed 5-day time frame should apply. 

We additionally are soliciting comments on whether we should establish 

additional requirements for beneficiary materials relating to mail order services, such as: 

clear definitions of processing time and delivery time; how to access customer support; 

how to submit a complaint via 1 800 MEDICARE; and beneficiary options for accessing 

medications when a delivery is lost or delayed. 

We also welcome comments on any other requirements we should consider for 

mail order or other home delivery options. For example, also potentially affecting 
 62 

consistent access to medication is the use of mail order to fill initial prescriptions of new 

drugs or to fill 30-day supplies of chronically used medications. The need to order a 

refill early, allowing sufficient time for processing and delivery, can result in refill too 

soon edits based upon retail 30 day standards. Resolving inappropriate or inapplicable 

edits increases burden on the beneficiary and the mail order pharmacy and essentially 

creates a disincentive for beneficiaries who are planning ahead and attempting to order 

early enough to ensure un-interrupted supplies of chronic medications. In general, we 

believe that filling initial prescriptions or routine 30-day supplies at mail order is not 

good practice. We recognize that there may be a small minority of beneficiaries who 

successfully depend solely upon mail order or other home delivery options for access to 

prescription drugs due to particular circumstances of geography or mobility. We have no 

reason to discourage their continued use of these services. However, due to the 

difficulties reported to CMS with consistently and effectively filling short time frame 

supplies through mail order, we do not believe that Medicare beneficiaries in general 

should be incentivized through lower cost sharing to utilize mail order pharmacies for 

initial prescriptions or 30-day supplies. 

9. Collections of Premiums and Cost Sharing (§ 423.294) 

Since the beginning of the Part D program, when asked whether Part D sponsors 

could waive premiums and cost sharing we have responded that reducing or waiving 

either of these amounts would be inconsistent with the approved bid. The bid 

requirements, specified in section 1860D-11(e)(2)((C) of the Act, state the bid must 

reasonably and equitably reflect the revenue requirements of the expected population for 
 63 

the benefits provided under the plan. Waiving or reducing the cost sharing and/or 

premiums that are reflected in the approved bid would indicate that the plan bid was 

overstated and the amounts were not necessary for the provision of coverage. However, 

recently we have received reports of sponsors reducing or waiving cost-sharing and/or 

premiums. As a result, we propose to codify requirements for sponsor collection of cost 

sharing and premiums in regulation. 

In addition to violating the bid requirements, as we noted in the preamble of the 

October 22, 2009 proposed rule entitled, "Medicare Program; Policy and Technical 

Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit 

Programs" (74 FR 54690), waiving cost sharing or premiums also violates the uniform 

benefit requirements because doing so results in the plan's not providing the same 

coverage to all eligible beneficiaries within its service area. Section 1860D-2(a) of the 

Act defines qualified prescription drug coverage to mean access to standard or actuarially 

equivalent prescription drug coverage and access to negotiated prices (in accordance with 

section 1860D-2(d) of the Act). Thus, a Part D sponsor must offer its plan to all eligible 

beneficiaries residing in the plan's service area. We further interpret section 1860D-2(a) 

of the Act as requiring the provision of uniform premium and benefits and have codified 

these requirements in our regulations at § 423.104(b). 

Once CMS has approved a sponsor's Part D benefit package, it cannot be varied 

for some or all of the plan's Part D enrollees. Thus, sponsors must commit to providing 

the level of benefits described in the sponsor's benefit package and cannot waive or 

reduce cost sharing, as that would violate the uniform benefit provisions set forth in 
 64 

§ 423.104(b). This is true regardless of whether the Part D sponsor waives the 

copayment directly or indirectly through an affiliate, and regardless of whether such a 

waiver is prohibited by other laws. Some Part D sponsors are related to pharmacies 

through common ownership or control, and we note that an exception to the 

anti-kickback statute, set forth in section 1128B(b)(3)(G) of the Act, permits a pharmacy 

to waive cost sharing (that is, coinsurance and deductibles) imposed under Part D, if the 

conditions described in clauses (i) through (iii) of section 1128A(i)(6)(A) of the Act are 

met. These conditions include that the waiver is not advertised (through media outlets, 

telemarketing or otherwise) and is not routine, and the cost sharing is waived after a good 

faith determination that the individual is in financial need1 or reasonable efforts to collect 

the cost sharing have failed. This exception may protect from sanctions under the 

anti-kickback statute the waiver of cost sharing by pharmacies owned by Part D sponsors. 

 However, as noted in the proposed rule, entitled "Medicare Program; Policy and 

Technical Changes to the Medicare Advantage and the Medicare Prescription Drug 

Benefit Programs" (74 FR 54690), sponsor failure to collect or attempt to collect cost 

sharing at the time the service is provided or to bill cost sharing to the appropriate party 

(either a beneficiary or another payer) after the fact, is a violation of the uniform benefit 

provisions set forth in the current regulation at § 423.104(b). The fact that cost sharing is 

waived by a pharmacy that is related to a Part D sponsor by common ownership, rather 

than the Part D sponsor itself, and that it may be protected from sanctions under the 

anti-kickback statute, does not relieve the Part D sponsor of responsibility for this 

 

1 Under section 1128B(b)(3)(G) of the Act, an individual determination of financial need is not required for 
 65 

violation of the uniform benefit provisions. If a pharmacy is unrelated to a Part D 

sponsor and waives cost sharing under the conditions previously described, the pharmacy 

is making an independent business decision to which the Part D sponsor is indifferent. 

However, if an affiliated pharmacy waives cost sharing for a beneficiary enrolled in the 

sponsor's Part D plan, the sponsor is not indifferent because the cost-sharing waiver is 

more likely to be a strategic decision by the sponsoring organization to move market 

share to the related-party pharmacy and increase profits to the sponsor. Thus, the sponsor 

is altering the level of cost sharing in the approved bid in violation of the uniform benefit 

provisions in § 423.104(b). To clarify this for all parties, we propose to codify the 

prohibition of the waiver or reduction of premiums and cost sharing by adding a new 

section at § 423.294. We propose to specify that Part D sponsors either directly, or 

indirectly through related party pharmacies, as defined in regulation at § 423.501, are 

prohibited from reducing or waiving collection of premiums and cost sharing. In contrast, 

a pharmacy affiliated with one Part D sponsor may waive Part D cost sharing for 

beneficiaries enrolled Part D plans offered by other sponsors without violating the 

uniform benefit provisions. 

Additionally, we have become aware that the regulations in Part 423 do not 

address Part D sponsor requirements for refunding incorrect collections of premiums and 

cost sharing or for retroactively collecting underpayments of cost sharing. Therefore, we 

also propose to codify requirements at § 423.294 that mirror the language at § 422.270. 

We propose to apply the timeframe in § 423.466(a) to these refunds and recoveries. In 

 

Part D beneficiaries eligible for the low-income subsidy under section 1860D-14 of the Act. 
 66 

other words, whenever a sponsor receives information that necessitates a retroactive 

refund of incorrect collections of premiums and/or cost sharing or collection of 

underpayments of cost sharing, the sponsor would be required to issue refunds or 

recovery notices within 45 days. For incorrect collections, we propose to duplicate the 

language at § 422.270 with one exception. That is, in the absence of authority to do so, 

we are not proposing to reduce Part D sponsor premiums for failure to refund amounts 

incorrectly collected from Part D enrollees. Instead, we propose that sponsors that fail to 

meet these requirements may receive compliance notices from CMS or, depending on the 

significance of the non-compliance, be the subject of an intermediate sanction (for 

example, suspension of marketing and enrollment activities) pursuant to Part 423, 

Subpart O. 

10. Enrollment Eligibility for Individuals Not Lawfully Present in the United States 

(§ 417.2, § 417.420, § 417.422, § 417.460, § 422.1, § 422.50, § 422.74, § 423.1, 

§ 423.30, and § 423.44) 

a. Basic Enrollment Requirements 

Sections 226 and 226A of the Act establish the conditions for Medicare Part A 

entitlement for individuals who have attained age 65, are disabled or have end-stage renal 

disease (ESRD), and are entitled to monthly Social Security benefits under section 202 of 

the Act. Individuals entitled to Part A under these sections do not have to pay premiums 

for such coverage, and they may, but are not required to, enroll in Medicare Part B. 

Section 1818 of the Act establishes the conditions for Medicare enrollment for 

individuals who are not entitled to monthly Social Security benefits under section 202 of 
 67 

the Act. Individuals covered under section 1818 of the Act must meet citizenship or alien 

status requirements, in addition to other requirements, in order to enroll in Part B. 

Individuals must have Part B in order to purchase Part A hospital insurance. 

Sections 1851(a)(3)(B), 1860D-1(a)(3)(A), and 1876(a)(1)(A) of the Act outline 

the eligibility requirements to enroll in MA (Part C), Medicare prescription drug 

coverage (Part D), and Medicare cost plans. Under all options, individuals must have 

active Medicare coverage. Specifically, to enroll in MA, an individual must be entitled 

to benefits under Part A and be enrolled in Part B; to enroll in Part D, an individual must 

be entitled to Part A and/or enrolled in Part B; to enroll in a Medicare cost plan, an 

individual must be enrolled in Part B (Part A entitlement is not required). 

b. Medicare Eligibility and Lawful Presence 

Section 401 of the Personal Responsibility and Work Opportunity Reconciliation 

Act of 1996 (PRWORA), amended by section 5561 of the BBA, mandates that qualified 

aliens not lawfully present in the United States are not eligible to receive any federal 

benefit. This is outlined in 8 U.S.C. 1611 (Aliens who are not qualified aliens ineligible 

for federal public benefits) and 8 U.S.C. 1641 (Definitions). The definition of qualified 

alien is codified in 8 CFR 1.3 (Lawfully present aliens for purposes of applying for 

Social Security benefits). 

The aforementioned provisions affect eligibility to receive benefits that would 

otherwise be payable under provisions in the Act. For example, aliens meeting certain 

criteria are able to earn qualified credits towards Social Security retirement benefits as 

outlined in 8 U.S.C. 1631 (Federal attribution of sponsor's income and resources to alien) 
 68 

and 8 U.S.C. 1645 (Qualifying quarters). Such individuals may earn the total number of 

qualified credits to be eligible under the Act to receive retirement benefits under sections 

226 and 226A of the Act. However, should such individuals be unlawfully present in the 

United States under the previously mentioned PRWORA provisions, they are not eligible 

to receive the Social Security benefits they have earned for as long as they remain 

unlawfully present. At such time as they are lawfully present in the United States, or live 

outside the United States, they would again become eligible to receive Social Security 

payments. 

Similarly, when aliens become eligible for Medicare based on age or disability 

under the terms of the Act, they would also automatically be entitled to premium free 

Part A benefits and be eligible to enroll in Part B during a valid enrollment period. 

Furthermore, aliens receiving Social Security retirement benefits 4 months prior to 

turning 65, or are in their 21st month of receiving Social Security disability benefits, 

would, under the terms of the Act, also automatically be enrolled into both Part A and 

Part B consistent with section 1837 of the Act and the enrollment process outlined in 

§ 407.17. Again, however, under PRWORA, these individuals are not eligible to receive 

payment of Medicare benefits for so long as they are unlawfully present in the United 

States. Only upon becoming lawfully present would they become eligible to receive the 

Medicare benefits to which they would otherwise be entitled by paying into Social 

Security for the requisite number of quarters or paying premiums. 

We note that current regulations at § 406.28 and § 407.27 outline the reasons for 

loss of premium Part A and Part B enrollment, and do not include the absence of lawful 
 69 

presence or citizenship as a reason for loss of entitlement. Individuals who are entitled to 

Part A and enrolled in Part B based on eligibility of Social Security benefits currently 

may be enrolled in Medicare even if they are not lawfully present in the United States. 

When PRWORA was enacted, the Act was not amended to include the additional 

eligibility criteria for entitlement to either Social Security benefits or for Medicare Part A 

entitlement, nor were new provisions put into place regarding termination of entitlement 

or establishment of a special enrollment period to account for situations in which 

individuals reestablished lawful presence. As a result, individuals who meet the current 

statutory eligibility criteria have been reflected in CMS records as entitled to both Social 

Security benefits and Medicare coverage. 

c. Alignment of MA, Part D, and Cost Plan Eligibility with Fee-For-Service (FFS) 

Payment Exclusion Policy 

In order to implement 8 U.S.C. 1611 and ensure that individuals who are present 

in the United States unlawfully do not receive benefits, the Social Security 

Administration (SSA) established internal policies and procedures to suspend Social 

Security benefits during periods for which individuals are unlawfully present in the 

United States. Because Medicare entitlement flows from entitlement to Social Security 

retirement and disability benefits, Medicare also has implemented this provision through 

a payment exclusion process. 

Under Medicare's payment exclusion process, data on lawful presence is 

transmitted to CMS from the Department of Homeland Security via regular data 

exchanges from SSA. Once the data is received by us, the lawful presence status is noted 
 70 

on an individual's record and is retained in the FFS claims processing systems. As a 

result, we deny payment of both Part A and Part B claims for non-citizens where lawful 

presence is not established on their record, and do so until individuals regain their lawful 

presence status. Although payment is being denied for claims, individuals who are "fully 

insured" per section 226 of the Act, maintain Part A entitlement and remain enrolled in 

Part B on CMS records as long as premiums are paid. Similarly, individuals who are 

enrolled in premium Part A and/or Part B, maintain their enrollment status as long as 

premiums are paid. 

Although CMS implementation of the lawful presence criteria in the FFS program 

achieved the intent of PRWORA by preventing FFS payments for services rendered to 

individuals who are not lawfully present, this policy was not adopted in regulations for 

Part A and Part B eligibility in 42 CFR parts 406 and 407 or addressed in regulations or 

subregulatory guidance for MA, Part D, and Medicare cost plans. Thus, individuals who 

are not lawfully present, but are nevertheless shown on CMS records to be entitled to 

Medicare Part A and/or enrolled in Part B, have been able to enroll in MA, Part D, and 

Medicare cost plans and obtain Medicare coverage for which they should not be eligible 

under 8 U.S.C. 1611. By permitting these MA, Part D and cost plan enrollments to 

remain in place, we are allowing improper payments to be made to plans on behalf of 

these individuals, which in turn impacts the Medicare Trust Funds. In addition, MA 

organizations, PDP sponsors and cost plans are making benefit payments under the 

Medicare program on behalf of these enrollees that are similarly prohibited under 

PRWORA. 
 71 

Therefore, we are proposing to align eligibility for enrollment in MA, Part D, and 

cost plans (and resulting Medicare payments to plans and by plans that violate 

PRWORA) with the FFS payment exclusion policy to ensure that Medicare is only 

paying for services rendered to individuals who are eligible to receive them. These steps 

are consistent with recommendations made by the Office of Inspector General in its 

January 2013 report (A-07-12-01116) regarding the need for CMS to maintain adequate 

controls to prevent and detect improper payments for Medicare services rendered to 

unlawfully present beneficiaries. Accordingly, we are proposing to revise the regulations 

to establish U.S. citizenship and lawful presence as eligibility requirements for 

enrollment in MA, Part D, and cost plans. Further, we propose that individuals who are 

not lawfully present in the United States would be involuntarily disenrolled from MA, 

Part D, and cost plans, based on the date on which they lose their lawful presence status. 

Disenrollments would be effective the first of the month following the loss of eligibility, 

and the disenrollment process would follow that currently set forth in the regulations 

when an individual is no longer eligible to be enrolled in a plan. 

These regulatory changes would prevent an individual from enrolling in a plan 

and/or remaining enrolled in a plan if they are not lawfully present in the United States. 

Affected individuals will retain their Medicare entitlement and remain enrolled in FFS, as 

long as premiums continue to be paid, but MA, Part D and cost plan payments would be 

denied for time periods during which the individuals are not lawfully present in the 

United States. We must ensure that in administering the Medicare program, all programs 

are compliant with 8 U.S.C. 161l. Specifically, we are proposing the following to 
 72 

address the eligibility and disenrollment of individuals not lawfully present in the United 

States: 

● Sections 417.420, 417.422, 422.50, and 423.30 would be amended to add 

lawful presence or United States citizenship as eligibility criteria for enrollment in a cost, 

MA, or Part D plan, respectively. 

● Sections 417.460, 422.74, and 423.44 would be amended to require the 

involuntarily disenrollment of individuals from cost, MA or Part D plans when they lose 

lawful presence status. 

Conforming changes would be made to § 417.2, § 422.1, and § 423.1 to outline 

the authority for the aforementioned requirements, in 8 U.S.C. 1611 (Aliens who are not 

qualified aliens ineligible for Federal public benefits). 

11. Part D Notice of Changes (§ 423.128(g)) 

Section 1860D 4(a) of the Act requires Part D sponsors to disclose to 

beneficiaries information about their Part D drug plans in standardized form. The Act 

further directs Part D sponsors to include, as appropriate, information that MA 

organizations must disclose under section 1852(c)(1) of the Act, which includes a 

detailed description of benefits. (In guidance, we refer to the document containing this 

information and delivered to beneficiaries as the Evidence of Coverage (EOC).) To 

make informed decisions, enrollees need to understand how their benefits, including 

premiums and cost sharing, would change from one year to the next, should they reenroll 

in the same plan. (In guidance, we refer to the documents containing this information 

and delivered to beneficiaries as the Annual Notice of Change (ANOC).) And enrollees 
 73 

also need to be aware of changes that may take place during the course of the year as 

well. Part D regulations currently do not include language found in the Part C 

regulations at § 422.111(d) requiring notice of changes to the plan to be provided to CMS 

for review pursuant to procedures for marketing material review and to all enrollees at 

least 15 days prior to the annual coordinated election period. Given that guidance 

applicable to both programs discusses notice of changes, we propose to require, for Part 

D, delivery of an ANOC. 

Specifically, we propose to adopt in Part D, with modifications, the language 

contained in § 422.111(d). As is the case with the Medicare Advantage regulation, 

proposed § 423.128(g) would require that Part D sponsors submit their changes to us 

under the procedures contained in subpart V of part 423, and, for those changes taking 

effect on January 1, provide a notice of changes to all enrollees 15 days before the 

beginning of the annual election period. While part 422 requires a minimum of 30 days' 

notice before the effective date for all other changes, proposed § 423.128 would not 

impose that standard, but rather would state that Part D sponsors remain subject to all 

other notice requirements specified elsewhere in the Part D regulations. Our proposal 

reflects a programmatic difference between Parts C and D: under Part D it is not unusual 

for access to drugs listed on a plan's formulary to change during the course of a year. 

Changes can include changes to formulary status, tier placement, and utilization 

management or other restrictions. It is vital that beneficiaries currently taking a drug 

receive timely notice before such changes take place in order that they can decide 

whether to, for instance, change drugs or request an exception to cover the drug. 
 74 

Accordingly, our regulations currently specify when sponsors must provide notice of 

these kinds of changes. Our proposal to require the delivery of an ANOC is not intended 

to disrupt or change those existing notice requirements. 

 We would also like to take this opportunity to comment on the particular 

importance for Part D sponsors to provide notice in the ANOC of any changes they are 

making that will affect the amount of cost sharing which enrollees must pay for each drug 

belonging to a specific tier. As has been articulated in guidance, we continue to expect 

that sponsors will provide notice of such changes to all enrollees, including enrollees 

moved to a consolidated plan. Generally, sponsors compare numbers for the same plan 

from one year to the next in the ANOC. However, comparing numbers for the same plan 

would not benefit individuals moved from one plan to another. For instance, when a 

sponsor crosswalks members from a non-renewing plan to a consolidated renewal plan 

from one year to the next, cost sharing may change at the drug-tier level. For example, 

an enrollee who previously had zero cost sharing for all covered Part D drugs within the 

preferred generic tier may find that the consolidated plan now requires copays for drugs 

in that tier depending on how many months' supplies he or she orders, and whether he or 

she obtains those drugs at a retail level pharmacy or through mail order. We continue to 

expect that enrollees will receive ANOCs that clearly compare the non-renewed and 

consolidated plans' copayments or coinsurance for all drugs within each tier. 

12. Separating the Evidence of Coverage (EOC) from the Annual Notice of Change 

(ANOC) (§ 422.111(a)(3) and§ 423.128(a)(3)) 
 75 

 As provided in sections 1852(c)(1) and 1860D-4(a) of the Act, MA organizations 

and Part D sponsors must disclose detailed information about the plans they offer to their 

enrollees. This detailed information is specified in section 1852(c)(1) of the Act and 

§ 422.111(b) and § 423.128(b) of the Part C and Part D program regulations, 

respectively. 

 Under § 422.111(a)(3), we require MA plans to disclose a detailed plan 

description to each enrollee "at the time of enrollment and at least annually thereafter, 

15 days before the annual coordinated election period." A similar rule for Part D 

sponsors is found at § 423.128(a)(3). The content of the annual plan description is 

provided in paragraph (b) of the respective regulations. This is commonly referred to as 

the EOC. In addition, under § 422.111(d), we require MA organizations to notify all 

enrollees "at least 15 days before the beginning of the Annual Coordinated Election 

Period" of any changes that will take effect on January 1 of the next plan year. This 

notification is commonly referred to as the ANOC. Although our Part D guidance calls 

for Part D sponsors to provide an ANOC, there currently is not a regulatory requirement 

that they do so. Therefore, in the previous section of this proposed rule, we have 

proposed to codify such a requirement. 

 Prior to the 2009 contract year, these regulations required the provision of the 

EOC at the time of enrollment and at least annually thereafter but did not specify a 

deadline for the annual provision of the EOC. We permitted MA organizations and Part 

D sponsors to provide the EOC as late as January 31 of the applicable contract year. 

Therefore, prior to the annual coordinated election period (AEP) for the 2009 contract 
 76 

year, MA organizations and Part D sponsors may have provided the EOC and ANOC at 

different times. In the final rule entitled, "Medicare Program, Medicare Advantage and 

Prescription Drug Programs; Final Marketing Provisions" (73 FR 54220 and 54222), we 

required MA organizations to send the EOC at the same time as the ANOC (that is, 

15 days before the AEP), with the result that the EOC was sent about 4 months earlier. 

Our rationale for this requirement was to provide beneficiaries with comprehensive 

information prior to the AEP. In addition, the consolidated mailing reduced the number 

of mailings to enrollees and eliminated duplicative information. However, we have 

found through consumer testing that beneficiaries receive multiple documents from their 

plans and CMS during the AEP that address similar topics, which at times beneficiaries 

find confusing or overwhelming. The ANOC, which is much shorter than the EOC, is 

intended to convey all of the information essential to a beneficiary's decision to remain 

enrolled in the plan or choose another plan during the AEP. Research based on the 

consumer testing suggests that participants were more likely to review the ANOC if it 

was not included with the EOC. For example, when asked about the utility of each 

document, many participants stated that they would read the ANOC as soon as they 

received it, and use it more often than a combined ANOC/EOC because the combined 

document is too much to worry about, too wordy, and/or too difficult to find information 

in compared to just the ANOC. 

 We have also found that sending the EOC months earlier has led to some 

unintended consequences. Specifically, the earlier deadline shortens the production time 

and affects the MA organization's or Part D sponsor's ability to produce an EOC that 
 77 

provides accurate benefit information in accordance with CMS required timeframes, 

which results in plans sending and beneficiaries receiving additional mailings containing 

errata sheets. We have reviewed plan ANOC/EOC documents for errors and found that, 

of the total number errors found, EOCs contain significantly more errors (86 percent) 

than the ANOCs (14 percent), which leads us to believe that allowing plans to have 

additional time to prepare EOCs would allow them to produce EOCs with fewer errors. 

Additionally, resources are wasted when beneficiaries are sent a combined ANOC and 

EOC, but ultimately decide to enroll in a different plan, and have no need for the EOC. 

 In order to help current members make timely and informed decisions about plan 

choices for the next year while ensuring that they continue to receive all the 

post-enrollment information necessary in a timely manner, we believe it would be more 

effective for them to receive an ANOC before the AEP, and then receive the EOC from 

the plan he or she chooses for the next year after enrollment is effective. Therefore, we 

propose to require MA organizations and Part D sponsors to ensure that their current 

members receive the ANOC 15 days prior to the AEP, and receive the EOC no later than 

December 31st, for the contract year taking effect the following January 1st. To 

accomplish this, we propose to amend § 422.111(a)(3) and § 423.128(c)(3) to remove the 

current deadline and insert "by December 31 for the following contract year." The 

deadline established by § 422.111(d)(2) for provision of the ANOC would continue to be 

15 days prior to the beginning of the AEP. In addition, as mentioned previously, we are 

proposing to amend § 423.128 to require Part D sponsors to provide a separate ANOC 

and to adjust the time frames for delivery accordingly. 
 78 

13. Agent/Broker compensation requirements (§ 422.2274 and § 423.2274). 

 Section 103(b)(1)(B) of MIPPA revised the Act to charge the Secretary with 

establishing guidelines to ''ensure that the use of compensation creates incentives for 

agents and brokers to enroll individuals in the MA plan that is intended to best meet their 

health care needs.'' Section 103(b)(2) of MIPPA revised the Act to apply these same 

guidelines to Part D sponsors. Our program experience indicates that some agents may 

encourage beneficiaries to enroll in plans that offer higher commissions without regard to 

whether plan benefits meet the beneficiaries' health needs. In recognition that agents and 

brokers play a significant role in providing guidance and advice to beneficiaries and are 

in a unique position to influence beneficiary choice, we had proposed, prior to the 

enactment of MIPPA, a rule to regulate agent and broker compensation. To implement 

the MIPAA provisions and relying in part on comments in response to our previously 

proposed rule, we adopted an interim final rule on September 18, 2008, entitled 

"Medicare Program; Medicare Advantage and Prescription Drug Benefit Programs: Final 

Marketing Provisions" (73 FR 54208, at 54226), which, among other things, established 

the current compensation structure for agents and brokers in connection with Parts C and 

D. That rule remains significantly in place at § 422.2274 and § 423.2274, and our 

experience since then indicates that revision of the compensation requirements is 

appropriate to ensure that we continue to meet our statutory mandate. 

 The current compensation structure is comprised of a 6-year compensation cycle 

that began in contract year 2009. MA organizations and Part D sponsors were to provide 

an initial compensation payment to independent agents for new enrollees (year 1) and 
 79 

pay a renewal rate (equal to 50 percent of the initial year compensation) to independent 

agents for years 2 through 6. These rates were to be adjusted annually based on changes 

to the MA payment rates or Part D parameters as established by CMS. We later amended 

the regulations to allow MA organizations and Part D sponsors to compensate 

independent agents and brokers annually using an amount at or below the fair market 

value. (See the final rule with comment period entitled, "Medicare Program; Changes to 

the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for 

Contract Year 2013 and Other Changes" (77 FR 22072) published in the April 12, 2012 

Federal Register.) 

 The 6-year cycle is scheduled to end at the end of CY 2013, on 

December 31, 2013. The first year, 2009, was considered to be the first renewal year, 

effectively making 2009 the second full year of compensation. Because our regulations 

were silent regarding compensation amounts for Year 7 and beyond, we stated in our 

Final Call Letter for Contract Year 2014, issued on April 1, 2013, that MA organizations 

and Part D sponsors could, at their discretion, pay agents and brokers the renewal amount 

for Year 7 and beyond. However, this subregulatory guidance was intended to be a 

temporary measure, pending changes to our regulations. 

 Under the current structure MA organizations and Part D sponsors pay an initial 

rate for the first year, and then a renewal payment of 50 percent of the initial 

compensation paid to the agent for years 2 through 6. This structure has proven to be 

complicated to implement and monitor as it requires the MA organization or Part D 

sponsor to track the compensation paid for every enrollee's initial enrollment, and 
 80 

calculate the renewal rate based on that initial payment. For example, assume that the 

same agent enrolls three beneficiaries; one in each of the 2012, 2013, and 2014 contract 

years. Beneficiary A is a new, initial enrollee in MA plan XYZ for CY2012. Assume 

that the fair market value (FMV) cut-off amount for agent services for CY 2012 is $400. 

Plan XYZ has decided that its initial compensation will be equal to the full FMV, 

resulting in a payment to the agent of $400. Beneficiary B is a new, initial enrollee in 

MA plan XYZ for CY2013. In CY2013, assume the FMV has increased to $420. Plan 

XYZ has again decided that its initial compensation will be equal to the full FMV for 

Beneficiary B, resulting in a payment to the agent of $420. Also in CY2013, Plan XYZ 

is required to pay a renewal amount of 50 percent of initial enrollment to the agent for 

Beneficiary A. Since the initial payment for Beneficiary A was $400, Plan XYZ will pay 

a renewal amount of $200. Beneficiary C is a new, initial enrollee in MA plan XYZ for 

CY2014. In CY2014, assume the FMV value has again increased to $430. The Plan's 

initial compensation is, again, equal to the full FMV. Plan XYZ's payments to the agent 

would be as follows: $430 for Beneficiary C (new, initial), $210 for Beneficiary B 

(renewal, 50 percent of the initial payment of the CY2013 FMV of $420), and $200 for 

Beneficiary A (50 percent of the initial payment of the CY2012 FMV of $400). Thus, 

Plan XYZ has to know, at any given time, the amount of the initial compensation for 

each plan year – going back as far as 2009 – in which the member enrolled in order to 

pay the correct compensation amount to the agent. Moreover, MA organizations and Part 

D sponsors must first review CMS' reports to determine whether an initial or renewal 

payment should be made, and then combine that information with the FMV, or, if 
 81 

applicable, the plan's compensation set at less than the FMV, for each plan year to ensure 

the correct payments are made to agents. When these simple examples are multiplied by 

tens or thousands of members, the complexity and challenges associated with 

implementing the current compensation requirements becomes clear. 

 In addition to its complexity, we are concerned that the current structure creates 

an incentive for agents and brokers to move enrollees from a plan of one parent 

organization to a plan of another parent organization, even for like plan type changes. 

Currently, in these cases, the new parent organization would pay the agent 50 percent of 

the current initial rate of the new parent organization; not 50 percent of the original initial 

rate paid by the other parent organization. Thus, in cases where the FMV has increased, 

or the other parent organization pays a higher commission, the incentive exists for the 

agent to move beneficiaries from one parent organization to another. (See 

§ 422.2274(a)(3) and § 423.2274(a)(3)). So, in the example provided previously, if 

Beneficiary A switched to Plan ABC for CY2014, Plan ABC would pay the same agent 

$215 (50 percent of the 2014 initial rate of $430), instead of the $200 renewal payment 

the agent would have received if Beneficiary A remained in Plan XYZ. Although the 

mere $15 increase in the payment to the agent may not appear to be much of an incentive 

to move one enrollee, an agent would receive considerably more income by moving tens 

of enrollees to another plan. 

 Since 2008, we have received inquiries from MA organizations and Part D 

sponsors regarding the correct calculation of agent/broker compensation, and found it 

necessary to take compliance actions against MA organizations and Part D sponsors for 
 82 

failure to comply with the compensation requirements. To the extent that there is 

confusion about the exact levels or timing of compensation required, there could be an 

un-level playing field for MA organizations and Part D sponsors operating in the same 

geographic area. In addition, CMS' audit findings and monitoring efforts have shown 

that MA organizations and Part D sponsors are having difficulty correctly administering 

the compensation requirements. Therefore, we believe that simpler agent/broker 

compensation regulations that are easier to understand will better ensure that plan 

payments are correct and establish a level playing field that will further limit incentives 

for agents and brokers to move enrollees for financial gain. 

 We are proposing to revise the existing compensation structure for agents and 

brokers so that, for new enrollments, MA organizations and Part D sponsors could make 

an initial payment that is no greater than the FMV amount for renewals in Year 2 and 

beyond, the MA organization or Part D sponsor could pay up to 35 percent of the FMV 

amount for the renewal year, resulting in the renewal year payment changing each year if 

the MA organization or Part D sponsor chooses to pay 35 percent of the current FMV 

(that is, the renewal year FMV threshold). As we do now, we would interpret the FMV 

threshold in our annual guidance to MA organizations and Part D sponsors. This 

flexibility would enable MA organizations and Part D sponsors to better react to changes 

in the marketplace and adjust their compensation structures accordingly. 

 Under the proposed compensation structure, the calculations would be simpler 

than those required under the current rule, as shown in the following example: 
 83 

 Assume again that Beneficiary A is a new, initial enrollee in MA plan XYZ for 

CY2015. Assume the FMV for CY 2015 is $400. Plan XYZ has decided to pay the full 

FMV, resulting in a payment to the agent of $400. In CY2016, assume the FMV is $420. 

 Again, Plan XYZ has decided to pay the maximum FMV for initial enrollments, so it 

pays the agent $420 for Beneficiary B, who is an initial enrollee. Plan XYZ has also 

decided to pay the maximum renewal payment (35 percent of the FMV), resulting in a 

payment of $147 ($420 x .35) to the agent for Beneficiary A. Thus, Plan XYZ's 

payments to its agents are based on the FMV for the contract year in question, regardless 

of when the beneficiary enrolled in the plan. That is, when making the renewal payment, 

Plan XYZ doesn't have to determine what the FMV was in the initial year, but only looks 

to the FMV for the current year and pays the chosen percentage up to the maximum 

35 percent of the FMV established by CMS. 

 In order to implement these changes in the identical Part C and Part D regulations 

at, § 422.2274 and § 423.2274 , we first propose to designate the definition of 

"compensation" as paragraph (a)(1) and to restate the fair market value limit on 

compensation for the initial year as paragraph (b)(1)(i). Second, we propose to combine 

the current (a)(1)(i)(B), which addresses payments for renewals, and (a)(1)(iii), which 

addresses the length of time that renewals should be paid, and designate the revisions as a 

new (b)(1)(ii). Thus, the new paragraph (b)(1)(ii) would state that plans may pay up to 

35 percent of the current FMV and that renewal payments may be made for the second 

year of enrollment and beyond. 
 84 

 In addition, we propose to modify paragraph (a)(3) to remove the 6-year cap on 

the compensation cycle. Currently, paragraph (a)(3) refers to policies that are replaced 

with a like plan during the first year or the subsequent 5 renewal years. Since we are 

proposing to eliminate the 6-year cycle, our revised paragraph (b)(2) deletes the reference 

to the initial year and the 5 renewal years. By tying renewal compensation to the FMV 

for the renewal year, rather than the initial year of enrollment, our proposal reduces the 

financial incentives for an agent or broker to encourage Medicare beneficiaries to change 

plans, especially from one parent organization to another parent organization. As with 

the current regulation, we propose in paragraph (b)(2)(iii) that a change in enrollment to a 

new plan type be payable under the same rules that apply to an initial enrollment, 

regardless of whether the change is to an unlike plan type in the same parent organization 

or an unlike plan type in another parent organization. Note that, as with the current rule, 

our proposal only addresses compensation paid to independent agents and does not 

address compensation payable by an MA organization or Part D sponsor to its employees 

that perform services similar to agents and brokers. 

 For our proposed regulations, we considered several different alternatives, 

including prohibiting compensation payments entirely beyond year 6, permitting MA 

organizations and Part D sponsors to pay a residual payment for year 7 and subsequent 

years, and permitting existing renewal payments to continue. We also evaluated different 

renewal amounts, including a 50 percent renewal payment for years 2 through 6 with a 

continuing 25 percent residual payment for years 7 and beyond. The evaluation took into 

account different ages for an initial enrollment, as well as the life expectancy of 
 85 

beneficiaries. In the analysis, a continual renewal payment of 35 percent was similar in 

payout to the combination of a 50 percent payment for years 2 through 6 and a residual 

payment of 25 percent for year 7 and beyond. We believe that revising the existing 

compensation structure to allow MA organizations or Part D sponsors to pay up to 

35 percent of the FMV for year 2 and beyond is appropriate based on a couple of factors. 

 First, we believe that a two-tiered payment system (that is, initial and renewal) would be 

significantly less complicated than a three-tiered system (that is, initial, 50 percent 

renewal for years 2 through 6, and 25 percent residual for years 7 and beyond), and 

would reduce administrative burden and confusion for plan sponsors. Second, our 

analysis determined that 35 percent is the renewal compensation level at which the 

present value of overall payments under a two-tiered system would be relatively equal to 

the present value of overall payments under a three-tiered system (taking into account the 

estimated mortality rates for several beneficiary age cohorts). This analysis is based on 

the existing commission structure basing renewal commissions on the starting year initial 

commission amount and not the current year FMV amount. We welcome comments on 

both the amount of the renewal payment as well as the proposed indefinite time frame. 

 Current regulations at § 422.2274(a)(4) and § 423.2274(a)(4) address the timing 

of plan payments, as well as recovery of payments when a beneficiary disenrolls from a 

plan. Specifically, (a)(4) states that compensation may only be paid for the beneficiary's 

months of enrollment during the year (January through December). We propose to revise 

(a)(4) to define more clearly a plan year for purposes of compensation. The annual 

compensation amount covers January 1 through December 31 of each year. We have 
 86 

learned that some plans have been paying compensation based on an annual cycle, rather 

than a calendar year cycle. We have taken appropriate compliance actions in those 

instances where we have evidence that an MA organization or Part D sponsor is paying 

compensation incorrectly, and issued sub-regulatory guidance on 

August 14, 2013 reminding organizations and sponsors that compensation is to be paid 

based on a calendar year cycle. Along the same lines, we propose to revise the language 

at § 422.2274(a)(4) to clarify that the payment made to an agent must be for January 1 

through December 31 of the year and may not cross calendar years. For example, a 

renewal payment cannot be made for the period of November 1, 2013 through 

October 31, 2014. Rather, the renewal payment must cover January 1, 2013through 

December 31, 2013. 

 Currently, the regulation text at § 422.2274(a)(4) (i) permit payments to be made 

at one time or in installments and at any time. CMS proposes to change the timing of 

payments to require that payments may not be made until January 1 of the compensation 

year, and must be paid in full by December 31 of the compensation year. CMS believes 

this proposal is appropriate given the ability of beneficiaries to change plans during the 

annual coordinated election period (AEP), which runs from October 15 through 

December 7. That is, beneficiaries can choose a new plan during the AEP, and then 

revise that choice as many times as they desire during the AEP; the last enrollment 

choice made is the one that becomes effective on January 1 of the following year. Under 

CMS' current requirements, each MA organization or Part D sponsor would have to 

recoup compensation, if already paid, for every beneficiary that initially enrolled in their 
 87 

plan but later decided to enroll in a different parent organization prior to January 1. 

Under the proposed rule, MA organizations and Part D sponsors would not be allowed to 

pay compensation until the beginning of the calendar year, when the final AEP 

enrollment becomes effective. Thus, the proposed rule would simplify MA 

organizations' and sponsors' compensation processes and enable them to make more 

accurate payments. We welcome comments on this proposal. 

 Current regulations at § 422.2274(4)(ii)(A) and § 423.2274(4)(ii)(A) require MA 

organizations and Part D sponsors to recover compensation paid to agents when a 

beneficiary disenrolls from a plan within the first three months of enrollment. However, 

in sub-regulatory guidance, we have recognized several circumstances (for example, 

death of the beneficiary, the beneficiary moves out of the service area, the beneficiary 

becomes eligible to receive LIS, or the beneficiary loses Medicaid benefits) in which 

plans should not recover compensation even though the beneficiary was enrolled in the 

plan for less than 3 months. In circumstances such as these, since the disenrollment 

decision could not be based on agent or broker behavior, we believe it to be appropriate 

for the agent to receive the compensation associated with the months that beneficiary was 

a member of the plan. While the plan would not recover the compensation for those 

months, it would recover any compensation paid for the months after the disenrollment. 

Therefore, CMS is proposing to combine paragraphs (a)(4)(ii)(A) and (a)(4)(ii)(B) into a 

revised paragraph (b)(3)(iii),which would include new text to clarify that plans should 

recover compensation for only the months that the beneficiary is not enrolled, unless the 

disenrollment took place within the first 3 months. Under our proposal, we would 
 88 

require disenrollments that are the result of agent or broker behavior to trigger 

recoupment of any compensation that has been paid for that period. In cases where 

disenrollment took place within the first 3 months and the disenrollment did not result 

from or could not have resulted from an agent's behavior, we would not require that 

compensation be recovered under our proposal. We would provide more specific 

information in sub-regulatory guidance, and welcome comments regarding possible 

examples to include in that guidance. 

 CMS also proposes here, in § 422.2274(h) and § 423.2274(h) to codify existing 

sub-regulatory guidance regarding referral (finder's) fees. CMS released a memorandum 

on October 19, 2011 addressing excessive referral fees, noting that referral fees should 

not exceed $100. CMS has long been concerned that some MA organizations or Part D 

sponsors can offer the entire amount of compensation an agent or broker receives through 

only a referral, while others must combine any compensation for referrals with other 

agent marketing activities while meeting the same total cap on compensation, thereby 

creating an un-level playing field within the marketplace and a clear financial incentive 

for the referring agent to steer beneficiaries to MA organizations or Part D sponsors that 

offer the higher amount, without regard to whether plan benefits meet the beneficiaries' 

health care needs. Therefore, we are proposing to limit the amount that can be paid as a 

referral fee to independent, captive, and employed agents and brokers, regardless of who 

completes the enrollment, to a reasonable amount specified by CMS, which is currently, 

for CY 2013, and CY 2014, $100. Furthermore, note that, under § 422.2274(a) and 

§ 423.2274(a), CMS requires that referral fees paid to independent agents and brokers 
 89 

must be part of total compensation not to exceed the FMV for that calendar year. 

14. Drug Categories or Classes of Clinical Concern and Exceptions (§ 423.120(b)(2)(v) 

and (vi)) 

Section 3307 of the Affordable Care Act amended section 1860D-4(b)(3)(G) of 

the Act by replacing the specific criteria established under MIPPA in 2008 to identify 

categories or classes of Part D drugs for which all Part D drugs therein shall be included 

on Part D sponsor formularies. The specified criteria were replaced with the requirement 

that the Secretary establish criteria through notice and comment rulemaking to identify 

drug categories or classes of clinical concern. In addition, section 3307 of the Affordable 

Care Act requires the Secretary to engage in rulemaking to establish any exceptions that 

permit a Part D sponsor to exclude from its formulary a particular Part D drug (or 

otherwise limit access to such drug through utilization management or prior authorization 

restrictions) within the drug categories or classes that meet the criteria established by the 

Secretary. The Affordable Care Act amendments to section 1860D-4(b)(3)(G) of the Act 

specified that until such time as the Secretary establishes the criteria to identify drug 

categories or classes of clinical concern through rulemaking, the following categories or 

classes shall be identified as categories or classes of clinical concern: anticonvulsants, 

antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants 

for the treatment of transplant rejection. We now propose to implement the Affordable 

Care Act requirements set forth in section 1860D-4(b)(3)(G) of the Act by revising 

§ 423.120(b)(2)(v) and (vi) as follows: 1) the criteria the Secretary will use to identify 

drug categories or classes of clinical concern; and 2) the exceptions that permit Part D 
 90 

sponsors to exclude certain Part D drugs from within an identified drug category or class 

from their formularies (or otherwise limit access to such drugs, including through 

utilization management or prior authorization restrictions). We also propose to specify 

drug categories or classes that would meet the proposed criteria and explain the process 

we used for making these determinations. 

a. Categories or Classes of Clinical Concern 

In 2005, well before the passage of MIPPA, and before the start date of the Part D 

program, we directed Part D sponsors through guidance to include on their formularies 

all or substantially all drugs in six categories or classes (antidepressants; antipsychotics; 

anticonvulsants; immunosuppressants for transplant rejection; antiretrovirals; and 

antineoplastics). Our authority for this policy arises from section 1860D-11(e)(2)(D)(i) 

of the Act, which requires that in order to approve a plan, we must not find 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. We refer to this as our "non-discrimination" policy. This statutory directive 

helped to ensure a smooth transition of the approximately 6 million Medicare-Medicaid 

beneficiaries who were converting from Medicaid drug coverage to Medicare drug 

coverage at the start of the Part D program. Under the existing circumstances, any 

formularies that did not have all or substantially all drugs in these categories or classes 

potentially would have been discriminatory for the Medicare-Medicaid beneficiary 

population because state Medicaid program formularies were generally open compared to 

the Part D formularies that we were anticipating prior to the beginning of the Part D 
 91 

program. Thus, it stood to reason that Medicare-Medicaid beneficiaries and many of 

their providers were largely unaccustomed to drug utilization management techniques. 

That is, for the most part they had little experience dealing with the rejection of a drug 

claim at the point of sale because the drug was either not on formulary, or another drug 

needed to be tried first, or because more information was required to determine whether 

the drug could be covered under the plan. Moreover, since the majority of the 

Medicare-Medicaid beneficiaries did not make a decision to elect their new plan, but 

were instead auto-enrolled, these individuals may not have understood whether their 

current medications would continue to be covered under their new Medicare plan. Since 

the Part D program would be administered by private plans with extensive experience 

managing prescription drug costs through tighter formularies and a variety of utilization 

management techniques, we anticipated the need for a learning curve and delays in 

negotiating appeals processes that might endanger the beneficiaries who needed access to 

drugs in these particular categories or classes. In order to mitigate the risks and 

complications associated with an interruption of therapy for vulnerable beneficiaries, 

who would be trying to navigate a new drug benefit when they attempted to fill or refill 

their first prescriptions under the Part D program on or after January 1, 2006, we created 

the special requirements for coverage of the six drug classes. However, the 

circumstances that existed when this policy was originally implemented have changed 

dramatically in the more than seven years the program has been in operation. CMS, Part 

D sponsors, our partners who assist beneficiaries with making enrollment choices, and 

particularly our Medicare-Medicaid beneficiaries and their advocates have had a great 
 92 

deal of experience working with Part D plans since 2005. 

Section 176 of MIPPA added a new section 1860D-4(b)(3)(G)(i) to the Act 

requiring, effective with plan year 2010, that the Secretary identify certain categories or 

classes of drugs that meet two statutory specifications: (1) Restricted access to the drugs 

in the category or class would have major or life-threatening clinical consequences for 

individuals who have a disease or condition treated by drugs in such category or class; 

and (2) There is a significant need for such individuals to have access to multiple drugs 

within a category or class due to unique chemical actions and pharmacological effects of 

the drugs within a category or class, such as drugs used in the treatment of cancer. In 

addition, MIPPA provided the Secretary with the discretion to establish exceptions 

permitting Part D sponsors to exclude from their formularies, or to otherwise limit access 

to (including utilization management or prior authorization restrictions), certain Part D 

drugs in the protected categories or classes. 

In the January 16, 2009 Federal Register (74 FR 2881), we published an interim 

final rule with comment period (IFC) entitled, "MIPPA Drug Formulary and Protected 

Classes Policies." This rule revised the regulations governing the Medicare Part D 

formularies to reflect the MIPPA requirements. We codified at § 423.120(b)(2)(v) the 

MIPPA provision requiring the inclusion of all Part D drugs in categories or classes that 

we identified as meeting the two conditions set forth in section 1860D-4(b)(3)(G)(i) of 

the Act. Given the limited timeframe then available for establishing and implementing a 

process to identify such drug categories or classes due to formulary submission 

deadlines, we maintained the existing six drug categories and classes of clinical concern 
 93 

for 2010 with the intention to propose and finalize a new process through rulemaking that 

would be used to identify drug categories or classes that met the MIPPA criteria for 

CY2011. After receiving comments in response to the January 16, 2009 IFC, entitled, 

"Medicare Advantage and Prescription Drug Programs MIPPA Drug Formulary 

Protected Classes Policies" that persuaded us that the further interpretative rulemaking 

was necessary, we published a notice of proposed rulemaking (NPRM) on October 22, 

2009, entitled, "Policy and Technical Changes to the Medicare Advantage and the 

Medicare Prescription Drug Benefit Programs" (74 FR 54634) to further refine the 

MIPPA criteria and establish a process that met MIPPA requirements. However, 

between the issuance of the October 22, 2009 proposed rule and the April 15, 2010 final 

rule (75 FR 19766), the Affordable Care Act was enacted. Section 3307 of the 

Affordable Care Act amended section 1860D-4(b)(3)(G) of the Act to specify that the 

existing drug categories or classes of clinical concern would remain so until such time as 

the Secretary establishes new criteria to identify drug categories or classes of clinical 

concern under section 1860D-4(b)(3)(G) of the Act through notice and comment 

rulemaking. 

We are concerned that requiring essentially open coverage of certain categories 

and classes of drugs presents both financial disadvantages and patient welfare concerns 

for the Part D program as a result of increased drug prices and overutilization. The 

principal disadvantage is that an open coverage policy substantially limits Part D 

sponsors' ability to negotiate price concessions in exchange for formulary placement of 

drugs in these categories or classes. Since the beginning of the Part D program we have 
 94 

heard from stakeholders that this policy – frequently referred to as the "protected classes" 

policy – significantly reduces any leverage the sponsor has in price negotiations and 

results in higher Part D costs. A report by the OIG in March 2011 documented similar 

assertions from selected Part D sponsors, including assertions that "they received either 

no or minimal rebates for the drugs in these six classes," that "there is little incentive for 

drug manufacturers to offer rebates for these six classes of drugs because they do not 

need to compete for formulary placement," and that "if [a rebate] is provided, it's 

probably at a lower percentage than [the rebate for the drugs] that had some 

competition." (HHS Office of Inspector General, "Concerns with Rebates in the Medicare 

Part D Program", March 2011, OEI-02-08-00050) 

We are aware of other analyses that support these findings. A 2008 study 

conducted by the actuarial and consulting firm Milliman found that the six protected drug 

classes disproportionately accounted for between 16.8 percent and 33.2 percent of total 

drug spend among sponsors surveyed (Kipp RA, Ko C). (See "Potential cost impacts 

resulting from CMS guidance on 'Special Protections for Six Protected Drug 

Classifications' and Section 176 of the Medicare Improvements for Patients and 

Providers Act of 2008 (MIPPA) (PL 110-275)" available at: 

http://amcp.org/WorkArea/DownloadAsset.aspx?id=9279). Milliman reported that the 

Part D program administrators (plan sponsors and PBMs) commented that the protected 

status of these drug classes limited plan sponsors' ability to effectively negotiate lower 

costs with manufacturers since it is known that these drugs must be included on the 

formulary. The Milliman report estimated that affected drug costs were on average 
 95 

10 percent higher than they would be in the absence of the protected class policy and that 

this represented $511 million per year in excess costs to beneficiaries and the Part D 

program. We note that numerous brand drug patents expire between now and 2015 

which might reduce future cost projections. Another 2008 study from the National 

Bureau of Economic Research (NBER) suggested that while Medicare Part D led to a 

substantial decline in average pharmaceutical prices, Medicare-intensive drugs in 

protected classes did not experience price declines as did their counterparts not in 

protected classes and may have actually experienced price increases (Duggan M, Morton 

FS. 2010. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," 

American Economic Review, American Economic Association, vol. 100(1), pages 

590-607). Plan sponsors can still negotiate with manufacturers for preferred or 

non-preferred tier placement of protected class drugs, but CMS does not have any 

information on the justification for the relative magnitude of these rebates. However, it 

can reasonably be anticipated that such rebates would vary widely for individual 

manufacturers and sponsors, and anecdotal evidence would suggest the leverage these 

options provide sponsors may be minimal when compared to leverage available in 

connection with an initial decision regarding formulary inclusion, especially since tier 

placement has no impact on statutory LIS cost sharing levels. Consequently, we would 

predict future savings for both beneficiaries and the Part D program from both increased 

price competition as newly approved drugs come onto the market and more immediate 

savings if plans were able to remove some currently covered agents from their 

formularies. 
 96 

In addition to our concerns about increased Part D costs resulting from higher 

drug prices, we are also concerned that the policy potentially facilitates the 

overutilization of drugs within the protected classes. By limiting the ability of Part D 

sponsors to implement utilization management tools (for example, prior authorization or 

step therapy requirements) for an entire category or class, we also limit their ability to 

prevent the misuse or abuse of drugs that are not medically necessary. Not only can this 

increase Part D costs, but inappropriate use can also lead to adverse effects that can harm 

the beneficiary and require medical treatment that would otherwise not have been 

necessary. We believe the profitability of products not subject to normal price 

negotiations as the result of protected class status is a strong incentive for the promotion 

of overutilization, particularly off-label overutilization, of some of these drugs. 

 Given the findings in these reports and our expertise with the Part D program, we 

believe it is appropriate to revisit our original policy for the six drug categories and 

classes of clinical concern – particularly to assess whether it remains appropriate to 

require this additional level of protection for these categories or classes of drugs in order 

to ensure that Part D plans offer nondiscriminatory benefit designs and sufficient 

beneficiary access to medically necessary therapies. In considering the balance among 

beneficiary access, quality assurance, cost containment, and patient welfare in light of 

our existing beneficiary protections, we believe that drug categories and classes should 

be subject to normal formulary and price competition unless we cannot ensure clinically 

appropriate access (and thus non-discriminatory benefit design) to our Medicare 

beneficiaries in any less anticompetitive way than requiring the inclusion on all Part D 
 97 

formularies of all drugs in that category or class. Moreover, we believe that our 

consideration of how to implement section 3307 of the Affordable Care Act must take 

into account both the purpose of the Part D benefit and the context in which it is offered. 

Part D does not typically involve access to medications on an emergency basis. In cases 

where an emergency may arise, the Part D program has some protections to address this – 

for example, our long term care emergency first fill requirement requires plans to cover 

an emergency supply of non-formulary Part D drugs for long term care residents as part 

of their transition process. Moreover, the Part D benefit must be considered in light of 

the fact that urgently needed and emergency care is generally covered by Medicare Parts 

A and B. 

 To that end, we believe that criteria for identifying drug categories and classes of 

clinical concern should identify only those drug categories or classes for which access 

cannot be adequately ensured by beneficiary protections that otherwise apply. 

Consequently, as we take this opportunity to propose to codify criteria for identifying 

categories or classes of drugs that are of clinical concern, we believe that the 

requirements of section 3307 of the Affordable Care Act should be implemented taking 

into consideration the other protections available to beneficiaries. Otherwise, section 

3307 of the Affordable Care Act would establish duplicative, and thus unnecessary, 

protections that would serve only to increase Part D costs – without any added benefit 

and with the possibility of added harm from misuse. Therefore, in considering whether 

additional protections continue to be needed under this section, we need to take the other 

beneficiary access protections into account. There are five such protections and these are 
 98 

formulary transparency, formulary requirements, reassignment formulary coverage 

notices, transition supplies and notices, and the coverage determination and appeals 

processes. 

The first protection is our requirement for full transparency to beneficiaries. 

Sponsors are required to provide comprehensive formulary drug listings to the public 

through their own websites and printed materials, as well as to CMS for access through 

the online automated drug plan comparison tool, the Medicare Plan Finder (Plan Finder). 

 Beneficiaries or their representatives can complete a personalized search on Plan Finder 

to locate and select a Part D plan that covers their drugs. With our more than 7 years of 

experience with the Part D program, we are not aware of any Part D drug that is not 

included on at least one Part D formulary. Thus, beneficiaries who review plan 

formularies can select plans that cover all of their current medications. 

The second type of protection is the Part D formulary requirements. Our annual 

formulary review and approval process includes extensive checks to ensure adequate 

representation of all necessary Part D drug categories or classes for the Medicare 

population and includes the following: 

● Discrimination Review (§ 423.272(b)(2)). Formularies are reviewed to ensure 

inclusion of drug categories and classes that are used to treat all disease states. CMS 

evaluates the sufficiency of a Part D sponsor's formulary drug categories and classes in 

conjunction with the plan's formulary drug list to ensure that the formulary provides 

access to an acceptable range of Part D drug choices. 
 99 

● Two Drugs Requirement (§ 423.120(b)(2)(i)). Each submitted formulary is 

reviewed for the inclusion of at least two distinct drugs from each of the submitted 

categories and classes, except as provided in § 423.120(b)(2)(ii). 

● Formulary Tier Review (Medicare Prescription Drug Benefit Manual, Chapter 

6, 30.2.7). The tiering structure of each formulary is reviewed to ensure that each 

category and class has at least one drug in a preferred tier. 

● Common Medicare Drugs Review (§ 423.120(b)(2)(iii)). Formularies are 

reviewed for inclusion of the drugs or drug classes that are most commonly utilized by 

the Medicare population. We use prior years' data to identify the drugs or drug classes 

with the highest utilization in Medicare Part D, and use these drugs and drug classes as 

the basis for our review in this area. We also review formularies for the alternative 

dosage forms of the drugs that are most commonly utilized by the long-term care (LTC) 

population. 

● Treatment Guidelines Review (§ 423.120(b)(2)(iii)). The World Health 

Organization (WHO) defines a standard treatment guideline as a systematically 

developed statement designed to assist practitioners and patients in making decisions 

about appropriate health care for specific clinical circumstances (available at 

http://www.who.int/medicines/technical_briefing/tbs/10-PG_Standard-Treatment-Guideli

nes_final-08.pdf). We analyze formularies to determine whether appropriate access is 

afforded to drugs or drug classes included in widely accepted treatment guidelines. In 

general, although sponsors have some flexibility in determining the classification system 

they will use to identify categories or classes of drugs, if a treatment guideline speaks to a 
 100 

specific category or class of drugs, we look for representation from that drug category or 

class of drugs on the formulary. Moreover, if the treatment guidelines address specific 

drugs, we would expand this requirement to review formularies for those specific drugs, 

and not just the drug category or class to which they belong. 

● Common Home Infusion Drugs (§ 423.120(a)(4)). We review formularies for 

the drugs most commonly utilized in the home infusion setting in order to help facilitate 

rapid access to these drugs for beneficiaries. 

● Vaccines Review (§ 423.100). Each formulary submission is reviewed to 

ensure the formulary includes Part D vaccines. 

● Insulin Supplies Review (§ 423.100). Formularies are reviewed for the 

supplies associated with the administration of insulin: insulin syringes, alcohol swabs, 

and gauze pads. 

● Specialty Tier Review (§ 423.578(a)(7)). For formularies using a specialty 

tier, we perform an extensive review of the composition of each tier. We apply a 

standard outlined in the annual Call Letter to determine whether drugs placed in specialty 

tiers meet the relevant cost criteria. 

● Quantity Limits Outlier Review (§ 423.153(b)). All formulary submissions are 

compared to analyze the use of quantity limit (QL) edits. Formularies that are outliers 

with respect to the application of QL edits are asked to remove edits or provide a 

reasonable justification for the applicable QL. 

● Quantity Limits Amount Review (§ 423.153(b)). QL restrictions are reviewed 

for appropriateness. The standard for the review is generally based on the Food and Drug 
 101 

Administration (FDA)-approved maximum doses, when such dose limits are identified in 

the label. 

● Restricted Access Review (§ 423.153(b)). Formularies are reviewed for use of 

Prior Authorization (PA) and Step Therapy (ST) edits across drug categories and classes. 

 We decline to approve utilization management (UM) for entire drug classes, other than 

those considered to be best practices, for example, for erythropoietin stimulating agents 

(ESAs). 

● Step Therapy Criteria Review (§ 423.153(b)). The ST requirements are 

reviewed to ensure that the algorithms are consistent with best practices. 

● Prior Authorization Outlier Review (§ 423.153(b)). All formulary submissions 

are compared to analyze the use of PA edits. Formularies that are outliers with respect to 

the application of PA edits are asked to remove edits or provide a reasonable justification 

for such PA edits. 

● Prior Authorization Criteria Review (§ 423.153(b)). We then review the 

criteria for focused drugs requiring PA on the initial formulary submissions. We look to 

existing best practices, including prerequisite drugs, current industry standards and 

appropriate treatment guidelines, to check that the Part D plans' use of PA is consistent 

with such practices. Submitted criteria are also compared to compendia and 

FDA-approved label indications. 

● Mid-year formulary change restrictions (§ 423.120(b)(5)); Chapter 6 of the 

Medicare Prescription Drug Benefit Manual, 30.3.3). Except when the Food and Drug 

Administration deems a Part D drug unsafe or a manufacturer removes a Part D drug 
 102 

from the market, a Part D sponsor may not remove a covered Part D drug from its 

formulary, or make any adverse change in preferred or tiered cost-sharing status of a 

covered Part D drug, between the beginning of the annual coordinated election period 

described in section § 423.38(b) and 60 days after the beginning of the contract year 

associated with the annual coordinated election period. However, prescription drug 

therapies are constantly evolving, and new drug availability, medical knowledge, and 

opportunities for improving safety and quality in prescription drug use at a lower cost 

will inevitably occur over the course of the year. As recognized in regulation, these new 

developments may require formulary changes during the year in order to provide 

high-quality, affordable prescription drug coverage. To address such developments our 

negative formulary change policy requires that beneficiaries retain "grandfathered" 

coverage for the remainder of the coverage year if we permit an adverse change in the 

formulary status of any drug without a generic equivalent. Thus, in summary, our 

formulary rules both ensure that all Part D formularies contain sufficient drugs to treat all 

disease states in the Medicare population and protect beneficiaries from significant 

changes in formularies during the course of a coverage year.

The third type of beneficiary protection is the annual notice to reassigned 

enrollees required under section 3305 of the Affordable Care Act. Effective 

January 1, 2011, we provide LIS individuals who are reassigned to another Part D plan 

with information on the differences under the new plan formulary, as well as information 

on the beneficiary's grievance and appeal rights in the new plan. Thus, any individual 

who has his or her plan selection decision made through our reassignment process (in 
 103 

order to maintain access to a $0 premium) receives detailed coverage status information 

for each drug for which he or she filled a prescription between January and August of the 

previous year. With regard to the new plan, this notice describes for each drug whether it 

is on the formulary, whether the brand or generic version is covered, and whether or not 

utilization management tools may be applied. Moreover, the notice also provides a list of 

other plans that are available to the beneficiary to enroll in with no premium if they 

would prefer not to remain in the plan where they were reassigned. We send notices after 

the individual's reassignment and in time to allow for another voluntary plan selection 

effective January 1. Thus, any reassigned LIS individual receives advance notice of any 

change in formulary coverage of their medications in plenty of time to work with their 

prescribers if they wish to remain in the new plan, or to select a different Part D plan. 

The fourth type of beneficiary protection is our unique transition supply and 

notice requirements. A Part D sponsor must provide for an appropriate transition process 

for Part D drugs that are not on its formulary with respect to: (1) the transition of new 

enrollees into prescription drug plans following the annual coordinated election period; 

(2) the transition of newly eligible Medicare beneficiaries from other coverage; (3) the 

transition of individuals who switch from one plan to another after the start of the 

contract year; and (4) in some cases, current enrollees affected by formulary changes 

from one contract year to the next (see § 423.120(b)(3); Chapter 6 of the Medicare 

Prescription Drug Benefit Manual, 30.4). Within the first 90 days of a beneficiary's 

enrollment in a new plan, plans must provide a temporary fill when the beneficiary 

requests a refill of a non-formulary drug (including Part D drugs that are on a plan's 
 104 

formulary but require prior authorization or step therapy under a plan's utilization 

management rules). Since certain enrollees may join a plan at any time during the year, 

this requirement applies beginning on an enrollee's first effective date of coverage, 

regardless of whether this is within the first 90 days of the contract year. 

 A successful transition process is contingent not only upon providing the 

transitional drug supply, but also upon informing affected enrollees, their caregivers, and 

their providers about the beneficiary's options for ensuring that his or her medical needs 

are safely accommodated within a Part D sponsor's formulary. For this reason, when 

providing a temporary supply of non-formulary Part D drugs (including Part D drugs that 

are on a sponsor's formulary but require prior authorization or step therapy under a 

sponsor's utilization management rules), sponsors must provide enrollees and their 

providers with written notice within 3 business days after adjudication of the temporary 

fill that they are receiving a transition supply of a non-formulary Part D drug and that 

they must take action. The temporary fill and notice provides beneficiaries with a 

reasonable amount of time during which they and their providers can address the issue 

(by requesting a formulary exception or transitioning to a formulary drug) and prevents 

them from having to abruptly change or go without their medication (see Transition 

notice requirements (to beneficiaries and providers) [§ 423.120(b)(3)(iv and v); Chapter 6 

of the Medicare Prescription Drug Benefit Manual, 30.4.10]). Thus all beneficiaries and 

their prescribers have advance notice of any issue with continued coverage of a 

previously initiated therapy and sufficient time to resolve those issues without any lapse 

in appropriate therapy. The preceding formulary review and transition requirements are 
 105 

described in Chapter 6 of the Medicare Prescription Drug Benefit Manual (located at 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/

Downloads/Chapter6.pdf). 

The fifth beneficiary protection we take into account is the requirement for a 

robust coverage determination and appeal process, including the right of an enrollee or 

his or her prescriber to request an exception to the plan's utilization management criteria, 

tiered cost-sharing structure, or formulary. Part D plan sponsors are required to issue a 

coverage decision and notify the enrollee (and the prescriber, as appropriate) in writing in 

accordance with strict regulatory timeframes. A plan must grant a tiering or formulary 

exception (for example, provide coverage for a non-formulary drug or an exception to the 

UM criteria) when it determines that the requested drug is medically necessary, 

consistent with the prescriber's supporting statement indicating that preferred 

alternatives(s) would not be as effective and/or would have adverse effects. We have 

established by regulation both an expedited adjudication timeframe if the plan or 

prescriber believes that applying the standard timeframe may jeopardize the enrollee's 

health, and a requirement that plans must issue all coverage decisions as expeditiously as 

the enrollee's health condition requires. Any initial coverage request that the plan 

expects to deny based on a lack of medical necessity must be reviewed by a physician. If 

the Part D sponsor makes an adverse coverage determination, the required written notice 

must explain the specific reason(s) for the denial and include a description of the 

enrollee's right to a standard or expedited redetermination by the plan, and the rest of the 

five-level appeals process, including the right to request independent review. We require 
 106 

plans to conduct all redeterminations (first level appeals) using a physician or other 

appropriate health care professional with sufficient medical and other expertise, including 

knowledge of Medicare criteria, if the initial denial was based on a lack of medical 

necessity. If a plan fails to make a coverage decision and notify the enrollee within the 

required timeframe, the request must be forwarded to the independent review entity to be 

adjudicated. 

Moreover, while we do not treat a claim transaction as a coverage determination, 

we do require Part D sponsors to arrange with network pharmacies to provide enrollees 

with a written copy of the Office of Management and Budget (OMB)-approved 

standardized pharmacy notice ("Notice of Denial of Medicare Prescription Drug 

Coverage," CMS-10146) when the enrollee's prescription cannot be filled under the Part 

D benefit and the issue cannot be resolved at the POS. The notice instructs the enrollee 

on how to contact his or her plan and explains the enrollee's right to request a coverage 

determination. Thus, all beneficiaries immediately receive clear concise instructions on 

how to pursue their appeal rights whenever a prescription cannot be filled. For additional 

information on the coverage determination, appeals and grievance process, including 

information about the pharmacy notice, see 42 CFR Part 423, subparts M and U, and 

Chapter 18 of the Medicare Prescription Drug Benefit Manual. 

As the preceding discussion demonstrates, we have implemented extensive 

beneficiary protections in the form of formulary review checks, reassignment formulary 

coverage notices, drug therapy transition policies and notices for both new enrollees and 

continuously enrolled members experiencing changes in formulary benefits between 
 107 

coverage years, and robust exceptions and appeals processes that generally will assure 

appropriate access without having to guarantee formulary placement. Additionally, the 

formulary exceptions and appeals requirements facilitate obtaining any medically 

necessary Part D drug that is not on the formulary or that is otherwise subject to 

utilization management requirements. Taken together, we believe these requirements are 

comprehensive enough that additional access safeguards are needed only in those 

situations where a Part D beneficiary's clinical needs cannot be more efficiently met. 

b. Criteria Necessary to Identify Categories and Classes of Clinical Concern 

In developing our proposed criteria to identify drug classes of clinical concern, 

we considered all of the existing beneficiary protections described previously in section 

III.A.14.a. of this proposed rule, particularly our coverage determination and appeals 

process, which requires plans and other adjudicators to make all coverage decisions as 

expeditiously as the enrollee's health condition requires. Given our existing protections, 

we believe clinical concern would arise only if access to drugs within a category or class 

for the typical individual who is initiating therapy must be obtained in less than 7 days 

because the coverage determination and appeals process generally does not provide for 

independent review and determination, when necessary, within such timeframe. We 

believe this would be the case only when failure to initiate the therapy within that time 

period would be likely to lead to hospitalization, incapacity, disability or death as a result 

of the exacerbation of the disease or condition to be treated. We do not believe it is 

necessary to require all Part D drugs within a drug category or class to be included on the 

formulary if access within 7 days is likely sufficient to allow for initiation of therapy 
 108 

without putting beneficiaries at risk of hospitalization, incapacity, disability, or death. In 

other words, we believe that inconvenience associated with a delay that is unlikely to 

pose these serious consequences for the typical individual initiating a new therapy does 

not warrant requiring all Part D drugs from within the category or class to be included on 

the formulary because in such an instance, the beneficiary would have other protections 

to ensure that he or she has appropriate access to the drug. Moreover, we do not believe 

it is necessary to require all Part D drugs within a drug category or class to be included 

on the formulary when, for a typical individual who already is taking the drug, 

interruption in existing drug therapy might have adverse health consequences. 

Specifically, we believe that existing protections such as the Part D formulary change 

restrictions (for example, prohibition on midyear implementation of new PA, ST, or QL 

restrictions on existing therapies) and the transition requirements under § 423.120, which 

provide for temporary fills and require beneficiary notification of the need to request a 

coverage determination (including an exception or prior authorization approval) for 

future fills ensure sufficient protection for beneficiaries who may face an interruption in 

their ongoing therapies as a result of a change in their plan or formulary. Thus, our 

transition and negative formulary change requirements afford strong protections to 

individuals with ongoing therapy. However, this is in contrast to individuals who are 

initiating therapy. These individuals do not get an initial fill to try a medication while 

they petition for an exception, and thus the transition protections do not apply. Finally, 

we note that when we refer to a beneficiary's having "access" to a drug within 7 days, we 

mean that the beneficiary must need to ingest or otherwise use or consume the drug 
 109 

within that time period in order to avoid the adverse consequences. Thus, "access" 

means administration, which may include self-administration, of drugs. To illustrate this 

last point, initiation of therapy with drugs used to treat HIV/AIDS generally should not 

be delayed because initiation of therapy has rapid effects on viral load. Conversely, a 

minor delay with the initiation of therapy with HMG-CoA reductase inhibitors (also 

known as "statins") for patients with hyperlipidemia, even when transitioning among 

medications in the category or class in response to lipid profiles, liver or kidney function, 

or adverse events, is not as critical because it usually takes several weeks to detect 

measurable effects on serum lipid concentrations. 

Thus, for all of these reasons, we propose to specify at § 423.120(b)(2)(v)(A) a 

first criterion under section 1860D-4(b)(1)(G)(ii)(II) of the Act as follows: In the case of 

a typical beneficiary who has a disease or condition treated by drugs in the following 

category or class, hospitalization, persistent or significant incapacity or disability , or 

death likely will result if initial administration (including self-administration) of a drug in 

the category or class does not occur within 7 days of the date the prescription for the drug 

was presented to the pharmacy to be filled. By typical beneficiary, we mean, for a given 

disease or condition, an individual who has the average clinical presentation of the 

relevant disease or condition. 

 While this first criterion would establish the critical need to promptly initiate drug 

therapy with a drug from an identified drug category or class, we believe that, standing 

alone, it may be overly inclusive and, as such, would fail to appropriately balance the 

need for beneficiary protection with the need to allow plans to take appropriate steps to 
 110 

control costs and overutilization. If the drug category or class consists of many similar 

drugs that are often considered to be therapeutically interchangeable with one another 

when initiating drug therapy, a requirement to include on the formulary all drugs in that 

category or class would undermine the important place that formularies, due to their 

ability to control costs, hold within the Part D program without providing any additional 

beneficiary protection. According to the Academy of Managed Care Pharmacy (AMCP), 

therapeutic interchange is the practice of replacing, with the prescribing provider's 

approval, a prescription medication originally prescribed for a patient with a chemically 

different medication; medications used in therapeutic interchange programs are expected 

to produce similar levels of clinical effectiveness and sound medical outcomes, based on 

available scientific evidence. Moreover, in the absence of any specific treatment 

guidelines to the contrary, inclusion of all drugs in that category or class would be 

unnecessary. For example, some drugs in the nitrate class of drugs likely would meet our 

first proposed criterion, but because there are many therapeutically interchangeable 

options among nitrates, it is not necessary to require that all nitrate products be included 

on every Part D formulary. Indeed, under our current formulary treatment guideline 

reviews, while we require that sublingual nitroglycerin be included on all formularies 

because beneficiaries often need it on an urgent basis, we do not require inclusion of all

other nitrates (for example, isosorbide dinitrate, isosorbide mononitrate, and transdermal 

nitroglycerin) because these dosage forms are long-acting and typically are not needed on 

an urgent basis. (However, current treatment guidelines require the inclusion of 

isosorbide dinitrate for congestive heart failure.) Similarly, the typical diabetic patient 
 111 

who needs insulin could reasonably be anticipated to require two insulin products as part 

of his or her treatment regimen: specifically, one shorter-acting, and one longer-acting 

insulin. Among the insulins, there are four sub-classes: rapid acting, short acting, 

intermediate acting, and long acting. Within each of the sub-classes, there are 

alternatives from which to choose. In accordance with treatment guidelines, in most 

cases a patient's regimen is comprised of one selection from either the rapid acting or 

short acting sub-classes, and one selection from either the intermediate acting or long 

acting sub-classes. While the beneficiary would require access to multiple drugs within 

the class (insulins), which at times could certainly be considered urgent enough to risk 

dire consequences as discussed in the first criterion, they would not need access to all of 

the options within that class because there are many alternative products on the market 

within those sub-classes that are largely therapeutically interchangeable, and any one of 

these products will generally meet the patient's needs. Thus, our formulary checks for 

insulin require some products in each sub-class to ensure that access through each plan is 

clinically appropriate. 

These examples illustrate the principle that it is both feasible and appropriate to 

permit plan sponsors to develop formularies that exclude certain products when adequate 

access to an appropriate alternative is assured by way of our existing formulary 

requirements and review process. Moreover, the transition and coverage determination 

and appeal processes are available in those situations when a non-formulary drug is 

medically necessary for a specific individual.

For these reasons, we believe it is important to include a second criterion that 
 112 

must be met in order for us to consider a drug category or class to be one of clinical 

concern for the purposes of section 3307 of the Affordable Care Act. Specifically, we 

believe a drug category or class would be of clinical concern if CMS cannot establish that 

a formulary that includes fewer than all Part D drugs from within that category or class 

would include sufficient drugs needed to treat the diseases or conditions generally treated 

by such drugs. In other words, CMS cannot reasonably establish more specific CMS 

formulary requirements because there are too many potential drug-and-disease-specific 

scenarios that require specific drugs from within a category or class, even within 

sub-classes. This would be the case when the different drugs within a category or class 

are uniquely associated with specific clinical applications because of the unique effects of 

such drugs or the variable nature of the disease or condition treated by such drugs. For 

example, a cancer patient whose clinical picture is rapidly changing must immediately 

initiate very specific changes in antineoplastic therapy when the new disease target is 

identified. While perhaps possible, it would not be practical to establish a multitude of 

more class-specific formulary requirements for every current or future combination or 

sequence of such drugs simply to possibly exclude a few drugs. Thus, we propose to add 

§ 423.120(b)(2)(v)(B) specifying a second criterion to identify a clinical concern as 

follows: More specific CMS formulary requirements will not suffice to meet the 

universe of clinical drug-and-disease-specific applications due to the diversity of disease 

or condition manifestations and associated specificity or variability of drug therapies 

necessary to treat such manifestations. 

In summary, we propose to modify § 423.120(b)(2)(v) to require that (unless an 
 113 

exception applies) all Part D drugs within a drug category or class be included on the 

formulary if a the drug category or class of drugs for a typical individual with a disease 

or condition treated by the drugs in the category or class meets both of the following 

criteria (as determined by CMS): 

● Hospitalization, persistent or significant disability or incapacity, or death likely 

will result if initial administration (including self-administration) of a drug in the 

category or class does not occur within 7 days of the date the prescription for the drug 

was presented to the pharmacy to be filled; and 

● More specific CMS formulary requirements will not suffice to meet the 

universe of clinical drug-and-disease-specific applications due to the diversity of disease 

or condition manifestations and associated specificity or variability of drug therapies 

necessary to treat such manifestations. 

c. Exceptions 

Section 1860D-4(b)(3)(G)(i)(II) of the Act provides us with the authority to 

establish exceptions to the requirement that a Part D sponsor must include all Part D 

drugs on its formulary in the drug categories or classes identified by us as drug categories 

or classes of clinical concern under section1860D-4(b)(3)(G)(ii)(I) of the Act. Despite 

the narrow scope of applicability defined by the proposed criteria, we believe it is 

necessary to identify exceptions to help ensure Part D coverage is limited to Part D drugs, 

minimize duplicative protections within a drug category or class of clinical concern, and 

assure beneficiary safety while curbing potential abuse and misuse as a result of the 

added protection. 
 114 

First, we propose to retain § 423.120(b)(2)(vi)(A) as currently codified. This 

provision makes an exception for drug products that are rated as therapeutically 

equivalent (under the Food and Drug Administration's most recent publication of 

"Approved Drug Products with Therapeutic Equivalence Evaluations," also known as the 

Orange Book). Thus, two drug products that are determined to be therapeutic equivalents 

by the FDA and identified in the FDA's Orange Book are considered to be the same Part 

D "drug" solely for purposes of this requirement, and sponsors would not be required to 

include all therapeutic equivalents on their formularies. Rather, the inclusion of one such 

drug product would satisfy the formulary requirement with respect to all therapeutically 

equivalent products. 

We also propose to amend and renumber (as paragraph (F)) existing 

§ 423.120(b)(2)(vi)(B) to make an exception for point-of-sale utilization management 

safety edits that are based on maximum daily doses and black-box warnings specified on 

the FDA-approved label, potential drug interactions, or duplication of therapy. In fact, 

we believe that this exception is consistent with the requirement under 

section 1860D-4(c)(1)(B) of the Act that requires Part D sponsors to have in place quality 

assurance measures and systems to reduce medication errors and adverse drug 

interactions and improve medication use. As noted previously, although we believe that 

section 3307 of the Affordable Care Act is intended to provide additional beneficiary 

protections, we also believe that it would be imprudent to interpret these protections in 

such a way that they interfere with existing protections intended to promote safety and 

efficacy. We believe that it is appropriate for Part D sponsors to establish edits for safety 
 115 

and that our policies should not interfere with basic drug utilization management edits 

that sponsors apply at point of sale to ensure that adverse events do not occur. For 

example, we would expect that a claim for a 90 days supply of Atripla® for 180 tablets, 

when the drug is only approved for use once a day, would trigger a point-of-sale safety 

edit. Such edits must be consistent with FDA labeling to ensure that they are based on 

scientific evidence and medical standards of practice. However, the use of safety edits 

should not create a significant opening for plans to establish restrictive policies, because 

safety edits need to conform to FDA labeling. 

Next, we propose to add new language at § 423.120(b)(2)(vi)(B) to make an 

exception for drug products that are almost always covered under Medicare Parts A or B. 

 In order to minimize confusion about the scope of the protections under section 3307 of 

the Affordable Care Act, we specify that the formulary requirements set forth in section 

1860D-4(b)(3)(G)(i) of the Act do not apply to drugs almost always covered by Medicare 

Part A or B. We do not currently require, and would not require under the authority of 

section 3307 of the Affordable Care Act, the inclusion of drugs that have been 

historically paid for under Part B (for example, "incident to" drugs supplied and 

administered by physicians during a patient visit and paid for under Part B). Given the 

fact that these drugs are generally covered under Medicare Part B and are not required 

under our existing policy, we believe their absence from plan formularies would not 

disrupt access. We further believe that requiring the inclusion of these drugs on the 

formulary would lead to beneficiary confusion. For these reasons, we are proposing to 

exclude drug products almost always covered under Medicare Part A or B. 
 116 

We also propose to add an exception at § 423.120(b)(2)(vi)(G) to permit prior 

authorization for purposes of determining whether a drug is a Part D drug being used for 

a medically-accepted indication as defined in section 1860D-2(e)(4) of the Act or to 

verify a drug is not covered under Medicare Parts A or B as prescribed and dispensed or 

administered. Coverage under Part D is not available for drugs that are not used for a 

medically-accepted indication, and section 3307 of the Affordable Care Act does not 

change any Part D coverage rules. Moreover, we believe that this exception, like the 

exception for Medicare Part A or B drugs described in proposed paragraph (B), would 

not cause disruption because it merely reflects existing limits on Part D coverage. 

Thus, we also propose that prior authorization in the drug categories or classes of 

clinical concern is appropriate when used to confirm the presence of a 

medically-accepted indication or that coverage is not available under Medicare Parts A or 

B as prescribed and dispensed or administered. Prior authorization requirements to 

determine medically-accepted indications should be limited to those drugs for which it is 

reasonably foreseeable that use for non-medically-accepted indications are likely to 

occur. For example, when only narrow indications are supported (for example, pain 

medications indicated only for cancer pain, supported by the FDA label or compendia ), 

we would expect Part D sponsors to use prior authorizations to ensure that such agents 

are being used for the narrowly-supported indications only. Similarly, sponsors must 

apply prior authorizations for Medicare Parts A/B versus D determinations in a manner 

consistent how those determinations are made in all other categories or classes (that is, 

based upon likelihood of coverage under Medicare Part A or B), and thus, we would not 
 117 

expect to see a disproportionate amount of prior authorization requirements for the 

categories or classes of clinical concern compared to other formulary categories or 

classes. We expect that the plan sponsor's medical director is involved in establishment 

and oversight of plan policies related to prior authorization requirements. As with all PA 

requirements, these would require CMS review and approval. Consistent with current 

guidance, in Parts A or B versus D situations, CMS expects Part D sponsors will work 

aggressively to eliminate any interruptions of current therapy. 

In addition, we propose to amend § 423.120(b)(2)(vi)(C) to make an exception for 

Part D compounds. As noted in previous rulemaking, Part D only covers those 

ingredients in a compound that independently meet the definition of a Part D drug (see 

§ 423.120(d)). Since the Part D compound as a whole is not FDA approved, we do not 

believe that such compounded products reasonably can be classified as being included in 

a specific category or class that meets the criteria proposed in new §423.120(2)(v)(A). 

Currently, Part D compounds that include ingredients that fall within a protected category 

or class are not required to be included on formularies, and we do not interpret section 

3307 of the Affordable Care Act as requiring their inclusion now. Thus, we believe their 

continued absence from plan formularies would not disrupt access. 

We also propose to add § 423.120(b)(2)(vi)(D) to make an exception for drugs 

(other than antiretrovirals) that are FDA approved and that are fixed-combination dosage 

form prescription drug products as defined in 21 CFR 300.50, that contain at least one 

Part D drug in the category or class of clinical concern. Because all drugs in the category 

or class of clinical concern would be on the formulary as single entity products, we do 
 118 

not believe it is necessary, in most cases, to require inclusion of the fixed dose 

combination or co-packaged products. However, we would propose to carve out from 

this exception fixed dose combinations and co-packaged antiretrovirals, as discussed in 

FDA guidance found here: 

http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guid

ances/ucm079742.pdf) because avoiding excessive pill burden and simplifying dosage 

regimens is of utmost importance with this class of drugs. This is because the risk 

associated with non-adherence when beneficiaries have to take the single-entity products 

has far more severe consequences, such as viral resistance, than in most other instances, 

where occasional non-adherence does not present such dire complications. 

Consequently, although we believe this exception is generally appropriate for the 

categories and classes of clinical concern that receive added protections under section 

3307 of the Affordable Care Act, we propose that it not be available for antiretrovirals. 

This means that, under our proposed criteria, which, as discussed further in the following 

paragraphs, apply to antiretrovirals, all Part D formularies would need to include not only 

all single-entity antiretrovirals, but also all FDA-approved fixed-dose combination and 

co-packaged antiretrovirals. 

Additionally, consistent with current guidance, we propose an exception at 

§ 423.120(b)(2)(vi)(E) for certain types of Part D drugs, including multi-source brands of 

the identical molecular structure, extended-release products when the immediate-release 

product is included, products that have the same active ingredient or moiety, and dosage 

forms that do not provide a unique route of administration (for example, tablets and 
 119 

capsules versus tablets and transdermal products). Although such products may 

contribute to improvements in beneficiary adherence to their medication regimens, other 

interventions such as Medication Therapy Management Programs and special compliance 

packaging can also improve adherence. Therefore, the added costs of required formulary 

inclusion of such products may not provide added value since they do not provide a 

clinically different therapeutic alternative. Such products currently are not required to be 

included on formularies, and we do not interpret section 3307 of the Affordable Care Act 

as requiring their inclusion now. Thus, we do not believe this exception would disrupt 

access. 

Finally, we considered proposing an exception at § 423.120(b)(2)(vi)(H), to allow 

Part D sponsors to implement prior authorization, including PA used to implement step 

therapy requirements, to convert beneficiaries to preferred alternatives within these drug 

categories or classes for enrollees who are initiating therapy (new starts). This is 

consistent with current guidance that Part D sponsors may not implement prior 

authorization, including PA used to implement step therapy requirements that are 

intended to steer beneficiaries to preferred alternatives within these drug categories or 

classes for enrollees who are currently taking a drug, unless they are trying to establish 

appropriate coverage under Parts A, B, or D. This prohibition applies to those 

beneficiaries already enrolled in the plan, as well as to new enrollees who were actively 

taking drugs in any of the drug categories or classes of clinical concern prior to 

enrollment in the plan. If a sponsor cannot determine at the point of sale that an enrollee 

is not currently taking a drug (for example, new enrollee filling a prescription for the first 
 120 

time), the sponsor treats such enrollee as currently taking the drug. Additionally, step 

therapy and prior authorization for HIV/AIDS drugs are generally not employed in 

widely-used best-practice formulary models and are not permitted under the current 

policy. Although this has been our policy since the start of the Part D program, and we 

are not aware of any problems with it to date, we recognize that this raises the potential 

for a delay in access to initial therapy to occur and could be in conflict with our first 

proposed criterion. However, we must balance this with incentives for efficient 

formularies and do not want to eliminate a tool that may be useful for Part D sponsors. 

Consequently, we solicit comment on the continued need and utility of this policy and 

whether it should be included in the exceptions at 423.120(b)(2)(vi). These exceptions 

would supersede any previous guidance relative to PAs and UM for the categories and 

classes of clinical concern. 

d. Analysis and Identification of the Categories or Classes of Clinical Concern 

We convened a consensus panel of CMS pharmacists and the Chief Medical 

Officer for the Center for Medicare to identify which drug categories or classes met our 

proposed criteria for clinical concern. The panel was supported by a contractor that 

performed background research and provided specific information on Part D utilization 

by drug category or class and associated widely-accepted treatment guidelines for each 

drug category or class, when available. The panel reviewed all Part D drugs with 

utilization in 2012 using the American Hospital Formulary Service (AHFS)-6 

classification system. We chose the AHFS-6 classification system as a framework 

because it provided us with a tool to logically, and in stepwise fashion, apply the criteria 
 121 

to all Part D drugs. A detailed synopsis of the panel's findings is posted at 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/

RxContracting_FormularyGuidance.html. The consensus panel determined that of the 

current six drug categories or classes of clinical concern, three (anticonvulsants, 

antineoplastics, and antiretrovirals) meet both of the proposed criteria, and three do not 

(antidepressants, antipsychotics, immunosuppressants). The panel also determined that 

while other drug categories and classes met one of the criteria, no other drug categories 

or classes met both criteria. 

With respect to the first criterion, the panel concluded that initiation of therapy 

with drugs from the antiretroviral, antineoplastic, and anticonvulsant categories and 

classes for the typical individual prescribed these drugs in a Part D setting generally 

cannot be delayed for 7 days because of the risk of hospitalization, incapacity, disability, 

or death. For antiretrovirals, the risk associated with the failure to immediately initiate 

recommended concurrent therapies could significantly increase the risk of developing 

drug resistance and the potential for re-exacerbation of the disease. For antineoplastics, 

prompt initiation of therapy is also critical. Given that the antineoplastic drug therapy 

often is but one part of a complex cancer treatment protocol that includes non-drug 

therapies, such as radiation or surgery, initiation of the antineoplastic drug therapy is 

usually integrated with the entire treatment protocol. Thus, delaying initiation of 

antineoplastic drugs can delay a beneficiary's entire course of treatment. For 

anticonvulsants, the risk of seizure associated with a delay in drug therapy for 7 days can 

lead to hospitalization and significant incapacity. 
 122 

With respect to the second criterion, the panel concluded that the antiretroviral, 

antineoplastic and anticonvulsant categories and classes meet the criterion because 

different drugs within those categories and classes are used in so many patient-, drug-, or 

disease-specific clinical applications that an alternative formulary requirement is not 

feasible. For antiretrovirals, the panel based this conclusion on the number of multiple 

drug combinations and adjunctive therapies involved, frequency with which 

recommended drug protocols change, and the role that changing drug resistance plays in 

determining the selection of among the different antiretroviral drugs. The need to adjust 

specific combination antiretroviral therapy in real time is complex and must consider, 

among other things, viral sensitivity to the drugs, drug interactions, pregnancy status (if 

applicable), and potentially the patient's pharmacogenomic profile of the cytochrome 

P450 system. Similarly, for antineoplastic drug therapies, the panel based its conclusion 

on the diversity of treatment protocols, the specificity of such treatment protocols, 

including the role that specific genetic variations can play in the selection of the 

appropriate drug therapy, and the frequency with which disease-specific treatment 

protocols recognized in the official Part D compendia change and get updated. A cancer 

patient whose clinical picture is rapidly changing must immediately initiate very specific 

changes in antineoplastic therapy when the new disease target is identified. Finally, for 

anticonvulsants the panel concluded that the class met the criterion based on the number 

of unique types of seizures, the multiple drug combinations indicated for them, and the 

potential for altered drug effects based on drug-drug interactions that occur via the 

cytochrome P450 system. For all three of the classes (anticonvulsants, antineoplastics, 
 123 

and antiretrovirals), the panel concluded that CMS would be unable to address them more 

efficiently through formulary requirements that would allow for some restrictions at this 

time based upon the number and specificity of the different treatment protocols. 

After a detailed analysis of existing therapies and widely-accepted treatment 

guidelines, the panel concluded that immunosuppressants for transplant rejection, 

antidepressants, and antipsychotics do not meet both of the proposed criteria and thus 

would not be eligible for the additional protections intended by section 3307 of the 

Affordable Care Act. 

With respect to immunosuppressants for transplant rejection, the panel concluded 

that the first criterion was met. Due to the immune system's ability to mount 

progressively faster and stronger attacks against a beneficiary's new organ, and to 

maintain a memory relative to those attacks, initiation of therapy in a Part D setting 

generally cannot be delayed for up to 7 days because of the risk of hospitalization, 

incapacity, disability, or death, and thus meets the first criterion. Because 

widely-accepted treatment guidelines recommend sub-classes of drugs rather than 

specific, individual drugs, the panel did not believe that every drug product should be 

required for inclusion on Part D sponsors' formularies. Moreover, relative to the 

reasonably small number of transplant options available to beneficiaries (for example, 

stem cell, liver, lung, kidney, pancreas, heart and intestine), the consistency and 

specificity of treatment guidelines, and the amount of therapeutic drug monitoring 

required for these drugs, provide us with sufficient clinical information necessary to 

establish additional, specific formulary requirements without needing to continue to 
 124 

identify it as a drug category or class of clinical concern. 

For antidepressants, the panel concluded that a 7-day delay in initiation of therapy 

would generally not put the typical individual at risk of hospitalization, incapacity, 

disability or death, and thus did not meet the first criterion. The panel also concluded 

that antidepressants did not meet the second criterion. This determination was based 

upon the similarities of drugs within sub-classes and the lack of unique effects for 

distinguishing individual drug products when initiating drug therapy for the typical 

individual in a Part D setting. For example, for a patient initiating antidepressant therapy 

for depression, when the treatment guidelines indicate that a drug within the selective 

serotonin reuptake inhibitor (SSRI) sub-class of antidepressants should be used, there are 

multiple options from which to choose, such as fluoxetine, paroxetine, sertraline, 

citalopram, and escitalopram. While treatment guidelines may indicate the choice of an 

SSRI over the tri-cyclic antidepressant (TCA) or serotonin-norepinephrine reuptake 

inhibitor (SNRI) sub-classes, assuming a patient is dosed correctly, they generally do not 

advocate a preference of one SSRI drug over another for initiation of therapy, nor do they 

provide a hierarchical inventory for these drugs' place in therapy relative to each other. 

In fact, the American Psychiatric Association's 2010 treatment guideline (available at 

http://www.guideline.gov/content.aspx?id=24158) states that "the effectiveness of 

antidepressant medications is generally comparable between classes and within classes of 

medications." 

With respect to antipsychotics, many of these take weeks to reach their full effect 

(steady state). In addition, with regard to the Medicare population, particularly in long 
 125 

term care settings, current treatment guidelines indicate that the use of antipsychotics in 

the elderly is, in many cases, unwarranted and in others, possibly dangerous. However, 

due to the potential that, untreated, beneficiaries with active psychotic symptoms may be 

dangerous to themselves or others, the panel concluded that a 7-day delay in initiation of 

therapy met the threshold to put a typical individual with psychotic symptoms at risk of 

hospitalization, incapacity, disability or death, and thus met the first criterion. 

However, the panel concluded that antipsychotics did not have unique effects that 

distinguished one drug from another for the purposes of choosing the appropriate drug to 

initiate therapy. For example, for a patient initiating antipsychotic therapy for 

schizophrenia or schizoaffective, or schizophreniform disorder, when the treatment 

guidelines may indicate that a drug within the second generation (atypical) antipsychotic 

sub-class should be used, there are multiple options from which to choose such as 

aripiprazole, risperidone, olanzapine, quetiapine, ziprasidone, and clozapine. While the 

treatment guidelines may indicate the choice of a second generation antipsychotic over 

the neuroleptics or first generation antipsychotic sub-classes, assuming a patient is dosed 

correctly, they generally do not advocate a preference of one atypical antipsychotic over 

another for initiation of therapy, nor do they provide a hierarchical inventory for these 

drugs' place in therapy relative to each other. Moreover, the 2009 update to the 

American Psychiatric Association's treatment guideline for the management of patients 

with schizophrenia (available at 

http://psychiatryonline.org/data/Books/prac/Schizophrenia_Guideline%20Watch.pdf) 

states "the distinction between first- and second-generation antipsychotics appears to 
 126 

have limited clinical utility." Thus the panel concluded that these agents are considered 

to be generally therapeutically interchangeable when initiating therapy, and based on 

treatment guidelines, our formulary requirements could efficiently ensure appropriate 

access to antipsychotics without requiring inclusion on the formulary of every drug in the 

class. 

In addition to any cost savings that would result from the proposed change for the 

antipsychotic drug class, it is important to emphasize that the change also would provide 

Part D sponsors with an improved capability to address widespread inappropriate overuse 

of antipsychotic drugs through better utilization management. A recent study published 

in Psychiatric Services analyzing 2009 claims data from private insurance claims found 

that 58 percent of individuals prescribed psychotropic medication in 2009 had no 

psychiatric diagnosis during the year (Psychiatric Services 2013; doi: 

10.1176/appi.ps.201200557). Moreover, on September 20, 2013, the American 

Psychiatric Association released a "list of specific uses of antipsychotic medications that 

are common, but potentially unnecessary and sometimes harmful", including a 

recommendation not to prescribe these drugs "as a first-line intervention to treat 

behavioral and psychological symptoms of dementia" 

(http://www.psychiatry.org/choosingwisely). CMS has been particularly concerned with 

unnecessary use of antipsychotic drugs in nursing homes, which might be exacerbated by 

our current policy, which significantly limits Part D sponsors' options for ensuring 

appropriate use of these drugs. While this change in formulary requirements generally 

would not impede appropriate access to antipsychotic drug therapy for the mentally ill 
 127 

given the other formulary protections discussed previously, it would allow Part D 

sponsors to better align utilization management with CMS efforts to prevent 

inappropriate use of these drugs and the potential harmful effects associated with such 

inappropriate use. 

While proposing to remove the previous level of formulary coverage from these 

particular classes, it is worth noting that the requirement to include on plan formularies 

all drugs in certain categories and classes is unique to the Part D program. We are not 

aware of any other U.S. government programs (such as the Veteran's Administration 

(VA), Tricare, the Federal Employees Health Benefits Program (FEBHP), and, most 

recently, the Affordable Care Act Essential Health Benefits (EHB) Benchmark Plans), or 

commercial private health plans having a similar requirement. Similar to the Part D 

program, these plans also operate in the outpatient setting where access to medications is 

not typically needed on an emergency basis. Even though Part D formularies are more 

restrictive than Federal Employees Health Benefits Plans (FEHBP) and EHB plans, when 

CMS compared Part D formulary requirements with those of the VA National and 

Department of Defense (DoD) Basic Core formularies, out of 26 distinct antidepressant 

drugs required on all Part D formularies, the VA included 17, and the DoD included 10. 

Similarly, out of 19 distinct antipsychotic drugs required on all Part D formularies, the 

VA included 15, and the DoD included 2. 

Supporting this analysis that our formulary checks could efficiently require 

adequate access to the antidepressant and antipsychotic drug categories and classes 

without requiring that every drug be included on all Part D formularies, we compared a 
 128 

Part D formulary to other formularies. We took an approved CY 2014 formulary 

containing the average number of RxNorm Concept Unique Identifiers (RxCUIs). This 

formulary includes the following: 23 generic (ANDA) antidepressant drugs, 7 brand 

(NDA) antidepressant drugs, 18 generic antipsychotic drugs, and 9 brand antipsychotic 

drugs. We then reviewed the drugs comprising the aforementioned list against our 

formulary review requirements standards for treatment guidelines, common Medicare 

drugs, and the discrimination review. We found that the formulary could have passed 

these checks with 9 generic antidepressant drugs, and 6 generic antipsychotic drugs. No 

brands were necessary to meet the formulary review requirements. Thus, this formulary 

includes an excess of 16 brand drugs and 26 generic drugs within these two classes of 

medications. 

While the immunosuppressant, antidepressant and antipsychotic classes all fail to 

meet the second criterion, we are deferring any change in formulary requirements for the 

antipsychotic class at this time and will continue to require all drugs from within this 

class to be on Part D formularies in 2015, subject to the exceptions that get finalized in 

§ 423.120(b)(2)(vi). Section 1860D-4(b)(3)(G)(I) of the Act requires that the Secretary 

identify classes and categories of clinical concern "as appropriate," using criteria 

specified in notice and comment rulemaking. We interpret this provision as permitting us 

to postpone applying our proposed criteria to antipsychotics at this time, and as we are 

not applying the criteria to antipsychotics at this time, we believe it is appropriate to 

continue to treat antipsychotics as a class of clinical concern, in light of section 

1860D-4(b)(3)(G)(iv) of the Act, because we wish to make certain we have not 
 129 

overlooked a need for any transitional considerations. This is because the risks 

associated with untreated psychotic illness, as differentiated from the broad category of 

mental illness, have the potential to be so severe. Therefore, although we previously 

explained why we do not believe the antipsychotic drug class would meet the new 

proposed criteria, at this time, we are proposing not to subject the antipsychotic class to 

the new criteria and therefore are proposing not to change the current requirement that all 

drugs from within this class must be included on all formularies, except as permitted 

under our proposed exceptions. 

In general, our existing beneficiary protections should suffice to ensure 

appropriate access to antipsychotic drug therapies. However, we are not changing the 

requirement for antipsychotics at this time because we need to determine if additional 

transitional consideration is necessary for any individuals taking these medications. 

While we are not convinced that our existing transition requirements are insufficient, we 

seek comment on whether there are additional considerations for transitioning some 

patients taking these drugs to alternative drug therapies and if so, why our current 

requirements are not adequate. In addition, we seek comments on what specific patient 

population(s) or individual patient characteristics would require such additional transition 

protections and how such population(s) can be consistently identified. Conversely, we 

also seek comments on whether it might be in the best interest of beneficiaries to have 

their existing antipsychotic therapies reevaluated through utilization management, given 

our concern with the inappropriate use of these drugs especially in nursing homes and the 

limited clinical utility of distinctions among agents in this class of drugs. If so, we would 
 130 

also appreciate comments on whether the benefits of such a periodic reevaluation that 

would arise from routine utilization management might outweigh other transitional risks. 

 While we do not believe the risks associated with illnesses treated by antidepressants are 

as severe as those treated by antipsychotics, we are also seeking comment on whether 

any transitional policies specific to antidepressants would be appropriate. 

We are concerned about overutilization and inappropriate prescribing of 

antipsychotic medications in individuals with dementia for whom these medications may 

be prescribed as a mechanism for behavioral control; persons for whom antipsychotics 

are being used as sleeping aids or anxiolytics; and children who have not been diagnosed 

with a disorder for which an antipsychotic medication has been FDA-approved. Our 

concerns about overutilization are not aimed at individuals with a current mental illness 

or those who are or have recently or previously been stabilized on antipsychotic 

medications. We do not want to limit access to effective medications, or to limit a return 

to those effective medications for adults with a psychotic illness who need them. Finally, 

we seek comment on the timing necessary to address any additional transitional 

considerations, and remove the temporary protections for antipsychotics, if necessary. 

Therefore, the initial drug categories and classes of clinical concern that meet the 

proposed criteria for coverage year 2015 are anticonvulsants, antiretrovirals, and 

antineoplastics. In addition, the antipsychotic drug class will continue to be treated as a 

class of clinical concern in 2015 and until CMS determines that it is appropriate to apply 

the criteria with respect to the antipsychotics. These categories and classes will be read 

narrowly and are not inclusive of every related drug product that an individual who has a 
 131 

disease treated by one of these categories or classes of drugs would need to take. For 

example, conjugated or esterified estrogens used for the palliative treatment of carcinoma 

of the prostate or metastatic breast cancer are not considered antineoplastics and would 

not be included in the antineoplastic class of clinical concern. We will provide more 

detailed guidance on the specific formulary checks that will be in place relative to 

antidepressant and immunosuppressant categories and classes of drugs at a later date. 

Additionally, we plan to work with stakeholders to provide outreach to beneficiaries 

around the proposed modification of the categories and classes of drugs of clinical 

concern that receive additional protections under section 3307 of the Affordable Care Act 

so that beneficiaries can select the most appropriate drug plan for their needs based on 

drug choice as well as cost. Finally, CMS plans to periodically review the drug 

categories and classes as the clinical landscape changes to determine whether these 

classes continue to meet both criteria and/or if other categories/classes meet both criteria. 

 We would propose any changes to the categories and classes of clinical concern through 

a public notice and comment process such as the annual Call Letter. 

15. Medication Therapy Management Program (MTM) under Part D (§ 423.153(d)) 

 Section 1860D-4(c)(2) of the Act, provides that Part D sponsors, in offering 

Medication Therapy Management (MTM) programs, must target individuals who: (1) 

have multiple chronic diseases (such as diabetes, asthma, hypertension, hyperlipidemia, 

and congestive heart failure); (2) are taking multiple covered Part D drugs; and (3) are 

identified as likely to incur annual costs for covered Part D drugs that exceed a level 

specified by the Secretary. At the start of the Part D program, we believed that 
 132 

25 percent of enrollees would qualify for MTM services. However, analysis revealed 

that MTM program enrollment was well below that level. In the 2010 Call Letter and 

subsequent regulation, we modified the criteria to reduce the variability in eligibility and 

level of service and to improve access to MTM services, again targeting 25 percent of 

enrollees. Despite these changes, MTM program participation remains very low. 

Moreover, additional evidence that the program improves quality and generates medical 

savings supports the idea that more than 25 percent of enrollees will benefit from MTM 

services. 

 Section 1860D-4(c)(2)(C) of the Act, as implemented in § 423.153(d)(vii), 

specifies that sponsors shall offer a minimum level of MTM services to targeted 

beneficiaries to increase adherence to prescription medications or other goals deemed 

necessary by the Secretary. Additionally, section 1860D-4(c)(2)(E2) of the Act, as 

implemented in § 423.153(d)(1)(v), provides that Part D sponsors must automatically 

enroll targeted beneficiaries in the MTM program, allowing beneficiaries the option to 

opt out. Under that authority, we also issued sub-regulatory guidance (found at 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/

Downloads/Chapter7.pdf) and an annual memo with MTM Program Guidance and 

Submission instructions notifying Part D sponsors that we expect them to promote 

continuity of care by performing an end-of-year analysis that identifies current MTM 

program participants who will continue to meet the eligibility criteria for the next 

program year for the same plan. We indicated that this targeting could be done to 

auto-enroll beneficiaries in the plan's MTM program early in the next program year in 
 133 

order to provide MTM interventions with less interruption. Although beneficiaries who 

are new to Part D or who may have changed plans may be captured during the quarterly, 

or more frequent, targeting throughout the year, there is a time lag at the start of the year 

before these beneficiaries can be enrolled in MTM. This concern is particularly relevant 

for LIS enrollees who may have been reassigned to a new Part D plan if their existing 

plan terminated or no longer qualified as a benchmark plan. Moreover, we believe that 

there are other special populations of beneficiaries for whom simply increasing the 

frequency of targeting will not adequately address barriers they face to receiving MTM 

services. There are also situations in which a beneficiary is unable to accept the offer to 

participate in a CMR, but offering to perform the CMR with the beneficiary's prescriber, 

caregiver, or other authorized individual, as provided at § 423.153(d)(1)(vii)(B)(2), may 

not be effectively addressed by the sponsor. For example, sponsors may not effectively 

take steps to identify the beneficiary's authorized representative or coordinate with the 

beneficiary's LTC facility when appropriate. Consequently, to improve access to this 

beneficial service, we are exploring new ways to improve access to MTM services for 

Part D enrollees. 

 Although we initially estimated that 25 percent of the Part D eligible population 

would meet the three criteria for MTM services at the start of the Part D program, we 

provided minimal detail on how sponsors should implement the criteria. For example, 

we did not initially provide in regulation any detail on the number of chronic diseases or 

covered Part D drugs, or an annual cost threshold that would be required to establish a 

beneficiary's eligibility for MTM services, although we established an annual cost 

 

2 Two subparts (E) have been enacted in section 1860D-4(c)(2). Here, we refer to the first one. 
 134 

threshold of $4000 in subregulatory guidance. We did this to allow maximum flexibility 

for the industry to develop best practices in the provision of MTM services. 

 After an analysis of common practices revealed wide ranges in eligibility and the 

levels of services provided, we announced in the 2010 Call Letter (available at 

http://www.cms.gov/PrescriptionDrugCovContra/Downloads/2010CallLetter.pdf) that 

the MTM requirements would be revised beginning in 2010 to provide greater 

consistency among the MTM programs and to raise the level of MTM interventions 

offered to positively impact medication use by Medicare Part D beneficiaries. We 

clarified that in defining multiple chronic diseases, sponsors could not require more than 

three chronic diseases as the minimum number of chronic diseases and that sponsors 

must target at least four of seven core chronic diseases (hypertension, heart failure, 

diabetes, dyslipidemia, respiratory disease (such as asthma, chronic obstructive 

pulmonary disease (COPD), or chronic lung disorders), bone disease – arthritis (such as 

osteoporosis, osteoarthritis, or rheumatoid arthritis), and mental health (such as 

depression, schizophrenia, bipolar disorder, or chronic and disabling disorders)). We 

further clarified that in defining multiple Part D drugs, sponsors could not require more 

than eight Part D drugs as the minimum number of multiple covered Part D drugs. We 

also lowered the cost threshold to $3,000 and instructed sponsors to adjust their targeting 

criteria accordingly. These requirements were subsequently codified in the regulations at 

§ 423.153(d)(1) and (2). 

 Despite the expanded criteria, we continue to see restrictive criteria, such as plan 

sponsors specifying a narrow list of chronic diseases or Part D drugs coupled with 
 135 

requiring a higher minimum number of covered drugs (for example, eight drugs versus 

two) for eligibility. As a result, access to MTM services remains very low with MTM 

program eligibility rates at less than 8 percent in 2011. Even more concerning, there may 

be racial disparities in meeting the eligibility criteria. In the 2012 Call Letter (available 

at 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/A

nnouncement2012.pdf), we reviewed a 2010 study published in Health Services Research

(HSR) by Wang and colleagues (Wang, et al. 2010. "Disparity Implications of Medicare 

Eligibility Criteria for Medication Therapy Management Services." Health Services 

Research. 45 (4): 1061-1082.). This study was based on data from the Medical 

Expenditure Panel Survey (MEPS) collected prior to the implementation of the Part D 

program and used the original 2006 and the revised 2010 MTM eligibility thresholds. 

The study suggested that Hispanic and African American beneficiaries could be less 

likely to meet MTM eligibility criteria where utilization was a criterion for program 

participation. The study findings had important implications for the Part D program 

because utilization based upon drug costs is a critical part of MTM eligibility. In 2012, 

Wang and colleagues repeated the study (Wang, et al. 2012. "Historical trend of 

disparity implications of Medicare MTM eligibility criteria." Research in Social and 

Administrative Pharmacy (2012): 1-12) using 2007-2008 data along with both the 2006 

and 2010 MTM eligibility thresholds. They found that disparity patterns did not change 

from the first study. Their findings that "racial and ethnic disparities in meeting the 

MTM eligibility criteria may not decrease over time unless the eligibility criteria are 
 136 

changed" have led us to conclude that the current MTM eligibility criteria are overly 

restrictive. 

 A 2011 report from the United States Public Health Service (PHS) Pharmacist 

Professional Advisory Committee (PharmPAC report) (available at 

http://www.usphs.gov/corpslinks/pharmacy/sc_comms_sg_report.aspx) supports the 

conclusion that the current eligibility criteria are restricting access to MTM services. The 

PharmPAC report, which was based on the experiences of PHS clinical pharmacists who 

attempted to provide services to Part D beneficiaries, indicated that the Part D MTM 

eligibility criteria, and variability in the application of these criteria among Part D 

sponsors, constituted a policy constraint which limited patient participation in the 

program, despite the 2010 enhancements. The authors of the PharmPAC report 

expressed concern that, at the time, the criteria permitted sponsors to define eligibility 

parameters. The PharmPAC report went on to say that as a result of the overly restrictive 

targeting criteria, patients who may need MTM services but did not meet the plan's 

criteria were not able to participate, unless the plan offered MTM services to a wider 

group than the targeted population. 

 Further supporting this conclusion, a recent study conducted in conjunction with 

the Center for Medicare and Medicaid Innovation called Medication Therapy 

Management in Chronically Ill Population: Final Report (August 2013) ("CMMI MTM 

study") (available at http://innovation.cms.gov/Data-and-Reports/index.html) explored 

the variations in MTM eligibility criteria. This CMMI MTM study identified patients 

with equivalent MTM eligibility characteristics who were in different plans with different 
 137 

eligibility criteria. The enrollees were ineligible for MTM in their own plan, but would 

have been eligible for MTM if they were enrolled in another plan which targets a 

particular chronic disease that is not targeted for MTM services by their own plan or 

which targets beneficiaries for MTM services based on a lower number of chronic 

diseases or Part D drugs for eligibility. We are concerned with such variability, 

especially in cases where a beneficiary meets the minimum number of chronic diseases 

for eligibility, but may not qualify for MTM because his or her chronic condition is not 

targeted by the plan, he or she does not take enough medications for the plan's program 

(even though medication management issues are present), or because high utilization of 

lower cost generics places prescription drug costs for the beneficiary below the cost 

threshold. Restrictive application of MTM eligibility criteria may limit MTM enrollment 

to beneficiaries with spending well above the $3,000 threshold, and the CMMI MTM 

study indicates that drug spending for MTM enrollees varied from $4,452 to $7,477. The 

CMMI MTM study's final report was published in August, 2013 and is available at: 

http://innovation.cms.gov/Files/reports/MTM-FINAL-Report.pdf. 

 As discussed in the 2014 Call Letter (available at 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/A

nnouncements2014.pdf), the CMMI MTM study found that MTM programs effectively 

targeted high risk individuals who had problems with their drug-therapy regimens and 

had high rates of hospital and emergency room visits before enrollment as well as those 

that experienced a recent visit to the hospital or emergency room. The study also found 

that individuals with diabetes, CHF, and COPD who were enrolled in MTM programs – 
 138 

particularly those who received annual comprehensive medication reviews (CMRs) – 

experienced significant improvements in drug therapy outcomes when compared to 

beneficiaries who did not receive any MTM services, thus supporting the hypothesis that 

the annual CMR may be one of the more crucial elements of MTM. Significant cost 

savings associated with all-cause hospitalizations at the overall PDP and MA-PD levels 

were found, which may be due to MTM's comprehensive, rather than disease specific 

approach. This research supports statements in a recent Congressional Budget Office 

report that programs and services that manage the prescription drug benefit well or 

improve prescription drug use might result in medical savings (Congressional Budget 

Office, Offsetting Effects of Prescription Drug Use on Medicare's Spending for Medical 

Services, November 2012, available at http://www.cbo.gov/publication/43741). 

 Consistent with the findings of this research, we believe that the CMS-established 

eligibility criteria should be considered as the threshold for MTM eligibility, but not the 

driver of interventions by the plan. However, because plans target beneficiaries with 

specific diseases for MTM services, some plans, in turn, have designed interventions 

only focused on these diseases, in contrast to a more comprehensive approach to 

improving medication management and adherence. For example, one plan targeted 

beneficiaries with CHF and diabetes and designed interventions for these conditions. 

Beneficiaries who also had COPD qualified for MTM services, but the plan did not 

address their COPD medication issues, a practice that is inconsistent with the intent of 

comprehensive MTM. Nonetheless, the best-performing plans were able to improve 

medication adherence and quality of prescribing while maintaining or reducing overall 
 139 

health care costs (including drug costs), despite the costs associated with delivering a 

high number of CMRs. Moreover, the study's findings suggested that other conditions 

associated with cardiovascular disease, such as acute myocardial infarction (AMI), 

stroke, and vascular disorders, in addition to those already targeted under the eligibility 

criteria adopted in 2010, disproportionately appeared among the top cost savers. 

 Overall, the CMMI MTM study identified practices that typified high-performing 

MTM programs, including three that concern beneficiary targeting. They are: 

● Establishing proactive and persistent CMR recruitment efforts; 

● Targeting and aggressively recruiting patients to complete a CMR based on 

information on medical events such as a recent hospital discharge in addition to scanning 

for the usual MTM eligibility criteria; and 

● Coordinating care by utilizing trusted community relationships, including 

networks of community pharmacists, to recruit MTM eligible candidates, and utilizing 

existing working relationships between MTM providers (pharmacists) and prescribers to 

make recommendations and discuss identified problems for patients. 

 Potential additional requirements, related to the first and third practices, are 

discussed elsewhere in this proposed rule. However, the second practice leads us to 

reconsider our current MTM targeting requirements. We believe that the results of the 

aforementioned studies indicate the necessity to reduce variability in eligibility criteria 

among plans and as a result improve access to MTM services. 

a. Multiple Chronic Diseases 
 140 

 The statute identifies targeted beneficiaries as those Part D beneficiaries who 

have multiple chronic diseases such as diabetes, asthma, hypertension, hyperlipidemia, 

and congestive heart failure. We previously interpreted this language to allow sponsors 

to define "multiple chronic diseases" with three chronic diseases being the maximum 

number a plan sponsor may require for targeted enrollment. Further, sponsors are 

allowed to target beneficiaries with select chronic diseases, but must include at least five 

of the nine core chronic diseases in their criteria. This list of core chronic diseases, as 

updated in the 2013 Call Letter (available at 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/downloads//A

nnouncement2013.pdf), includes hypertension, congestive heart failure, diabetes, 

dyslipidemia, respiratory disease, bone disease – arthritis, mental health, Alzheimer's 

disease, and end stage renal disease. We propose to revise our interpretation of "multiple 

chronic diseases" to require that sponsors must target enrollees having two or more 

chronic diseases for MTM services. We believe this is a reasonable interpretation of the 

statute because "multiple" is commonly understood to mean more than one. 

 In addition, we believe that the statute specifically named the diseases that are 

most prevalent within the Medicare Part D beneficiary population and that present a 

likelihood of having medication use issues that impact therapeutic outcomes. Therefore, 

we propose to require that at least one of the chronic diseases that a beneficiary has in 

order to satisfy the eligibility criteria must be one of the list of core chronic diseases. 

This list has been updated since 2010 to encompass common targeting practices among 

plan sponsors and diseases prevalent among beneficiaries. We also believe that this 
 141 

interpretation is consistent with other literature concerning the relative risk of the 

combination of multiple disease states and medications and ensures that Medicare Part D 

beneficiaries with prevalent health conditions receive access to MTM. In addition, to be 

more consistent with the findings of the CMMI MTM study and the current drug 

hierarchical condition categories (RxHCCs) used in the Part D risk adjuster, we propose 

to redefine the core diseases by combining hypertension and congestive heart failure 

under the umbrella of "cardiovascular disease," which would also encompass congestive 

heart failure, acute myocardial infarction, cerebral hemorrhage and effects of stroke, 

vascular disease, specified heart arrhythmias, and hypertensive heart disease. The list of 

core chronic diseases would thus become cardiovascular disease, diabetes, dyslipidemia, 

respiratory disease, bone disease – arthritis, mental health, Alzheimer's disease, and end 

stage renal disease. However, in future rulemaking, we may consider further revising the 

regulation to establish standards by which these core chronic diseases are selected, and 

therefore establish the list of core chronic diseases annually in subregulatory guidance 

based on those factors. We solicit comment on what specific patient population(s) or 

individual patient characteristics should be considered in establishing such standards. 

b. Multiple Part D Drugs 

 The statute identifies targeted beneficiaries as those Part D beneficiaries who are 

taking multiple covered Part D drugs. Although we initially had no requirements in this 

area, as early as contract year 2006, we asked plan sponsors to report to us the number of 

covered Part D drugs that a beneficiary must have filled to meet their targeting criteria 

for MTM, and if applicable, to list the type of Part D drugs that would apply. While still 
 142 

allowing a great deal of flexibility in the design of MTM programs, for contract year 

2007 forward, we requested more detailed information in this area in MTM Program 

Submission materials for a March 15, 2006 User Group Call which were distributed 

through HPMS. We asked plan sponsors to identify the number of covered Part D drugs 

that a beneficiary must have filled to meet their criteria for MTM programs, and to 

provide information on the type of covered Part D drugs that would apply. Specifically, 

we asked if any Part D drug would apply, only chronic/maintenance drugs, only 

disease-specific drugs related to chronic diseases, or if specific Part D drug classes would 

apply (and what those drug classes were), or what other types of categories the plan 

sponsor intended to use. For coverage year 2013, we consolidated this list of types of 

covered Part D drugs that could apply and no longer specifically collected information on 

disease-specific drugs related to chronic diseases. (MTM Program Submission Process 

Guidance for CY 2013 is available at: 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/

Downloads/Memo-Contract-Year-2013-Medication-Therapy-Management-MTM-Progra

m-Submission-v041012.pdf) 

 Because our analyses continued to reveal such wide ranges in eligibility under 

this criterion, we issued guidance in 2009, which we subsequently codified in our April 

2010 final rule entitled, "Policy and Technical Changes to the Medicare Advantage and 

the Medicare Prescription Drug Benefit Programs" (75 FR 19678), to establish specific 

requirements regarding the minimum number of covered Part D drugs that plan sponsors 

should consider in order to satisfy the statutory requirement. Specifically, we instructed 
 143 

that Part D sponsors should define "multiple" for purposes of satisfying this requirement 

as no more than eight Part D covered drugs. (75 FR 19772) Although we tried to 

maintain maximum flexibility for plan sponsors by permitting this broad range, the 

authors of the PharmPAC report specifically cite the options available to plan sponsors in 

determining enrollee eligibility criteria for multiple Part D drugs as a limitation of the 

MTM programs required under Part D. We now believe that allowing plans this 

flexibility has contributed to beneficiary confusion, decreased access to MTM services, 

and even led to racial disparities in access to services. 

 We propose to revise our interpretation of "multiple Part D drugs" to require that 

sponsors must target enrollees taking two or more Part D covered drugs for MTM 

services. While we are expanding this criterion, we are also proposing to restrict the 

flexibility previously available to sponsors by requiring that they consider any Part D 

covered drug. Literature supports the idea that patients with multiple diseases and taking 

at least two drugs are more likely to have drug therapy problems. 

 The importance of MTM services for patients taking two or more medications 

was demonstrated in a 2007 evaluation which validated the Risk Based Relative Value 

Scale (RBRVS) for MTM Services by Isetts and colleagues on behalf of the state of 

Minnesota (available at 

http://www.dhs.state.mn.us/main/groups/business_partners/documents/pub/dhs16_14028

3.pdf). This study shows that when a patient has a single indication treated by at least 

two medications, there is likely to be at least one drug therapy problem. When the 

patient moves to two indications, he or she is more likely to be treated by at least three to 
 144 

five medications, and will likely have at least two drug therapy problems. It should be 

noted that this evaluation considered not only prescription drugs, but also over the 

counter medications and dietary supplements. 

TABLE 2. PHARMACEUTICAL CARE RBRVS*

 – AT A GLIMPSE 

Level** Number of Medical 

Indications 

Number of 

Medications 

Number of Drug 

Therapy Problems 

(DTP) 

Level 1 At least 1 At least 1 None observed 

Level 1 At least 1 At least 2 1 DTP 

Level 2 At least 2 At least 3-5 2 DTPs 

Level 3 At least 3 At least 6-8 3 DTPs 

Level 4 4 or more 9 or more 4 or more DTPs 

*

 Summarized from the Minnesota DHS Web Site Program Guide for Delivery of Medication Therapy 

Management Services (MTMS). 

** The level of care reported is the lowest of patient needs met by all criteria in each level. 

 Section 3503 of the Affordable Care Act establishes a program under the Public 

Health Service Act under which the Secretary is authorized to provide grants or contracts 

to eligible entities to implement MTM services and provides that MTM programs shall 

target individuals who take four or more prescribed medications, including 

over-the-counter (OTC) medications and dietary supplements, and take any high-risk 

medications. Although this provision does not directly pertain to the Part D program, we 

believe that an examination of the criteria used to target individuals under that provision 

is helpful in considering what changes could be made to improve the effectiveness of 

MTM programs offered under Part D. Unlike section 3503 of the Affordable Care Act, 

which expressly requires that services be targeted based on the use of either prescription 

or non-prescription drugs, the Part D statute expressly requires that Part D plans target 

beneficiaries taking multiple covered Part D drugs for MTM services. OTC medications 
 145 

or dietary supplements are not covered Part D drugs, and we cannot require Part D 

sponsors to consider them in targeting beneficiaries for MTM services. Nevertheless, as 

evidenced by the RBRVS approach discussed previously, we believe that these OTC 

medications and supplements may contribute to drug therapy problems. Therefore, we 

believe that it is reasonable to propose that "multiple Part D drugs" should be construed 

to mean two or more Part D drugs in order to ensure that beneficiaries that are at risk of 

drug therapy problems, including problems associated with taking multiple prescription 

medications in conjunction with over-the-counter medications, are appropriately targeted 

for MTM services. A literature review (Hajjar ER, Cafiero AC, Hanlon JT. 

Polypharmacy in elderly patients. Am J Geriatric Pharmacother. 2007; 5:345-351) cited 

a study that found that almost 90 percent of elderly, rural community-dwelling patients 

took one or more OTC products and almost 50 percent took two to four. Another study 

of noninstitutionalized patients found that 47 to 59 percent of older patients took a 

vitamin or mineral and 11 to 14 percent took herbal supplements. The review found that 

polypharmacy among the elderly may be increasing. (Stoehr GP, Ganguli M, Seaberg 

EC, et al. Over the counter medication use in an older rural community: The MOVIES 

Project. J Am Geriatr Soc. 1997; 45:158-165). Therefore, it is reasonable to conclude 

that the Part D MTM population with multiple chronic diseases would also be taking 

OTC medications. Furthermore, we expect that sponsors will perform outreach to 

beneficiaries to acquire additional information regarding OTC medication use by their 

enrollees, consistent with our current guidance for CMRs, which explains that the 

medication review as part of the CMR should include prescriptions, OTC medications, 
 146 

herbal therapies, and dietary supplements (available at 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/

Downloads/Memo-Contract-Year-2013-Medication-Therapy-Management-MTM-Progra

m-Submission-v041012.pdf). 

 Although we are proposing this option, we also considered alternatives such as 

duplication of the section 3503 of the Affordable Care Act criteria for four or more 

prescribed medications which could include OTC medications and dietary supplements, 

provided the beneficiary was taking at least 2 covered Part D drugs. However, we 

recognized that Part D sponsors would not have the ability to assess an enrollee's use of 

OTC medications or dietary supplements in order to determine MTM eligibility despite 

the RBRVS approach which suggests that beneficiaries may still experience drug therapy 

problems when they have only one chronic disease but take at least two medications, 

which could include OTC medications or dietary supplements. As a result, we solicit 

comments on alternative definitions for "multiple Part D drugs," including what 

minimum number of medications is appropriate for MTM targeting. 

c. Annual Cost Threshold 

 The Congress did not impose any specific requirements with respect to the cost 

threshold at the time the MTM criteria were passed in to law, nor has it addressed this 

threshold in any of the subsequent amendments to section 1860D-4(c)(2) of the Act. 

When we first established the requirements regarding MTM programs, we recognized 

that cost alone was not the best indicator of those that could benefit most from MTM. 

Indeed, in our January 2005 final rule entitled, "Medicare Prescription Drug Benefit" 
 147 

(70 FR 4282), we stated that cost might not be the best proxy for identifying patients that 

could benefit most from MTM. Nevertheless, in an attempt to identify a manageable 

population at the start of the program, we believed that individuals with the highest costs 

were more likely to be suffering from more chronic conditions and taking more Part D 

medications. Therefore, we believed that setting a cost threshold that would limit MTM 

programs to the individuals with the highest costs would increase the likelihood that 

MTM services would be provided to those individuals that could benefit most (because 

those individuals were likely to be at greater risk for improper medication use and 

adverse drug events). Thus, although it was set in subregulatory guidance, we 

established the initial $4000 cost threshold at the inception of the Part D program. 

 As discussed in our April 2010 final rule entitled, "Policy and Technical Changes 

to the Medicare Advantage and Medicare Prescription Drug Benefit Programs" 

(75 FR 19776), following an analysis of plan reported data, we found that only 10 percent 

of beneficiaries enrolled in a Part D plan with an approved MTM program were eligible 

for MTM services in 2006 and only13.1 percent were eligible for MTM services in 2007. 

 In 2008, we conducted an analysis of beneficiary drug costs using Prescription Drug 

Event (PDE) data from contract years 2006 and 2007 obtained from the Integrated Data 

Repository (IDR) system. As part of this analysis, the total gross drug cost and number 

of beneficiaries that incurred annual drug costs (below) or (greater or equal to) the $4000 

cost threshold was determined. The average number of PDEs and average costs per 

beneficiary were also calculated. Further analysis examined cost breakouts in $500 

increments to determine the distribution of beneficiaries, as well as the number of fills, 
 148 

and gross drug cost for beneficiaries with annual drug costs in each of these categories. 

We determined that close to 25 percent of Part D enrolled beneficiaries with drug 

utilization (beneficiaries with at least one PDE during the study period) during 2006 and 

2007 had annual gross drug costs of at least $3,000. Therefore, we lowered the cost 

threshold to $3,000 in the 2010 Call Letter. Based upon our analysis of the more recent 

data in 2010, we concluded that this threshold would ensure that approximately 

25 percent of the beneficiaries using the Part D benefit would receive MTM services, and 

we codified the $3,000 threshold, as updated annually by the annual percentage increase 

in the average per capita aggregate expenditures for Part D drugs for Part D eligible 

individuals under § 423.104(d)(5)(iv) in the April 2010 final rule entitled, "Policy and 

Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit 

Programs" (75 FR 19818). The threshold is currently $3,144 in 2013. 

 However, the use of lower cost generics has been increasing since the Part D 

program began, so the application of this threshold may exclude many beneficiaries who 

are in need of MTM services. We believe this increase in the use of lower cost generics 

may contribute to low MTM program enrollment rates which currently hover around 

8 percent, and may also be a driver in racial disparity in MTM program enrollment. 

Additionally, prior work, including the RBRVS approach described previously, assigns 

relative risk of needing MTM services using the number of indications that an individual 

has and the number of medications that he or she is taking, but does not address a cost 

threshold. Consequently, we are concerned that there are a number of beneficiaries who 

need MTM, but are not currently eligible because they do not meet the current cost 
 149 

threshold of $3,144, despite the increased likelihood of having drug therapy problems as 

a result of having multiple chronic diseases and taking multiple medications. Moreover, 

the current cost threshold may have the unintended consequence of causing beneficiaries 

to no longer qualify for MTM services in the next plan year (whether remaining in the 

same plan or enrolling into a new plan) if they fall below the cost threshold as a result of 

their enrollment in plans that employ cost avoidant strategies, such as aggressive use of 

generics, or in MTM programs that center on therapeutic interchange. 

 Consistent with our proposal that sponsors must target enrollees taking two or 

more Part D covered drugs for MTM services and taking into account that one or more of 

these Part D drugs are likely to be generics, we propose setting the annual amount in Part 

D drug costs at an amount that represents the intersection of multiple conditions and 

multiple drugs. Based on an analysis of PDE data, the average cost of a generic 

prescription is $25.85. Because a very small percentage of prescriptions are for more 

than 30 days, we assume that this amount is the average cost for a 30-day generic 

prescription. Thus, the annual total drug cost for a beneficiary filling two generic 

prescriptions is $620.40. Accordingly, consistent with our proposal to determine a cost 

threshold that is commensurate with the drug spending of beneficiaries that meet the first 

two criteria regarding multiple conditions and use of multiple covered Part D drugs, we 

would set the cost threshold at $620, which is the approximate cost of filling two generic 

prescriptions. We propose to revise this number periodically to reflect more up-to-date 

information regarding the drug spending of beneficiaries that have two or more chronic 

conditions and use two covered Part D drugs. We remind sponsors that the drug costs 
 150 

used to determine if the total annual cost of a beneficiary's covered Part D drugs is likely 

to equal or exceed the specified annual cost threshold for MTM program eligibility 

includes the ingredient cost, dispensing fee, sales tax, and vaccine administration fee, if 

applicable. Because the statute requires that plans target beneficiaries who "are identified 

as likely to incur annual costs for covered Part D drugs that exceed a level specified by 

the Secretary," we encourage sponsors, as most do now, to project annual costs for a 

beneficiary based on costs from the preceding month or quarter. 

 We took a number of factors into consideration in deciding to propose lowering 

the annual threshold to a level commensurate with the drug spending of beneficiaries 

with multiple chronic diseases taking two covered Part D drugs. Doing so promotes 

consistency among Part D plans relative to the three eligibility criteria set forth in the 

statute by factoring multiple conditions and multiple Part D drugs into how the cost 

threshold is set. We know now that patients with multiple conditions and taking multiple 

drugs have a higher probability of having at least two drug therapy problems and could 

benefit from MTM. More beneficiaries are using lower cost generic alternatives and no 

longer meet the current cost threshold, which is over $3,000, and studies have found that 

the current cost threshold may promote racial disparities in MTM eligibility. 

 Based on an analysis of 2011 PDE data and 2011 RxHCCs from the Risk 

Adjustment system, approximately 60 percent of Part D enrollees have two or more 

chronic diseases were taking two or more Part D drugs and incurred drug costs greater 

than or equal to $500. We found that 50 percent of Part D enrollees have two or more 

chronic diseases, were taking two or more Part D drugs, and had drug costs of greater 
 151 

than or equal to $1000. Therefore, we estimate that approximately 55 percent of Part D 

beneficiaries will be eligible for MTM based on the proposed criteria (two or more 

chronic diseases, two or more Part D drugs, and likely to incur $620 in annual Part D 

drug costs). 

 The CMMI MTM study found that high-performing MTM programs not only 

improved drug therapy outcomes but also maintained or lowered rates of hospitalizations, 

ER visits, and associated costs. Therefore, more of the Part D population can benefit 

from MTM services and these programs can potentially positively impact the Medicare 

program as a whole through improved medication use and lower healthcare costs. As a 

result of this, we no longer believe that it is appropriate to target only 25 percent of the 

Part D populations, and only those beneficiaries with high drug costs. This is consistent 

with our view in our January 2005 final rule where we stated that we believe that MTM 

must evolve and become a cornerstone of the Medicare Prescription Drug Benefit. We 

also intend that the Medicare Prescription Drug Benefit will serve as a model for 

achieving quality improvement in prescription drug therapy. 

 Although we are proposing to set the annual threshold at a level that is 

commensurate with the drug spending of beneficiaries with two or more chronic diseases 

that use two covered Part D drugs, we considered other alternatives. For example, we 

considered setting the threshold at $900 or $1200, which roughly coincide with cost 

thresholds achieved by taking three or four generic drugs. We solicit comment, based on 

industry and MTM provider experience, on where this threshold might be alternatively 

set. 
 152 

 Although we are proposing to broaden MTM eligibility, we also believe there are 

special populations of beneficiaries for whom broader targeting criteria will not 

adequately address barriers they may face to receiving MTM services. The CMMI MTM 

study found that effective MTM programs establish proactive and persistent CMR 

recruitment efforts. These programs also utilize trusted community relationships, 

including networks of community pharmacists, to recruit MTM eligible candidates as 

well as existing working relationships between MTM providers (pharmacists) and 

prescribers to make recommendations and discuss identified problems for patients. 

Trusted community relationships are an important tool that can be leveraged to reduce 

disparities in access to MTM services, and other health disparities in general, faced by 

some special populations of beneficiaries. 

 For example, LIS-enrollees are a diverse group and are more likely than other 

Medicare enrollees to have a high burden of disability and chronic disease, to have 

limited English proficiency, and to belong to a racial or ethnic minority group. Although 

LIS-eligibility is not a perfect indicator for the social determinants of health faced by 

those with limited English proficiency or belonging to racial or ethnic minorities, it is 

true that those with limited English proficiency, and those belonging to racial and ethnic 

minorities are more likely than other Medicare enrollees to be poor. Because this 

financial status is frequently compounded by a variety of barriers to accessing health 

insurance and care, these beneficiaries generally have a higher burden of disability and 

chronic disease. As discussed previously, the use of utilization-based criteria to target 

at-risk individuals who may not, as a result of cultural norms or preferences, be high 
 153 

utilizers of health care services is particularly troubling. This comes in spite of evidence 

in treatment guidelines which suggests that they may need targeted outreach. Such 

criteria may also miss other high-risk individuals who use multiple low-cost generic 

drugs that present a safety risk without reaching a cost threshold. More of these 

beneficiaries will be eligible for MTM services due to the revised criteria that we are 

proposing in this rule. However, there are currently no requirements under our 

regulations that Part D plans ensure that beneficiaries in these special populations receive 

focused outreach or engagement to increase their participation in MTM. 

 Chronic disease and disability are common in the LIS population. More than 

80 percent of Part D enrollees who had spending high enough to reach catastrophic 

coverage were LIS enrollees. Additionally, the reassignment process can present 

additional challenges for LIS enrollees such as new formularies, requirements for prior 

authorizations, step therapy, or quantity limits, processes for exceptions, appeals, and 

grievances, and contacting their plan. This makes it more challenging for LIS enrollees 

to maintain access to their drugs. Further, pharmacists at the point of sale frequently 

spend a great deal of time with and on behalf of these enrollees as they face formulary 

changes. This, in turn often generates high levels of frustration for the enrollee, as he or 

she waits for the pharmacist to resolve the issues, as well as for the pharmacist, as the 

effort required to assist the customer approaches the level of service furnished in MTM, 

but remains uncompensated. 

 Challenges faced by LIS enrollees in the Part D program are exacerbated for those 

with limited English proficiency or who belong to a racial or ethnic minority. For 
 154 

example, translators and multi-language inserts currently required may not be adequate to 

address the cumulative effects of race and ethnicity, lower levels of education, and 

poverty that are frequently associated with individuals with limited English proficiency. 

Moreover, messages conveyed by such approaches may not be consistent with an 

individual's underlying cultural beliefs and attitudes about medicine and therapy. 

 Another example involves the Indian Health Service, which is staffed by many 

health care providers in the United States Public Health Service and bears primary 

responsibility for caring for American Indians and Alaska Natives. The Indian Health 

Service is comprised of facilities operated by the Indian Health Service, tribes or tribal 

organizations pursuant to the Indian Self-Determination and Education Assistance Act, 

and urban Indian organizations pursuant to title V of the Indian Health Care 

Improvement Act. When the majority of American Indians and Alaska Natives live 

outside reservation land, where most IHS/tribal facilities are located, barriers in access to 

care are seen in both rural and urban landscapes, where there is limited availability of 

providers or limited offering of services, respectively. Transportation to IHS/tribal 

facilities may be a barrier and, the PharmPAC report also indicates that the 

patient-perceived benefit of paying monthly premiums, in light of 100 percent coverage 

of health care expenses for eligible patients, may also reduce participation in MTM 

services. The PharmPAC report goes on to state that the Public Health Service Pharmacy 

program has apprehension about contracting with Part D plans offering MTM programs 

because limited compensation by Part D plans for MTM services is not cost-effective to 

implement on a national scale. 
 155 

 We believe that the difficulties faced by special populations of beneficiaries 

represent important opportunities for robust MTM services that, when associated with 

early completion of CMRs, will help beneficiaries navigate the reassignment process, 

better reward pharmacists for the level of effort needed to serve these beneficiaries, and 

provide another option for sponsors to manage high cost beneficiaries. We have 

previously discussed the impact of one-to-one counseling by State Health Insurance 

Assistance Programs, and a growing body of evidence indicates that the person-to-person 

aspect of MTM (including through the use of telehealth technologies) has the potential to 

yield multiple benefits that warrant more effective outreach by sponsors to LIS 

beneficiaries and those with limited English proficiency or who belong to a racial or 

ethnic minority. As we see with the proportion of LIS-eligible-but-unenrolled 

beneficiaries who have to apply to qualify for subsidies, generalized attempts at outreach 

are not sufficient to increase enrollment. Because of the wide variety in social 

determinants that contribute to barriers in access to coverage and care, individualized 

approaches to target populations such as LIS-eligible, limited English proficiency, racial 

and ethnic minorities, including American Indians and Alaska Natives, within the larger 

MTM-eligible population will likely require a multi-faceted approach. Thus, the opt-out 

method of enrolling targeted beneficiaries into MTM at § 423.153(d)(1)(v) may only 

partly address the increased barriers to care faced by this group. 

 We are concerned that such social determinants contribute to persistently low 

MTM enrollment and participation despite attempts to broaden the criteria. As we have 

gained more experience with the MTM programs, we have become concerned with the 
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number of simplistic, generalized strategies that have been implemented for delivering 

MTM services. We believe that Part D sponsors' strategies for outreach and service 

provision cannot be "one size fits all" and must be appropriately geared to social and 

demographic subpopulations within the overall targeted population in order to be 

effective. As discussed previously, the CMMI MTM study identified that 

high-performing MTM programs engage in multi-pronged, persistent efforts to recruit 

Medicare beneficiaries to CMRs and often use effective and diverse communication 

modalities such as person-to-person interactions, phone calls, or community contacts 

(through networks of trusted community pharmacists), if needed. Moreover, as 

illustrated in the example of the Indian Health Service, this may also include negotiating 

rates more acceptable to MTM providers that beneficiaries perceive as more accessible 

and trustworthy. 

 Consequently, we are interpreting section 1860D-4(c)(2)(D) of the Act, which 

requires plans to have in place a process to assess medication use of individuals who are 

at-risk but not enrolled in MTM, to require Part D sponsors to establish effective 

strategies that ensure access to MTM services for all eligible beneficiaries. The statutory 

requirement to assess the medication use of at risk beneficiaries should encompass the 

requirement that plan sponsors better address barriers in access to MTM services and 

improve participation rates, particularly at the start of enrollment in the plan, faced by 

those with limited English proficiency, those who belong to racial and ethnic minorities, 

or who are LIS enrollees. Without being prescriptive about what strategies must be 

employed, we are proposing that sponsors develop an effective strategy to ensure access 
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to services for all MTM-eligible beneficiaries, including those who have disabilities or 

who have limited English proficiency. Specifically, we propose to revise 

§ 423.153(d)(1)(v) to include the requirement that a Part D sponsor must "have an 

outreach strategy designed to effectively engage all at-risk beneficiaries enrolled in the 

plan." 

 Sponsors have previously commented to us that they have difficulty reaching 

many individuals in these special populations because of inconsistent or incorrect contact 

information. While this certainly presents an added challenge, plan sponsors could, for 

example, analyze fill data, and partner with pharmacies they know that a particular 

beneficiary or populations of beneficiaries frequent. Incorporating the pharmacies that 

targeted individuals utilize into the MTM program may be a particularly effective 

strategy for successful outreach that will lead to enrollment in MTM programs that is 

more broadly representative of the breadth of demographic segments in the targeted 

population. We believe that current plan reporting requirements, along with other CMS 

data sources, will be sufficient for us to evaluate the impact of such strategies. We solicit 

stakeholder comment on other important strategies that might prove successful in 

improving access to MTM services which could be considered at a later time. This 

proposed rule may be of interest to, and affect, American Indians/Alaska Natives. 

Therefore, we plan to consult with Tribes during the comment period and prior to 

publishing a final rule. We also intend to monitor best practices as sponsors implement 

more effective strategies and may consider imposing additional requirements in future 

rulemaking. 
 158 

 In summary, we are proposing revisions to the MTM eligibility criteria to target 

beneficiaries who have two or more chronic conditions, with at least one being a core 

chronic disease, who are taking two or more covered Part D drugs, and who have annual 

Part D drug costs commensurate with the drug spending of beneficiaries with two or 

more chronic diseases that use two covered Part D drugs. By decreasing the number of 

chronic diseases and medications and lowering the cost threshold for MTM eligibility, 

we anticipate that more beneficiaries will have access to MTM services which have been 

shown to improve drug therapy outcomes and decrease healthcare costs. We believe that 

these changes will simplify the MTM criteria and minimize beneficiary confusion when 

choosing or transitioning between plans. We believe these changes will also reduce 

disparities within the Part D beneficiary population and allow more beneficiaries with 

drug therapy problems to receive MTM. Additionally, broadened criteria, when paired 

with more effective strategies for outreach and access to MTM services, will more 

appropriately reach those individuals in need of these services. We remind sponsors that 

these proposed changes represent the minimum requirements, and that they may target 

additional beneficiaries. Effective MTM programs strengthen the Part D program and 

improve its overall value and, we note, our 5-star plans have consistently made 

significant investments in MTM. 

16. Business Continuity for MA organizations and Part D Sponsors (§ 422.504(o) and 

§ 423.505(p) 

A variety of events ranging from power outages to disasters and warnings of 

disasters can disrupt normal business operations, and when these events occur it is 
 159 

important to ensure beneficiary access to health care services and drugs. Sections 

1852(d) and 1860D-4(b) of the Act, respectively applicable to Parts C and D, establish 

access to services and covered Part D drugs as a core beneficiary protection. After 

Hurricane Sandy it became apparent that a few entities, particularly those with 

operational centers and/or information technology (IT) resources physically located in the 

affected areas, did not have consistent continuity plans or back-up systems and processes 

to ensure ongoing coordinated deployment of critical staff to alternate locations. 

Sections 1857(e)(1) and 1860D-12(b)(3)(D) of the Act authorize the Secretary to 

adopt additional contract terms for, respectively, MA organizations and Part D sponsors, 

including section 1876 cost contracts and Program for the All-Inclusive Care for the 

Elderly (PACE) organizations that provide qualified prescription drug coverage, that are 

not inconsistent with Parts C and D, respectively, of Title XVIII of the Act, when the 

Secretary finds it necessary and appropriate. Hereafter, all proposed requirements 

described in this section as applicable to Part D sponsors, also apply to section 1876 cost 

contract and PACE organizations that provide qualified prescription drug coverage. 

While a limited number of beneficiaries were affected by problems on the part of a small 

number of entities as a result of Hurricane Sandy, the goal of consistent disaster response 

remains: all MA organizations and Part D sponsors must limit the beneficiary impact of 

unavoidable disruptions and must ensure rapid restoration of operations. Accordingly, we 

propose to add contract provisions to require that MA organizations and Part D sponsors 

develop and maintain business continuity plans in order to better anticipate the types of 

disruptions that could occur and then implement policies and procedures to reduce 
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interference with business operations. We believe this is appropriate to ensure that 

Medicare beneficiaries have access to the care and coverage contemplated by the statute. 

The proposed provision would, in § 422.504(o)(1) and § 423.505(p)(1), require 

that every MA organization and Part D sponsor develop, maintain, and implement a 

business continuity plan that meets certain minimum standards. In § 422.504(o)(1)(i) and 

§ 423.505(p)(1)(i), we propose that the business continuity plan must assess risks posed 

to critical business operations by disasters and other disruptions to business as usual, be 

they natural, human, or environmental. Proposed § 422.504(o)(1)(ii) and 

§ 423.505(p)(1)(ii) would impose a requirement that the business continuity plan contain 

a mitigation strategy to lessen hazards, identify essential functions, and prioritize the 

order in which functions are restored to normal operations; proposed paragraphs (1)(iii) 

through (v) contain other minimum requirements for the business continuity plan, 

discussed in more detail in the following paragraphs. In paragraphs (o)(2) of § 422.504 

and (p)(2) of § 423.505, we propose essential functions that must be restored within 24 

hours of a failure, disaster, emergency, or other disruption. 

In paragraph (1)(ii) of § 422.504(o) and § 423.505(p), we would require MA 

organizations and Part D sponsors to mitigate those risks through a variety of strategies, 

specifically, by: (A) identifying events (triggers) that would activate the business 

continuity plan; (B) developing plans to maintain the availability and, as applicable, the 

confidentiality of hard copy and electronic essential records, including a disaster 

recovery plan for IT and beneficiary communication systems; (C) establishing a chain of 

command, which would ensure that employees know the rules of succession; (D) creating 
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a communications plan that includes emergency capabilities and means to communicate 

with employees and third parties; (E) establishing procedures to address management of 

space and transfer of employee functions; and (F) establishing a restoration plan with 

procedures to transition back to normal operations. Finally, we also propose, at (1)(ii)(G) 

in § 422.504(o) and § 423.505(p), that the business continuity plan comply with all 

applicable federal, state, and local laws. In light of the nature of the records an MA 

organization and Part D sponsor would have in its possession, we propose to emphasize 

continuing compliance with the contingency plan requirements of the Health Insurance 

Portability and Accountability Act of 1996 (HIPAA) Security Rule (45 CFR Parts 160 

and 164, Subparts A and C) by including a cross-reference to those requirements in 

paragraph (1)(ii)(B)(2). These areas of responsibility are essential to continuing the 

business operations that allow beneficiaries to access health care services and covered 

Part D drugs. 

To better ensure that a business continuity plan works as a practical matter, we 

next propose in § 422.504(o)(1)(iii) and (iv) and § 423.505(p)(1)(iii) and (iv) to require 

that on an annual basis, each MA organization and Part D sponsor test and revise the plan 

as necessary, and train employees on their responsibilities under the plan. Sections 

422.504(o)(1)(v) and 423.505(p)(1)(v) would require that MA organizations and Part D 

sponsors keep records of their business continuity plans that would be available to CMS 

upon request. 

We do not believe the broad list of areas that we propose be covered by business 

continuity plans are new to MA organizations and Part D sponsors. Rather, these topics 
 162 

typically appear in standard business continuity plans. And we are also building on some 

requirements that already exist under federal and state laws. For instance, with respect to 

electronic protected health information, health plans have long had to comply with the 

contingency plan requirements found in the HIPAA Security Rule. Indeed, our goal is to 

provide a list broad enough to align with the business contingency plans that we believe 

most, if not the vast majority, of MA organizations and Part D sponsors already have in 

place. 

In contrast to the aforementioned list of broad content requirements, we believe 

the need to protect beneficiary access requires a prescriptive approach for some 

functions. In paragraphs (o)(2) and (p)(2), as part of the proposal that essential functions 

must be restored within 24 hours of failure (whether due to disaster, emergency, or other 

disruption), we identify what we believe are the minimum essential functions for each 

MA plan and Part D plan: benefit authorization, if authorization requirements have not 

been waived, and claims adjudication and processing; an exceptions and appeals process; 

and call center operations. Given the mandate of the Act to ensure beneficiary access to 

health care and covered Part D drugs and the inability of many beneficiaries to pay for 

services or drugs without the Medicare benefit, we believe that the operations listed in 

the proposed regulations are the most essential operations because they directly support 

the provision of Part C and D benefits. They ensure immediate electronic 

communication on the availability and extent of Part C and D benefits and also provide 

support that makes it more likely that Medicare benefits will be appropriately and timely 

provided (for example, by providing telephone assistance to beneficiaries with questions 
 163 

on how to obtain benefits and maintaining a forum in which beneficiaries can challenge 

benefit denials). Without real time provision of Medicare benefits, beneficiaries might 

not pay for the entire cost of the services or drugs and therefore go without necessary 

treatment. 

We believe the operations listed here are the essential operations which must be 

restored in a rapid time frame. We intend our proposed deadline of 24 hours to be the 

outside limit and would expect MA organizations and Part D sponsors to restore 

operation of essential functions as soon as possible but not later than 24 hours after they 

fail or otherwise stop functioning as usual. The clock would begin running in cases of 

total failure (for example, a computer or telecommunications system crashes or stops 

working after disruption of the power supply) and also when significant problems occur 

(for example, a central database is corrupted). 

The need to ensure correct claims adjudication and benefit administration of 

health care services and drugs is no less acute during emergencies. A disaster or other 

disruption in one part of the country may disable computer systems that service areas 

across the country that have not otherwise been disrupted. Beneficiaries in those 

unaffected areas who were denied health care or drug benefits (that is, access to drugs or 

reimbursement for claims paid out of pocket) before the disruption took place should not 

be denied the right to immediately challenge those denials or to learn timely the 

resolution of earlier challenges. As proposed, § 422.504(o)(2)(i) and § 423.505(p)(2)(i) 

identify benefit authorization (if authorization requirements have not been waived) and 

claim adjudication and processing as essential functions which must be operational 
 164 

within 24 hours. We intend that this proposed regulation would require restoration of 

those operations for services rendered at a hospital, clinic or provider office or at the 

point of sale for Part D covered drugs. This function is essential for both Medicare 

Advantage and Part D plans. 

In addition, we also propose standards specific to Part D sponsors in 

§ 423.505(p)(2)(ii) and (iii) to ensure that a beneficiary who presents at a pharmacy with 

an appropriate prescription for a covered Part D drug during a disruption will be more 

likely to walk away with the drug in hand. The first three prongs under proposed 

§ 423.505(p)(2) would classify as essential the following functions: (i) authorization, 

adjudication and processing of pharmacy claims at the point of sale; (ii) administration 

and tracking of enrollee's drug benefits in real time, including automated coordination of 

benefits with other payers; and (iii) provision of pharmacy technical assistance. These 

essential tasks entail numerous sub-functions. For instance, Part D sponsors would need 

to restore within the 24 hour return to operations (RTO) all computer and other systems 

that meet all privacy and security requirements in order to communicate to pharmacies 

information about topics including: coverage under Part D and the specific plan; 

cost-sharing and deductibles; any restrictions such as prior authorization, step therapy, or 

quantity limit edits; and coordination of benefits from other insurers and any low income 

subsidies. Additionally, the sponsor would need to undertake a concurrent drug 

utilization review (DUR) to address, for instance, safety issues, as well as restore its 

pharmacy help desk to provide prompt answers to any questions pharmacies might have. 

(For more detail on some of these functions and sub-functions, as related to Part D, 
 165 

please see the preamble to section III. A. 17 of this proposed rule entitled, "Requirement 

for Applicants or their Contracted First Tier, Downstream, or Related Entities to Have 

Experience in the Part D Program Providing Key Part D Functions".) 

Proposed § 422.504(o)(2)(ii) and § 423.505(p)(2)(iv) would classify as an 

essential operation an enrollee exceptions and appeals process including coverage 

determinations. Under this provision, within 24 hours of failure, MA organizations and 

Part D sponsors would need to restore all IT and workforce support necessary to maintain 

the "safety net" that ensures beneficiaries the right to appeal or to seek a formulary 

exception. 

Finally, for both MA organizations and Part D sponsors, we propose that the 

operation of the call center be an essential function which must be restored within 24 

hours. By classifying operation of the call center as essential, proposed 

§ 422.504(o)(2)(iii) and § 423.505(p)(2)(v) would ensure that beneficiaries can receive 

the information necessary to find out where they need to go to access benefits and learn 

about any special rules that might apply (for example, whether pre-authorization 

requirements are waived or beneficiaries can obtain benefits at out-of-network providers 

or pharmacies) by requiring MA organizations and Part D sponsors to restore operation 

of call center services within 24 hours. Enabling a beneficiary who has just been denied 

Part D coverage at his or her usual pharmacy to call immediately and speak to a customer 

service representative while still standing in that pharmacy can ensure that he or she 

obtains drugs appropriately covered by his or her Part D plan before returning home or 

moving to a safer area. 
 166 

Furthermore, because it may be difficult during a disaster to get to a provider's 

office or a pharmacy, we believe it is also important that benefit authorization, claims 

adjudication, and call center operations be restored within 24 hours after failure. While 

our proposed provision would require MA organizations and Part D sponsors to 

coordinate their workforce, facilities, and IT and other systems support to meet the 24 

hour RTO, we believe that the vast majority of MA organizations and Part D sponsors 

already meet, or if not, would be able to meet this requirement with their current 

resources, based upon our knowledge of the industry and as evidenced by the lack of 

widespread problems with MAO and Part D operations that resulted after recent natural 

disasters in different parts of the country. MA organizations and Part D sponsors would 

not be required to take any prescribed actions (for example, there is no requirement for 

redundant systems located at certain distances apart). Rather, the 24 hour RTO would 

allow MA organizations and Part D sponsors the flexibility to continue to seek their own 

disaster preparedness solutions (for instance, vendor sites or functions spread across 

facilities). 

Our goal in proposing a contractual requirement for business continuity plans is to 

ensure beneficiary access to health care services and Part D drugs during disasters and 

other interruptions to regular business operations. We view prior planning as essential to 

achieving this goal. We specifically solicit comments regarding which functions should 

be identified as essential operations and the 24-hour timeframe for RTO and would 

appreciate any information unique to the role of MA organizations and Part D sponsors. 
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17. Requirement for Applicants or their Contracted First Tier, Downstream, or Related 

Entities to Have Experience in the Part D Program Providing Key Part D Functions. 

(§ 423.504(b)) 

 Since its establishment in 2006, the Medicare Part D program has matured into a 

generally stable, well functioning program, and the Part D sponsors (as well as their first 

tier, downstream, and related entities (FDRs)) with which CMS contracts have developed 

vast expertise in the operational complexities of the program. While we will continue to 

fine tune the program through rulemaking, guidance, and additional oversight 

procedures, we believe the program has largely entered a mature stage. Despite this 

progress, we still find ourselves spending a disproportionate amount of resources and 

attention on the operations of new Part D sponsors where neither the new sponsor nor its 

supporting FDRs have experience with Part D. In an environment where there is an 

abundance of Part D industry expertise, we are committed to establishing an approach to 

contracting with new Part D sponsors that ensures that they take advantage of that 

expertise and experience in the development of their Part D program operations. 

 To address this problem, pursuant to our authority at section 1860D 12(b)(3)(D) 

of the Act to adopt additional contract terms, not inconsistent with the Part C and D 

statutes, that are necessary and appropriate to administer the Part D program, we are 

proposing to adopt provisions that would require any entity seeking to contract as a Part 

D plan sponsor (as a stand alone prescription drug plan sponsor or as a Medicare 

Advantage organization offering Part D benefits) to have arrangements in place such that 

either the applicant or one of its contracted FDRs has one full benefit year serving as a 
 168 

Part D plan sponsor, or at least one full benefit year of experience performing key Part D 

functions for another Part D plan sponsor. The applicant or a contracted FDR will be 

required to have obtained that experience within the two years preceding the Part D 

sponsor qualification application submission. Under this proposal, the experience 

requirement would be met by an entity seeking to contract as a Part D plan sponsor if its 

parent or another subsidiary of that parent already holds a Part D sponsor contract that 

has been in effect for at least one year at the time of the application submission. 

 Of course, all applicants and their FDRs were new to the Part D program in 2006, 

so we necessarily went forward with partners that may have had significant drug benefit 

administration experience, but no experience with the unique features of Part D. In 2014, 

there will be approximately 310 parent organizations that own 578 legal entities offering 

881 contracts for Part D. In addition, more than 300 organizations (including Part D 

sponsors and their FDRs) perform key Part D functions on behalf of the Part D sponsors. 

Given this large number of organizations with Part D experience available to serve 

beneficiaries, we believe it is in the Part D program's best interest to be more 

discriminating about the entities with which we partner to deliver the Part D benefit. 

 New, inexperienced entities may be more likely to fail in all or some key Part D 

functions, causing harm to beneficiaries and requiring us to devote significant resources 

providing technical support to the new Part D sponsor in order to protect the Medicare 

beneficiaries enrolled in the sponsor's plan(s). Given the wealth of available Part D 

expertise that now exists, it is justifiable for us to require that new applicants to the 

program bring with them Part D experience so that we can better protect Part D enrollees 
 169 

and minimize unnecessary expenditures of resources by us in correcting avoidable 

problems. 

 We have determined that prior experience offering drug benefits in the 

commercial insurance or Medicaid markets is no longer a sufficient substitute for 

experience operating the Part D benefit. The Medicare drug benefit is fundamentally 

different from other drug benefits, with unique and operationally complex provisions, 

including transition fill requirements, protected class medication formulary requirements, 

low income subsidy administration, Part A and B versus Part D coverage determinations, 

requirements related to the tracking of true out of pocket costs, and requirements related 

to the coordination of benefits with other payers in real time. When neither a Part D 

sponsor, nor its FDRs providing key Part D functions, has any experience delivering Part 

D benefits, the consequences can be disastrous for beneficiaries and highly disruptive for 

the program and CMS. In a recent plan year, we placed a new PDP sponsor, where 

neither it nor its FDR had PDP experience, under an immediate enrollment and marketing 

sanction just months after the organization began its PDP operations. The sponsor had 

experienced widespread failures across all of the most important PDP operational areas 

and was unable to fix its problems without hiring additional staff and contractors with 

PDP experience. In this case, among other deficiencies, this sponsor had inappropriately 

rejected drug claims at the point of sale; failed to properly process coverage 

determinations (that is, requests for drug coverage or payment and reimbursement); 

denied enrollees the chance to appeal rejected claims and failed to ensure that denied 

coverage determinations were reviewed by an independent third party; and failed to 
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process enrollment and disenrollment requests, or failed to properly process enrollment 

transactions. In short, the PDP sponsor was not providing the PDP benefit to its 

members. This became obvious when the rate at which we received beneficiary 

complaints about the sponsor for the first 4 months of operation was more than 225 

percent higher than the average rate at which we received complaints about all other PDP 

sponsors for the same period. We were forced to dedicate significant resources and 

personnel to addressing the sponsor's systemic failures. 

 We believe that these failures would not occur, or would be less catastrophic, if 

either the Part D sponsor or its supporting FDRs have had experience actually performing 

key Part D functions. When both the new sponsor and its FDRs lack experience in Part 

D, there is no source of Part D expertise associated with the operation of a Medicare 

contract that could be counted on not only to establish and maintain systems that would 

ensure the effective delivery of the drug benefit, but also to identify emerging operational 

problems and promptly develop and implement necessary corrective action plans. Thus, 

we have found that the marriage of Part D novices under a single contract has proven to 

be a particularly risky and disruptive combination. 

 At the heart of the Part D benefit is the sponsor's ability to process claims for 

prescription drugs in real time because, unlike health benefits, where claims payment 

normally follows the delivery of services, pharmacies require confirmation of claims 

payment at point of sale either from an insurer or payment from the individual. While 

there are many operational functions that must run smoothly for a Part D plan to be 

successful (for example, pharmacy network development/maintenance, enrollment 
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processing, prescription drug discount negotiation, and provision of customer service), 

we are proposing to require Part D experience in only three critical areas in which 

beneficiaries are particularly vulnerable should the sponsor demonstrate significant non 

compliance. We believe limiting our new requirement proposal to just three targeted 

areas offers a balanced approach which protects beneficiaries while at the same time 

provides needed flexibility to new sponsors to structure their business arrangements to 

address the dozens of other Part D functions. The three areas for which we are proposing 

to require prior experience in Part D at the time of application to become a new Part D 

sponsor are 

● (1) Authorization, adjudication and processing of pharmacy claims at the point 

of sale; 

● (2) Administration and tracking of enrollees' drug benefits in real time, 

including automated coordination of benefits with other payers; and 

● (3) Operation of an enrollee appeals and grievance process. 

 It is in these three areas where – in our view, based on our experience with Part D 

 enrollee health is placed at the most significant risk by Part D sponsor compliance 

failures. Further, our audit work has indicated that these are the operational areas where 

sponsors are most likely to have significant failures that require immediate corrective 

action. While other areas, like enrollment processing, also present risks of direct 

beneficiary harm, our experience has shown that organizations usually can overcome 

enrollment problems in a manner that minimizes direct beneficiary harm fairly quickly. 

Also, our audit findings have shown far fewer serious problems in the enrollment area 
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compared to the three selected areas (see http://www.cms.gov/Medicare/Compliance and 

Audits/Part C and Part D Compliance and Audits/Downloads/2012 Part C Part D 

Program Audit Annual Report .pdf). 

 Authorization, adjudication and processing of pharmacy claims at the point of 

sale are the most basic features of the Part D program, allowing Part D plan enrollees to 

have their prescriptions filled at the pharmacy counter. When presented with a 

prescription by a beneficiary, the pharmacy communicates electronically with the Part D 

sponsor to determine eligibility, coverage, and cost sharing for the item according to the 

formulary and benefit structure of the plan in which the beneficiary is enrolled. Aspects 

of eligibility and coverage unique to Part D include eligibility for the Low Income 

Subsidy and transition benefits. Assuming that the sponsor informs the pharmacy that 

the prescribed drug is covered under the beneficiary's plan, the pharmacy charges the 

beneficiary the appropriate cost share or deductible amount, as determined by the plan 

sponsor. The Part D sponsor also uses the online, real time system to conduct concurrent 

drug utilization review (DUR), a process through which pharmacists receive a message 

warning of potential safety issues given the drug requested and the patient's drug history. 

 If any of the cost sharing information is incorrect, or if the claim fails to adjudicate 

electronically for any reason, the beneficiary may be forced to pay out of his own pocket 

costs that are not his responsibility or leave the pharmacy without his prescription drugs. 

 If concurrent DUR is not performed correctly, the beneficiary's health and safety is at 

risk. 
 173 

 Administration and tracking of enrollees' drug benefits in real time refers to a Part 

D sponsor correctly adjudicating the formulary it had submitted to CMS and that had 

been approved by CMS, along with accurately tracking an enrollee's drug spend within 

the Part D benefit, and coordinating benefits in real time with other payers. Sponsors 

must insure that the drug dispensed meets the definition of a covered Part D drug, 

including a medically accepted indication that is not otherwise covered under Part A or B 

of Medicare. Sponsors must also insure that any approved prior authorization, step 

therapy, and quantity limit edits are processed consistent with those approved by us, so 

that drugs are not denied inappropriately at the point of sale. Sponsors are also required 

to insure that enrollees are charged correct cost sharing, as amounts vary depending on 

the drug's tier placement, the enrollee's drug spend to date, contributions from other 

payers, and other factors such as whether the beneficiary receives a low income subsidy. 

Critically, compliance also includes correct application of our transition requirements, 

which is a beneficiary protection that is unique to Part D, and ensures beneficiaries facing 

a situation where their drugs are not on the plan's formulary have access to a temporary 

fill of the prescription, giving beneficiaries time to switch to another drug or seek a 

formulary exception. Failures in this area can have significant negative health 

consequences for enrollees because they are likely to be denied access to Part D drugs or 

face incorrect charges at the point of sale. 

 The third key function we selected as part of the experience requirement is 

operation of an enrollee appeals process (including coverage determinations). A 

sponsor's appeals operations serve as a "safety net" for improper benefits administration. 
 174 

Medicare enrollees have the right to contact their sponsor to make a complaint about the 

denial of coverage for drugs or services to which the enrollee believes he or she is 

entitled. Generally, sponsors are required to classify and process complaints about 

coverage for drugs or payment as a request for a coverage determination or appeal. 

Improper processing of a coverage determination denies an enrollee their due process and 

appeal rights and may delay an enrollee's access to medically necessary, even life 

sustaining services or drugs. There are different decision making timeframes for the 

review of coverage determinations and appeals. We have a beneficiary protection in 

place that requires plans to forward coverage determinations and redeterminations to an 

Independent Review Entity (IRE) when the plan has missed the applicable adjudication 

timeframe. If the plan sponsor reverses its initial adverse coverage determination or the 

IRE reverses the plan sponsor's adverse decision, the plan sponsor must correctly 

authorize or provide the benefit under dispute within the timeframes set forth in 

regulation. If the plan sponsor does not effectuate the decision timely and correctly, this 

can result in delays to an enrollee's access to medically necessary or even life sustaining 

drugs. Thus, the appeals process is a vital beneficiary protection that serves as the 

beneficiary's safety net when something goes wrong with claims adjudication or benefit 

administration, and once again, directly affects a beneficiary's access to prescription 

drugs. 

 Under our proposal, multiple separate organizations could together combine their 

experience to meet the prior qualification requirements for the three key Part D functions. 

That is, no one single entity would need to have prior experience in all three areas. 
 175 

Rather, the requirement would be for the Part D applicant in combination with its FDRs, 

if any, to have Part D experience covering the three key functions. 

 We believe there will be minimal impact on the prescription drug benefit 

administration market stemming from our proposal, particularly since large numbers of 

experienced organizations currently perform this Part D work. Fifty nine entities 

currently perform authorization, adjudication and processing of pharmacy claims at the 

point of sale; 66 entities perform administration and tracking of enrollees' drug benefits 

in real time; and 203 entities operate an enrollee appeals and grievance process. The 

ready availability of entities that would meet the criteria we establish here is 

demonstrated by the fact that the vast majority of new Part D sponsors each year choose 

to contract with experienced Part D FDRs. For example, as of late May 2013, there are 

21 new organizations (at the parent level) with active Part D contract qualification 

applications for 2014, and each applicant has contracted with an FDR having at least one 

year of recent Part D experience. Some of the applicants for 2014 that attempted to apply 

with inexperienced entities performing the selected key functions withdrew their 

applications upon learning that they contained significant deficiencies. 

 Our proposal also does not prohibit additional organizations from gaining Part D 

experience in the selected key functional areas. Should an organization wish to become a 

new Part D FDR for one or more of the key functions, this "novice" entity could provide 

the service for just one of the hundreds of existing Part D sponsors. After a period of one 

year, the novice entity would then be qualified to provide its services to existing Part D 

sponsors as well as partner with new Part D applicants. We are comfortable with this 
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scenario because during the novice entity's first year gaining Part D experience the 

existing Part D sponsor would apply its knowledge of how to oversee its FDRs, have 

institutional knowledge of the functional area, understand the complexity of the program, 

and know the risks of failing to implement the program successfully. 

 In the somewhat the opposite scenario, a new Part D sponsor contracting with 

experienced FDRs will have the opportunity to gain its experience in the key Part D 

functions by working closely with its FDRs, developing in house expertise, and providing 

oversight. After a period of one or more years, if desired, the Part D sponsor itself could 

conceivably take responsibility for carrying out one or more of the key Part D functions. 

We fully believe that our proposed approach allows for new organizations to develop 

Part D expertise, yet minimizes the significant risk to beneficiaries that would be caused 

by the types of widespread failures we have seen in the selected key Part D functions 

performed by inexperienced entities. 

 While our proposal does not require the Part D experience to be current at the 

time of an application to become a Part D sponsor, we are proposing that the experience 

be recent (that is, within the past 2 years) and have lasted for at least one full benefit year. 

As stated previously, the Part D program is complex, and program policies evolve each 

year, requiring organizations working in Part D to adapt and adjust their operations. We 

believe that any experience older than 2 years would be out of date and would not 

represent experience with the current state of the Part D program. As for our proposed 

requirement that the experience be for at least a term of one full benefit year, this 

approach is appropriate because operating the benefit involves cyclical activities, some of 
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which take place only one time per year, and thus an organization can only gain full 

experience by operating its Part D functional area for an entire benefit year. 

 We intend to implement this proposal through our existing Part D contract 

qualification application process, and we have proposed to amend § 423.504(b) 

accordingly. Today, at the time of application, an entity seeking a Part D sponsor 

contract must provide evidence that it has contractual arrangements in place for any key 

Part D function that the applicant itself will not be performing. For the three key 

functions identified under this proposal, new application procedures will require the 

applicant to submit evidence that the entity to perform such functions (whether itself or 

an FDR) has provided the same function for another Part D sponsor within the past 2 

years, for at least one full benefit year. Applicants with existing Part D contracts or 

whose parents or other subsidiaries of the same parent hold Part D contracts will not be 

required to submit evidence of their Part D experience. 

18. Requirement for Applicants for Stand-Alone Part D Plan Sponsor Contracts to Be 

Actively Engaged in the Business of the Administration of Health Insurance Benefits 

(§ 423.504(b)(9)) 

 The Medicare prescription drug benefit program has matured into a generally 

stable, well-functioning program, and the Part D sponsors with which CMS contracts 

have developed vast expertise in the operational complexities of the program. The 

market for stand-alone Part D Prescription Drug Plans (PDPs) has also matured 

significantly since the program's inception and what was once a novel product is now 

available to residents of every state from multiple sponsors who offer several plan 
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options. Over the same period, we have noticed that the Part D program has in some 

cases attracted sponsors wishing to offer stand-alone PDPs who have no prior experience 

in the delivery of health or prescription drug insurance benefits, often to the detriment of 

the Part D program and the Medicare beneficiaries who elect plans offered by these 

sponsors. We are committed to establishing an approach to contracting with 

organizations new to the stand-alone PDP program that ensures that their first experience 

in the health insurance and health benefits market is not as the sponsor of a stand-alone 

PDP. 

To address this problem, we are proposing, pursuant to our authority at section 

1860D-12(b)(3)(D) of the Act to adopt additional contract terms that are necessary and 

appropriate to administer the Part D program, regulatory provisions that would require 

any entity seeking to contract as a stand-alone PDP sponsor, to have either actively 

provided health insurance or health benefits coverage for 2 continuous years immediately 

prior to submitting a contract qualification application, or provided certain prescription 

drug benefit management services to a company providing health insurance or health 

benefits coverage for 5 continuous years immediately prior to submitting an application. 

This requirement would not apply to an entity seeking to contract as the sponsor of a 

stand-alone PDP if its parent or another subsidiary of itself or its parent possesses the 

requisite experience. 

This proposal may appear similar to the immediately-preceding proposal (section 

III.A.17) of this proposed rule requiring, at § 423.504(b)(8), that new Part D sponsors 

engage first tier, downstream, and related entities with prior Part D experience. 
 179 

However, the proposed change we are discussing in this section, which we propose to 

codify at § 423.504(b)(8), would apply only to entities seeking to contract as a Part D 

sponsor of a stand-alone PDP, whereas the proposed requirement at § 423.504(b)(8) 

would apply to all new Part D sponsors, including those seeking to contract as Medicare 

Advantage organizations offering Part D through an MA-PD plan. We are proposing 

both requirements because the problems encountered by new PDP sponsors with no 

experience in the health insurance market are distinct from those encountered by new 

PDP sponsors and MA organizations who use PBMs with no experience in the Part D 

market. New PDPs with no prior health insurance or health benefits experience have 

demonstrated significant problems even when using experienced PBMs. 

The Part D program has matured to the point where beneficiaries in every state 

now have access to several options for basic and enhanced stand-alone Part D coverage. 

In 2013, there is an average of 15 enhanced stand-alone plans and 16 basic plans per PDP 

Region and no region had fewer than 23 plans from which beneficiaries may choose. 

These numbers are consistent with the quantity of available PDPs in recent benefit years 

and are well above the minimum of two plans per region required by section 

1860D-(a)(1) of the Act. Also, a total of 57 parent organizations that own 72 legal 

entities hold 75 Part D contracts for stand-alone PDPs, numbers that indicate that CMS 

has kept the PDP marketplace open to a significant number of entities that compete to 

serve beneficiaries. 

Among the patterns we have identified during our implementation and 

administration of the Part D program is the extent to which the program has attracted 
 180 

organizations with no experience in the delivery of health or prescription drug benefits 

prior to their entry into the Part D program. These organizations often have experience in 

other lines of business, such as information technology, or are formed by investment 

groups with no other health care business for the sole or primary purpose of entering the 

Part D market. The Part D program is effectively used by these organizations as a means 

to finance their first (and often only) foray into the health insurance or health benefits 

industry. It appears to CMS that these sponsors view the Part D program as simply 

another line of business to which they can profitably apply their information management 

expertise, especially if they believe they can sell these new contracts to a larger 

participant at a substantial profit after several years. While relatively few sponsors fit 

this profile each year, they have caused disproportionate problems for beneficiaries and 

CMS, as described in the following paragraphs. The proper administration of the Part D 

benefit involves much more than claims adjudication. Our interaction with these novice 

sponsors leads us to believe that they underestimate the value of clinical expertise in 

administering Part D benefits, particularly in conducting effective coverage 

determination and appeals processes. Also, we believe they often do not recognize the 

critical role that relationships, particularly those among beneficiaries, physicians, 

pharmacists, other health care professionals, and insurers, play in the successful delivery 

of a healthcare or prescription drug benefit. Yet, the stakes involved in administering a 

Part D plan are likely higher than those associated with any other line of business in the 

novice sponsor's portfolio. Operational failures in Part D can cause improper denials at 

the pharmacy counter of beneficiaries' valid claims for prescriptions or improper denial 
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of appeals, leading to interruptions in their therapies, which can have life- threatening 

implications. In short, we have found that these types of applicants have been unable to 

administer a Part D benefit. 

The compliance record of PDP sponsors with no healthcare-related experience 

confirms our assessment of the risks they pose to the Part D program. Time and again, 

these sponsors fail our past Medicare contract performance and audit tests or receive low 

quality scores (that is, star ratings) because they lack the ability to administer even the 

most basic elements of a health or drug benefit program, let alone one as complex as 

Medicare Part D. For example, we recently sanctioned a new stand-alone PDP sponsor 

(a situation we describe in section III.A.17 of this rulemaking where we propose to 

establish the requirement that all new Part D sponsors engage subcontractors with Part D 

experience). The sponsor had no recent experience providing or administering health 

benefits. It only began offering healthcare-related benefits when it became a Part D plan 

sponsor. We believe the sponsor's inexperience administering health insurance and 

health benefits, as well as its apparent reliance on Medicare as its sole source of revenue, 

compounded the problems it experienced, as the sponsor was unable to independently 

and expeditiously identify and resolve problems with benefits administration. 

Another, more dramatic case, involved a CMS decision in 2010 to immediately 

terminate a PDP sponsor's contract under urgent circumstances in which beneficiaries 

were being significantly harmed. Prior to contracting with CMS, the PDP sponsor 

involved had no experience providing or administering health insurance or health 

benefits coverage. We terminated the sponsor's contract when an audit (prompted by 
 182 

urgent complaints from providers) revealed that the sponsor's compliance failures 

resulted in improperly denied access to Part D drugs and put the health of enrollees in the 

sponsor's PDP at imminent and serious risk. Numerous compliance failures resulted in 

beneficiaries being denied drugs that they were entitled to, including those needed to 

treat HIV, cancer, and seizures, or receiving delayed access to these drugs, sometimes 

after being required to undergo medically unnecessary and invasive procedures. The 

problems were so egregious and widespread that we were compelled to terminate the 

contract less than a month after we were first alerted to the problems and less than a week 

after an onsite audit of the sponsor. This termination created massive disruption for 

beneficiaries and to the program and required significant resources from CMS to resolve. 

 As discussed previously, we believe that these failures would not have occurred, or 

would not have been as catastrophic, if the sponsors had prior, recent experience 

providing health insurance, health benefits coverage, or key services related to health 

benefits coverage. 

When the sponsor is a novice not only to Medicare Part D, but also to virtually 

every aspect of health benefits administration, there is no assurance that the entity will be 

able to administer or oversee the most basic elements of health benefits coverage, such as 

processing claims, administering a coverage determination and appeals process, enrolling 

beneficiaries, or administering the benefit as approved. Its systems and procedures for 

doing so are by definition new and unproven. We do not believe that health care is a 

commodity that can be reduced to a programmable data set, or that administering the Part 

D benefit involves little more than having the right software package. To entrust 
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inexperienced applicants with responsibility for correctly operating a program for which 

even experienced health insurers have had to develop new expertise has proven to be 

unacceptably risky. Part D sponsors are charged with both ensuring that beneficiaries get 

the drugs they need and applying clinically appropriate utilization management protocols 

to control costs and protect beneficiary safety. In this capacity, they have a role in 

clinical decision making that is usually reserved for physicians and health care providers 

with years of academic training and clinical practice. Permitting an organization with 

prior experience limited to, for example, developing payroll software, to design and 

broker individuals' access to prescription drugs for potentially life-threatening conditions 

is an unacceptable mismatch between a set of tasks and the expertise applied to it. 

We propose that new applicants have two years of experience providing health 

insurance or health benefits coverage (that is, operating as risk-bearing entities licensed 

in the states where they offer benefits) prior to applying as stand-alone Part D Sponsors 

because we believe that this provides sufficient time to demonstrate the applicant's ability 

to operate a health plan. A risk-bearing entity with significant problems administering 

health benefits would be unlikely to remain in good standing with its licensing authority 

for two years. While a longer record of successful operations would likely provide better 

evidence of the organization's competence, we are also sensitive to the need to promote 

innovation and competition that can come from new PDP sponsors. We believe that 

requiring two years of experience as a risk bearing entity offering health insurance or 

health benefits coverage ensures that new sponsors of stand-alone PDPs have minimal 
 184 

experience operating a health benefits program without unduly limiting new entrants to 

the marketplace. 

 We recognize that a number of PBMs and Third Party Administrators with 

experience administering prescription drug benefits have entered the stand-alone PDP 

market and have adapted to providing the Part D benefit despite their lack of previous 

experience as health insurers. We believe this success is the result, at least in part, of 

their substantial experience operating key functions that form the core of PDP benefits on 

behalf of insurers. This experience is not sufficient in and of itself to administering a 

Part D plan, but it is certainly necessary. Therefore, we are proposing elsewhere in this 

proposed rule that organizations applying to contract as stand-alone PDP sponsors that do 

not have experience as a risk-bearing entity providing health insurance or health benefits 

coverage would, in the alternative, be eligible to hold a PDP contract if they had 

experience performing services on behalf of an insurer in the delivery of benefits in any 

health insurance market in the three key areas indicated in this section III.A.17 of this 

proposed rule. The three areas that we are proposing as meeting the experience 

requirements are: (1) adjudication and processing of pharmacy claims at the point of 

sale; (2) administration and tracking of enrollees' drug benefits in real time, including 

automated coordination of benefits with other payers; and (3) operation of an enrollee 

appeals and grievance process. Our reasons for selecting these three areas as meeting the 

experience requirements are described in more detail in the section of this rulemaking 

notice relating to the proposed requirement at § 423.504(b)(8) that new Part D sponsors 

employ experienced FDRs for these functions. 
 185 

 We are proposing that entities without two years of experience as a risk bearing 

entity offering health insurance or health benefits coverage have five continuous years' 

experience providing services in the three key areas listed previously. We are proposing 

a longer experience requirement for these entities because entities offering these services 

face fewer barriers to entry in the marketplace and are not as tightly regulated as risk 

bearing entities. An entity seeking to become a risk bearing entity must qualify for a 

state license, which requires the entity to demonstrate on a continuous basis that it meets 

extensive financial, capitalization, and administrative requirements. By contrast, an 

entity seeking to become a PBM or Third Party administrator faces little or no regulatory 

oversight for the services it offers. The investment required to start a PBM or Third 

Party Administrator may be significantly lower than that required of risk bearing entities 

operating health insurance programs. While a PBM that performs poorly may lose 

contracts, it is unlikely to be subject to regulatory action that would become part of the 

publicly available record that CMS could use to evaluate its application to operate a 

stand-alone PDP. However, we do believe that over a longer period of time, a PBM or 

Third Party Administrator's poor reputation would become known among participants in 

the health and prescription drug insurance markets, making it difficult for that 

organization to retain current contracts or obtain new ones with insurers and remain in 

business. We therefore believe that entities that seek to qualify on the basis of their 

experience as PBMs or Third Party Administrators should be required to have provided 

services in these key areas for five continuous years, rather than merely two. 
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 We believe our proposal will not have significant impact on the availability of 

stand-alone PDP plans in the marketplace, but that it will simply function to keep out a 

small number of inexperienced organizations who are likely to perform poorly as 

stand-alone PDPs. Fortunately, the vast majority of new sponsors of stand-alone PDPs 

each year have the requisite experience. For example, eight organizations filed initial 

applications during 2013 to qualify to offer stand-alone PDPs in 2014 and 6 of them had 

at least two years' experience as a health insurer or 5 years' experience managing 

prescription drug benefits for health insurers. Of the six new stand-alone Part D plans in 

2013, five had the level of experience we are proposing to require. Thousands of entities 

nationally possess the requisite experience providing health insurance, health benefits 

coverage, or PBM services. 

 If this proposed change is finalized, we intend to incorporate it into our existing 

Part D application process. At the time of application, an entity seeking a Part D sponsor 

contract must provide evidence that it is currently licensed or is in the process of being 

licensed in a state and provide certain information about its organizational experience and 

history. New application procedures would require an applicant for a stand-alone PDP 

contract to submit evidence that the entity, its parent, or a subsidiary of the same parent 

has actively provided health insurance or health benefits coverage for the prior 2 years, or 

has engaged in the three key functions identified here continuously for the prior 5 years. 

19. Limit Parent Organizations to One Prescription Drug Plan (PDP) Sponsor Contract 

Per PDP Region (§ 423.503) 
 187 

 Each year, we accept and review applications from organizations seeking to 

qualify to offer stand-alone prescription drug plans in one or more PDP regions. With 

limited exceptions (for example, poor past contract performance, limited Part D 

experience), we approve all applications submitted by organizations that demonstrate that 

they meet all Part D application requirements. CMS proposes, under our authority at 

section 1860D-12(b)(3)(D) of the Act to adopt additional contract terms, not inconsistent 

with the Part C and D statutes, that are necessary and appropriate to administer the Part D 

program, to add as a basis upon which we may deny a PDP sponsor application the fact 

that the applicant is applying for qualification in a PDP Region where another subsidiary 

of the applicant's parent organization already holds a PDP sponsor contract. In our 

description of this proposal, the term "parent organization" refers to an entity that 

controls a subsidiary through ownership of more than 50 percent of the subsidiary's 

shares. 

During the 2013 contract year, there are 72 unique contracting entities (that is, 

entities licensed as risk bearing entities) holding 75 PDP sponsor contracts. There are 57 

parent organizations that hold more than one PDP sponsor contract through a subsidiary 

contracting organization over which they maintain a controlling interest. 

 To promote the effective administration of a Part D program that involves so 

many parent organizations and contracting entities, we have consistently taken steps to 

ensure that the numbers of PDP sponsors, PDP sponsor contracts, and plan offerings are 

kept at a level that allows sponsors to fully exercise their rights as PDP sponsors but 

avoids the duplication and confusion that can result when reasonable limits are not placed 
 188 

on sponsors' requests for contracting arrangements that serve only their internal business 

operations. During the initial Part D contracting conducted during 2005, we approved a 

handful of contracts that were held by subsidiaries of a common parent organization. 

Since then, we have worked with the affected parent organizations to consolidate almost 

all of those "duplicate" contracts down to one PDP contract per participating parent 

organization per PDP region. The remaining duplicate contracts accommodate parent 

organizations that made binding business arrangements while acting in reliance on our 

previous allowance of multiple PDP sponsor contracts in the same PDP region. We 

expect to continue to work with those parent organizations to explore options for 

discontinuing their reliance on the second PDP sponsor contract in the immediate future. 

 Section 1860D-12(b)(1) of the Act provides that PDP sponsors may offer multiple 

plan benefit packages (referred to as PBPs or plans) under one PDP sponsor contract. 

Therefore, parent organizations need only one PDP sponsor contract to offer the full 

range of the possible plan options in a particular PDP Region. We recognize that many 

parent organizations that offer plans in multiple PDP regions must use more than one 

subsidiary to administer their full array of plans throughout the United States and the 

territories. For example, parent organizations may adopt these arrangements to 

accommodate unique state licensure requirements or the terms of trademark licensing 

agreements. However, none of these justifications, which are based on a parent 

organization's need to serve more than one PDP Region, would support a request, like 

several we have received during the CY 2014 contract qualification application cycle, by 

a parent organization to be granted a second PDP sponsor contract in a PDP Region it 
 189 

already serves. As discussed more fully in the following paragraphs, there are significant 

inefficiencies to the program of having duplicate contracts that do not provide more 

benefit plan options than could be offered under a single contract. Additionally, informal 

communications made by past requestors of duplicate contracts indicated that the purpose 

has been to either a) segregate low income beneficiaries into their own contract, or b) 

corral the experience of a particular low-performing plan into its own CMS contract so as 

not to taint the performance rating of the better performing plan offering, as performance 

ratings are calculated at the contract level. CMS opposes the inefficiencies of duplicate 

contracts and the gaming duplicate contracts can support. That said, we welcome 

comments from industry, advocates, and others as to circumstances for our consideration 

under which duplicate contracts may be beneficial. 

 One of the fundamental principles of the Part D program is that the selection of 

plans made available to beneficiaries is the product of true competition among PDP 

sponsors. Two subsidiaries of the same parent organizations offering plans in the same 

PDP region are not truly competitors as decisions concerning their operations are 

ultimately controlled by a single entity, or parent organization. Also, we only approve 

those PDP offerings that meet the meaningful differences test stated at § 423.265(b)(2), 

and we apply that test at the parent organization level. A parent organization would not 

gain an opportunity to offer more plan benefit packages under two or more contracts it 

controlled through its subsidiaries than it would under one contract because we would, as 

part of our bid review, evaluate whether all the plans proposed by the same parent 

organization met the meaningful differences test. 
 190 

 The proposed limitation on the number of PDP sponsor contracts a parent may 

control in a PDP Region is also necessary to preserve the integrity of CMS' star ratings. 

CMS assigns star ratings at the contract level, and they are intended to reflect all aspects 

of the PDP operations controlled by a unique contracting entity. However, that principle 

is compromised when a parent organization to one of the contracting entities is permitted 

to control, through other subsidiaries, more than one PDP contract. While the contracting 

entities (that is, PDP sponsors) are legally accountable for the delivery of benefits under a 

PDP sponsor contract, when those sponsors are subsidiaries to a parent organization, it is 

the parent that, in reality, controls the quality of the sponsor's contract performance. The 

parent does this by using its controlling interest in the subsidiaries to establish the budget 

priorities and operational policies of those entities. As a result, allowing a parent 

organization to effectively administer two or more PDP sponsor contracts would allow it 

potentially to artificially inflate the star ratings on one contract by excluding the poor 

performance under its other contract from the rating calculation. In that instance, some 

beneficiaries could make a plan election without complete information about the 

performance of the organization ultimately responsible for the quality of services they 

would receive by enrolling in that plan. A beneficiary for whom quality ratings are an 

important factor in choosing a plan is best served by contracting arrangements and rating 

systems that provide the most transparency about the performance of all the PDP 

products offered under the authority of the single parent organization. This goal is best 

served by limiting parent organizations to one PDP sponsor contract per PDP Region. 
 191 

 Based on our experience in administering the Part D prescription drug benefit 

program we do not believe that there is a compelling justification for parent organizations 

to administer two PDP sponsor contracts in the same PDP region. Moreover, such 

arrangements impede our ability to efficiently administer the PDP and provide a means 

by which the integrity and reliability of our star ratings system can be compromised. 

Therefore, we propose to amend § 423.503(a) by adding a paragraph (3) stating that CMS 

will not approve an application when it would result in the applicant's parent organization 

holding more than one PDP sponsor contract in the PDP region for which the applicant is 

seeking qualification as a PDP sponsor. We anticipate that we would most frequently use 

this authority to deny an application in instances where the applicant's parent 

organization already controls a PDP sponsor contract, either directly by acting as a PDP 

sponsor itself (in instances when the parent is licensed as a risk-bearing entity) or through 

its ownership of a subsidiary that qualifies as a PDP sponsor and is a party to a 

stand-alone PDP sponsor contract. In the less likely situation where two or more 

subsidiaries of the same parent organization each submit applications in the same year for 

PDP regions where the parent organization controls no PDP sponsor contracts, we would 

request that the parent withdraw all but one of the applications. In the absence of a 

withdrawal election, CMS will deny all of the parent organization's applications.

20. Limit Stand-Alone Prescription Drug Plan Sponsors to Offering No More Than Two 

Plans Per PDP Region (§ 423.265) 

Under our authority at section 1860D-11(d) of the Act, we conduct negotiations 

with stand-alone prescription drug plan (PDP) sponsors concerning our approval of the 
 192 

bids they submit each year. As the Part D program has evolved, we have adopted 

regulations designed to authorize us to use that negotiating authority to ensure that the 

number of plans offered in a given PDP region reflects a balance between sponsors' 

interest in providing options tailored to meet the needs of a diverse Medicare population 

and the need to avoid creating undue confusion for beneficiaries as they consider various 

plan offerings. We continue here our process of updating our bid review authority to 

reflect the evolution of the Part D program by proposing to limit to two the number of 

plans stand-alone PDP sponsors may offer in each PDP region. 

 PDP sponsors must offer throughout a PDP region at least one basic plan that 

consists of: standard deductible and cost sharing amounts (or actuarial equivalents); an 

initial coverage limit based on a set dollar amount of claims paid on the beneficiary's 

behalf during the plan year; a coverage gap during which a beneficiary pays more of his 

drug costs; and finally, catastrophic coverage that applies once a beneficiary's 

out-of-pocket expenditures for the year have reached a certain threshold. Prior to our 

adopting regulations requiring meaningful differences among each PDP sponsor's plan 

offerings in a PDP Region, CMS guidance allowed sponsors that offered a basic plan to 

offer in the same region additional basic plans, as long as they were actuarially 

equivalent to the basic plan structure described in the statute. These sponsors could also 

offer enhanced alternative plans which provide additional value to beneficiaries in the 

form of reduced deductibles, reduced copays, coverage of some or all drugs while the 

beneficiary is in the gap portion of the benefit, or some combination of those features. 
 193 

 As we have gained experience with the Part D program, we have made consistent 

efforts to ensure that the number and type of plan benefit packages PDP sponsors may 

market to beneficiaries are no more numerous than necessary to afford beneficiaries 

choices from among meaningfully different plan options. In addition to setting 

differential out-of-pocket-cost (OOPC) targets each year to ensure contracting 

organizations submit bids that clearly offer differences in value to beneficiaries, we 

issued regulations in 2010 that established at § 423.265(b)(2) our authority to deny bids 

that are not meaningfully different from other bids submitted by the same organization in 

the same service area. Our application of this authority has effectively eliminated PDP 

sponsors' ability to offer more than one basic plan in a PDP region since all basic plan 

benefit packages must be actuarially equivalent to the standard benefit structure 

discussed in the statute. That regulation also effectively limited to two the number of 

enhanced alternative plans that we can approve for a single PDP sponsor in a PDP region. 

 As part of the same 2010 rulemaking, we also established at § 423.507(b)(1)(iii) our 

authority to terminate existing plan benefit packages that do not attract a number of 

enrollees sufficient to demonstrate their value in the Medicare marketplace. Both of 

these authorities have been effective tools in encouraging the development of a variety of 

plan offerings that provide meaningful choices to beneficiaries without creating undue 

confusion for beneficiaries. 

 We believe that the progressive closure of the coverage gap provided for in the 

Affordable Care Act affords us another opportunity to promote even greater clarity in the 

set of stand-alone PDP plan options from which beneficiaries may make an election. 
 194 

Under the statute, beginning in 2011, applicable beneficiaries enjoy discounts of 

50 percent off negotiated prices on brand name drugs when purchased while in the 

coverage gap portion of the benefit. Also, since 2011, the required coverage in the gap 

has increased and will continue to do so gradually until 2020, when the combination of 

required coverage and manufacturer discounts covers 75 percent on average for both 

brand-name and generic drugs. This "closing" of the coverage gap effectively will leave 

the beneficiary with only a 25 percent cost share on average across the entire benefit (or 

its actuarial equivalent) before the catastrophic threshold. 

 Our experience in applying the meaningful differences standard indicates that, as 

the Part D coverage gap is closed, it will become increasingly difficult for a PDP sponsor 

to qualify to offer more than two plans in the same service area and still meet the 

meaningful differences test. Since we began applying the meaningful differences 

standard to our bid reviews, we have generally approved two types of enhanced 

alternative plans. The first type of plan offers beneficiaries, in exchange for a higher 

premium than that charged for basic plan coverage, significant reductions in the cost 

sharing and deductible amounts associated with the basic Part D benefit. The second 

type offers even greater cost sharing and deductible reductions as well as coverage for 

many drugs in the gap. Since coverage of Part D drugs in the gap is the distinguishing 

feature between the two types of enhanced alternative plans currently available, closing 

the coverage gap also means that sponsors can no longer rely on it to establish that their 

proposed second enhanced alternative plan is meaningfully different than their first. 
 195 

 Our enrollment data indicate that beneficiaries are already making plan choices 

based on their recognition of the shrinking significance of the coverage gap and with it, 

the value of PDP sponsors' second enhanced plans. Since the start of the coverage gap 

discount program in 2011, enrollment levels in the second enhanced alternative plans 

offered by PDP sponsors that offer two enhanced alternative plans have declined from 

approximately 12 percent of those sponsors' total enhanced alternative plan enrollment in 

2010 to between 7 percent and 8 percent in the 2011, 2012, and 2013 benefit years. This 

finding suggests that the proportion of beneficiaries for whom the additional 

supplemental coverage offered by these plans is worth the supplemental premium 

continues to decline, and we expect this trend to continue as the coverage gap closes. 

 Despite these developments, many sponsors continue to submit three bids per 

region each year, at least in part, we believe (based on conversations with various 

stakeholders), to ensure that they are not perceived as a weaker participant in the Part D 

market by offering a smaller set of plans than their PDP competitors. CMS believes that 

plan sponsors and beneficiaries, as well as the taxpayers, would be better served by a 

more streamlined bid submission process that limited sponsors to submitting two PDP 

bids (one basic and one enhanced) per PDP region each year. This limitation would 

provide a consistent bidding framework for all sponsors, allowing them to focus on 

quality, rather than quantity, in development of their bids. It would also reduce some of 

the sponsors' administrative costs associated with preparing, marketing, and 

administering a third benefit package. It may also help ensure that beneficiaries can 
 196 

choose from a less confusing number of plans that represent the best value each sponsor 

can offer. 

 For CY 2013, there are seven parent organizations that offer two enhanced plans 

(that is, three plans total, one basic and two enhanced alternative) within a given PDP 

region. This amounts to 264 enhanced alternative plans in total (two for each affected 

PDP region) among the seven parent organizations. The application of this proposed 

regulation, if finalized, would result in the elimination of 132 enhanced alternative plans, 

representing 13 percent of the total number of stand-alone PDP plans, and 25 percent of 

all enhanced alternative plans in 2013. If implemented today, these proposed reductions 

would affect a combined 522,742 beneficiaries, approximately 2 percent of the overall 

stand-alone PDP enrollment of 22,529,197 (based on April 2013 enrollment data). We 

expect that most sponsors would attempt to consolidate their current beneficiaries in one 

of their two remaining plan options, so we believe adoption of this proposal would result 

in minimal disruption to beneficiaries currently enrolled in a sponsor's second enhanced 

plan. 

 While the incremental closure of the coverage gap continues until 2020, CMS 

believes that the observed enrollment trends in these plans demonstrate the reduction in 

beneficiaries' coverage gap costs that has occurred already has moved the stand alone 

PDP plan market in a way that warrants the imposition of the two plan limit as soon as 

possible. The list of plan options today is cluttered with those that the record shows 

appeal to only approximately 2 percent of the overall stand alone PDP-plan-enrolled 

beneficiaries of which 522,742 are enrolled in second enhanced plans). In addition, in 
 197 

many cases one of the two enhanced plans offers the minimum level of supplemental 

coverage required to meet our meaningful differences tests. We refer to these as "low 

value enhanced plans" to distinguish them from second enhanced plans with substantially 

more supplemental coverage. In some cases, the premiums for these low value enhanced 

plans have been less than the premiums for the sponsors' basic plans due to favorable risk 

selection. This occurs because many of the beneficiaries with more serious health issues 

and higher utilization of prescription drugs are in the low-income subsidy (LIS) eligible 

population which will not receive the full LIS subsidies in plans with supplemental 

coverage. For this reason we neither auto-assign the LIS eligible population into such 

plans, nor will this population generally voluntarily enroll in such plans. Thus, 

continuing to permit multiple enhanced plans, particularly low value enhanced plans, 

facilitates risk segmentation. This can increase costs for the Part D program and the 

taxpayers overall. During the most recently completed CY 2014 bid review cycle, we 

continued to encounter bids submitted by sponsors for low value enhanced plans with 

premiums lower than the premiums for their basic plans. We believe it is urgent that we 

adopt this proposed policy as soon as possible so that we can bring an end to this bidding 

practice. However, because such a change would entail substantial changes to bidding 

processes for both Part D sponsors and CMS that could not realistically be undertaken 

until the proposal was final, we propose to adopt this policy for the 2016 Part D 

contracting cycle. We believe that beneficiaries and the Part D program would be better 

served by sponsors that are focused on developing plans with broad beneficiary appeal 

rather than those intended to enable the sponsor to either pursue a diminishing niche in 
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the Part D market or segment favorable risk into low value enhanced plans. We solicit 

comments on whether there is any real need for more than two standalone plan options 

per PDP sponsor. 

 Therefore, we propose to amend the Part D regulations at § 423.265 to add a 

revised subsection (b)(3), which states that "CMS shall not accept more than one basic 

bid and one enhanced bid for a coverage year from a single PDP sponsor in the same 

PDP region." We would adopt this provision under our authority at section 1860D-11(d) 

of the Act. In instances where a parent organization owns a controlling interest in more 

than one subsidiary that operates as a PDP sponsor in a single PDP region, we would 

apply subsection (b)(3) at the parent organization level. That is, in the same way that we 

currently apply the meaningful differences test, a parent organization with two subsidiary 

PDP sponsors could offer no more than one plan under each sponsors' contract. We 

anticipate that the need to use this interpretation will be infrequent as existing 

multi-contract arrangements are phased out through plan consolidation and the creation 

of new ones would be prohibited by the implementation of the provision described 

elsewhere in this proposal (if finalized) authorizing CMS to deny applications from 

organizations owned by a parent that already has a subsidiary operating a PDP sponsor 

contract in the same PDP region. 

 In a proposed rule we published in October 10, 2010, announcing our intent to 

codify the Affordable Care Act provision in the Part D regulations, we solicited 

comments on whether we should use the Affordable Care Act authority to impose limits 

on the number of plans in a PDP region. In the preamble to the final rule that followed 
 199 

on April 15, 2011, we noted that among the comments we received were those stating 

that we should not consider imposing limits on plan offerings until the impact of previous 

statutory and regulatory changes governing our bid review process could be fully 

evaluated. At the time we declined to codify such limits. Now, we believe that the 

record in support of the adoption of a two-plan limit has had time to fully develop, 

including, as discussed previously, the dwindling popularity of the second enhanced 

option, the shrinking differences between the first and second enhanced options, and the 

role the second enhanced option plays in enabling risk segmentation, and therefore we 

make the proposal described here and seek comment from the public. 

In addition to proposing to limit PDP sponsors to submitting one basic and one 

enhanced bid per coverage year, we are also considering several regulatory proposals for 

limiting the type of coverage offered in those two plans to reduce or eliminate the risk 

segmentation described previously. We believe that risk segmentation is not consistent 

with the Congressional design for the Part D program, or with the policy goal of 

obtaining the best value for the government and the taxpayer. We believe the Congress 

intended sponsors to compete in the Part D market by offering their best bids for basic 

plans, in order to attract the greatest enrollment through the lowest premiums, and that 

this competition would maintain downward pressure on Part D bids and government 

subsidies. We do not believe that the Congress intended that instead sponsors would 

offer their best bids for a segment of the market that represents individuals who are low 

utilizers of prescription drugs due to better health and who can afford unsubsidized 

supplemental premiums due to better socioeconomic status. When many healthy 
 200 

individuals are not included in the basic plans, the cost of the basic plans is increased, 

and this in turn increases low-income premium subsidies. Therefore, permitting risk 

segmentation does not generate the best value for the Part D program as a whole. To 

reduce or eliminate risk segmentation, we are considering three options. We solicit 

comments on our conclusions with respect to risk segmentation and on the effectiveness 

of the following options. 

The first option we are considering would be to continue to allow separate basic 

and enhanced plans, but require that enhanced plans offer a substantial minimum level of 

supplemental coverage defined in regulation. This would differ from current practice in 

that we currently set meaningful differences requirements by observing the distribution 

of benefits submitted independently by sponsors and using statistical techniques to 

identify outlier thresholds. The problem with the current approach is that, when all or 

most sponsors reduce their supplemental coverage over time – the trend that we have 

observed – the outlier thresholds will decline as well. When this occurs the supplemental 

coverage will again tend to converge on the value of basic coverage. Instead, for 

instance, we could require that the enhanced plan offering had to cover a minimum of 

50 percent (or another higher percentage) of the remaining actuarial value of the Part D 

benefit not included in the standard benefit for any coverage year. The additional 

coverage would be in the form of reduced deductibles and cost sharing and the inclusion 

of excluded drugs, consistent with the statutory definition of supplemental coverage. We 

solicit comment on whether such an approach would be sufficient to accomplish our goal 

of eliminating risk segmentation. 
 201 

In the second option we are considering, instead of setting minimum 

supplemental coverage requirements for a sponsor's enhanced plan offering, we would 

propose to use the authority provided in section 3209 of the Affordable Care Act which 

amends section 1860D-11(d)(3) of the Act to deny any enhanced plan bid with a 

premium equal to or lower than the sponsor's basic plan premium. Alternatively we 

might require the enhanced premium to be no less than a specified multiple of the basic 

premium, such as 115 percent or another multiple. Again, the additional coverage in the 

enhanced plan would be in the form of reduced deductibles and cost sharing and the 

inclusion of excluded drugs. We solicit comments on this approach, and on the 

appropriate multiple of the basic premium necessary to eliminate risk segmentation. We 

also solicit comment on whether there is a possibility that this approach might effectively 

eliminate the offering of supplemental coverage if favorable risk selection were to 

continue and the actuarial value of such coverage could not generate sufficient premiums 

to pass these sorts of tests. 

The third option we are considering would be to reinterpret the provisions of 

section 1860D-11(b) and (c) of the Act governing the submission of bids that include 

supplemental benefits. We would propose that enhanced alternative coverage would be 

redefined to consist of supplemental coverage added to the sponsor's one basic benefits 

offering (for an additional premium). This could be thought of as basic benefits plus a 

supplemental benefit rider. This would mean that all Part D enrollees in a sponsor's Part 

D plans would be enrolled in the sponsor's one basic plan with the same formulary and 

pharmacy network, and some portion of those enrollees would also elect the optional 
 202 

supplemental coverage in the form of the second plan that would be the combination of 

the basic plan and the supplemental benefits. Thus, the risk of the basic benefits would 

be estimated at the PDP Regional level and the risk of the supplemental benefits would 

be estimated in accordance with that of the projected enrollees in the second plans. This 

means that the supplemental benefits would have to constitute actual enhancements to the 

basic benefit and that the notion of actuarial equivalence would not apply to the 

combination of the basic and supplemental benefits. This change would bring standalone 

PDP coverage more in line with both commercial coverage designs and with the offering 

of Part C optional supplemental benefits. We believe this option would eliminate the 

possibility of risk segmentation because every enrollee participating in a sponsor's Part D 

line of business would be enrolled in the one basic plan and beneficiaries that elect 

supplemental benefits will be charged the additional premium for the extra coverage. 

The sponsor's Part D offerings would consist of two plan benefit packages, one 

comprised solely of basic coverage and the other (if offered) consisting of the 

combination of the basic coverage with the supplemental coverage. 

We solicit comments on this approach and on our belief that this approach would 

be the most effective strategy for eliminating risk segmentation and providing the best 

value for the government and the taxpayer. 

21. Efficient Dispensing in Long-Term Care Facilities and Other Changes (§ 423.154) 

 We are proposing changes to the rule requiring efficient dispensing to Medicare 

Part D enrollees in Long Term Care (LTC) facilities. For background, section 3310 of 

the Affordable Care Act amended the Act to add a new paragraph (3) to section 
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1860D-4(c) of the Act. Section 1860D-4(c)(3) of the Act provides that the Secretary 

shall require Medicare Part D sponsors of prescription drug plans to utilize specific, 

uniform dispensing techniques, such as weekly, daily, or automated dose dispensing, 

when dispensing covered Part D drugs to enrollees who reside in a LTC facility in order 

to reduce waste associated with 30-day fills. The section states that the techniques shall 

be determined by the Secretary in consultation with relevant stakeholders. 

 After extensive consultation with stakeholders, in the April 15, 2011 Federal 

Register entitled "Medicare Program; Changes to the Medicare Advantage and the 

Medicare Prescription Drug Benefit Programs for Contract Year 2012 and Other 

Changes" ("April 15, 2011 Final Rule"), we published a final rule at 76 FR 21432 which 

governs the appropriate dispensing of prescription drugs in LTC facilities under Part D 

plans. Pursuant to this regulation, Part D sponsors generally must require their network 

pharmacies to dispense certain solid oral brand covered Part D drugs in quantities of 

14 days or less, unless an exemption applies. The regulation is found at § 423.154. 

 We are proposing the following specific changes to the LTC short cycle 

dispensing requirements: 

● Add a prohibition on payment arrangements that penalize the offering and 

adoption of more efficient LTC dispensing techniques. 

● Eliminate language that has been misinterpreted as requiring the proration of 

dispensing fees. 

● Incorporate an additional waiver for LTC pharmacies using restock and reuse 

dispensing methodologies under certain conditions. 
 204 

● Make a technical change to eliminate the requirement that Part D sponsors 

report on the nature and quantity of unused brand and generic drugs. 

After providing a summary of the current LTC short cycle dispensing rule, we will 

address each proposed change in more detail. 

 Section 423.154 requires that all Part D sponsors require all pharmacies servicing 

LTC facilities to dispense solid oral doses of covered Part D brand name drugs to 

enrollees in such facilities in no greater than 14 day increments at a time. Part D 

sponsors must also require such pharmacies to permit the use of uniform dispensing 

techniques, as defined by the LTC facility. The regulation refers to definitions in 

existence at the time of its promulgation. Brand name and generic drugs are defined in 

§ 423.4, and the definition specifically refers to a brand name drug as being one approved 

under an NDA. 

 In order to quantify waste more precisely, the regulation requires Part D sponsors 

to collect and report information to CMS on the dispensing methodology used for each 

dispensing event, and on the nature and quantity of unused brand and generic drugs 

dispensed to enrollees in LTC facilities. Reporting on unused drugs is waived for Part D 

sponsors when both brand and generic drugs are dispensed in no greater than 7-day 

increments. 

 The regulation excludes: 1) solid oral doses of antibiotics; and 2) solid oral doses 

that are dispensed in their original container as indicated in the Food and Drug 

Administration (FDA) prescribing information or that are customarily dispensed in their 

original packaging to assist patients with compliance. Thus, the regulation does not 
 205 

apply to drugs that are not typically dispensed in greater than 14-day supplies (for 

example: inhalers, eye drops, ear drops, steroid dose packs). 

 LTC facilities are defined in § 423.100, which definition excludes assisted living 

facilities. Intermediate care facilities for the mentally retarded and institutes for mental 

disease are specifically waived from the requirement in the regulation, as are I/T/U 

pharmacies, due to specific problems with delivery and dispensing to closed (often 

locked) facilities. 

 With respect to copayments, the regulation states that regardless of the number of 

incremental dispensing events, the total cost sharing must be no greater than the total cost 

sharing that would be imposed if the regulation did not apply. 

 When permitted under applicable law, the regulation requires Part D sponsors to 

include provisions that address the disposal of drugs that have been dispensed to an 

enrollee in an LTC but not used, and then returned to the pharmacy, in the terms and 

conditions that they must offer to pharmacies, including whether return for credit and 

reuse is authorized. 

a. Prohibition on Payment Arrangements that Penalize the Offering and Adoption of 

More Efficient LTC Dispensing Techniques (§ 423.154) 

Our first proposed change is to add a clause to § 423.154 prohibiting payment 

arrangements that penalize the offering and adoption of more efficient LTC dispensing 

techniques. It is our understanding that for 2013, some of the largest PBMs have 

prorated LTC pharmacy dispensing fees for medications subject to the LTC short cycle 

requirements. Under such dispensing fee payment arrangements, if a medication is 
 206 

discontinued before a month's supply has been dispensed, a pharmacy that dispenses the 

maximum amount of medication at a time permitted under § 423.154 collects more in 

dispensing fees than a pharmacy that utilizes dispensing techniques that result in less than 

maximum quantities being dispensed at a time. 

 We provide the following example of two pharmacies – one more efficient at 

dispensing than the other-- to illustrate our concern: A $4.00 dispensing fee for a 

30-days' supply is prorated, and a medication is discontinued after 21 days. The first 

pharmacy dispenses 14-days' supply at a time and receives approximately $3.73 in total 

dispensing fees for a 28-days' supply, which results in 7 days' worth of medication waste. 

 The second pharmacy dispenses 3-days' supply at a time and receives approximately 

$2.80 in dispensing fees for a 21-days' supply in total, which results no medication waste. 

 We believe this example is contrary to the Congress' intent in enacting section 

3310 of the Affordable Care Act. In this example, the second pharmacy's more efficient 

dispensing techniques save facility, sponsor, and Part D program costs associated with 

reducing the amount of medication waste, but the pharmacy itself receives less in 

dispensing fees than it would if it had dispensed in 14-day increments. This approach 

creates a perverse incentive for LTC pharmacies to adopt less efficient dispensing 

techniques, if available. Rational self- interest on the part of any LTC pharmacy with the 

flexibility to dispense greater quantities encourages wasteful dispensing and additional 

costs to the Part D program, in direct opposition to the intent of the law. 

 During the extensive industry consultation conducted prior to the rulemaking 

required to implement section 3310 of the Affordable Care Act, CMS was repeatedly 
 207 

informed by multiple stakeholders that dispensing costs did not vary on the basis of the 

quantity of medication dispensed, but only by the number of dispensing events and the 

type of dispensing technique utilized. Therefore, there is no justifiable rationale for 

proration, since the cost of dispensing is not directly related to the quantity dispensed. In 

order to align incentives, we encouraged Part D sponsors to do quite the opposite to 

prorating dispensing fees, and offer differentially higher dispensing fees to promote the 

adoption of the most efficient dispensing methodologies. 

 Starting in the fall of 2012, we have received numerous complaints about 

proration of dispensing fees from multiple LTC pharmacy organizations, LTC 

pharmacies, and LTC facilities that represent, offer, or have contracted to utilize more 

efficient dispensing methodologies. Some smaller LTC pharmacies, which rely upon 

their relative greater efficiency in reducing waste from unused drugs for competitive 

advantage, have complained that they were unable to negotiate appropriate terms through 

their intermediary group purchasing and contracting organizations and could not 

negotiate directly with Part D sponsors. Small LTC pharmacies have also reported that 

they risked losing their LTC facility contracts to larger LTC pharmacies if they did not 

accept the payment terms that, in effect, penalize their efficiency. These pharmacies 

have indicated that prorated dispensing fees are not mutually agreeable terms, and that 

this fee structure threatens the survivability of the most efficient dispensing techniques. 

 It is unclear why Part D sponsors and their agents would choose to reimburse 

LTC pharmacies in a manner that does not promote more efficient dispensing 

methodologies. One possibility is that the smaller LTC pharmacies lack the leverage to 
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negotiate differential fees due to the market power of the largest LTC pharmacies, which 

control more than 60 percent of the market. This would be the case only if the largest 

LTC pharmacies had the market power over the largest PBMs to not only set their own 

dispensing fees, but also the dispensing fees of their competitors. However, we have not 

heard any evidence or testimony that would support that conclusion. 

 Another possibility is that Part D sponsors are not motivated to promote 

efficiencies in long-term care prescription drug utilization. This could be the case 

because their liability for these costs is substantially less than that of the federal 

government. Since most LTC residents are LIS-entitled individuals or likely to incur 

costs subject to catastrophic coverage, or both, sponsor liabilities are actually minimized 

when the LTC resident beneficiary reaches the TrOOP threshold as quickly as possible. 

Thus, sponsors' interests may actually be aligned with those LTC pharmacies with the 

least efficient dispensing methodologies, since both parties' interests may be served by 

higher costs. 

 A final possibility is that Part D sponsors believe the § 423.154 and/or the 

upcoming daily cost-sharing rate requirement at § 423.153(b)(4)(i) (which becomes 

effective January 1, 2014) mandate the proration of dispensing fees when less than 

30 days is dispensed. This is not accurate, and we discuss this misunderstanding both 

further in this section and in the section entitled, "Application and Calculation of Daily 

Cost-Sharing Rates" of this proposed rule. 

 Given the clear intent of the Affordable Care Act to reduce wasteful dispensing in 

the LTC setting, CMS is proposing to prohibit payment arrangements that penalize the 
 209 

offering and adoption of more efficient LTC dispensing techniques. This would be 

accomplished by adding a new clause (f) in § 423.154 that would state that a Part D 

sponsor must not, or must require its intermediary contracting organizations not to, 

penalize long-term care facilities' choice of more efficient uniform dispensing techniques 

by prorating dispensing fees based on days' supply or quantity dispensed. This clause 

would also state that a sponsor or its intermediary contracting organizations must ensure 

that any difference in payment methodology among LTC pharmacies incentivizes more 

efficient dispensing techniques. 

b. Misinterpretation of Language as Requiring the Proration of Dispensing Fees 

(§ 423.154) 

 Our second proposed change to § 423.154 is to eliminate paragraph (e), which we 

believe has caused confusion. Section 423.154(e) currently states: "Regardless of the 

number of incremental dispensing events, the total cost sharing for a Part D drug to 

which the dispensing requirements, under this paragraph (a) apply must be no greater 

than the total cost sharing that would be imposed for such Part D drug if the requirements 

under paragraph (a) of this section did not apply." The purpose of this language was to 

ensure that sponsors did not assess multiple monthly copayments for each incremental 

dispensing event. We believe misinterpretation of paragraph (e) may have prompted 

some sponsors to prorate dispensing fees, even though the regulation does not address 

dispensing fees. 

 Moreover, effective January 1, 2014, the daily cost-sharing rate requirement will 

apply whenever a prescription is dispensed by a network pharmacy for less than a 30 
 210 

days' supply, unless the drug is excepted pursuant to § 423.153(b)(4)(i), regardless of the 

setting in which the applicable drugs are dispensed. In other words, the daily cost-sharing 

rate requirement will apply to brand drugs dispensed in LTC facilities to the extent they 

must be dispensed in supplies less than 30 days pursuant to § 423.154, and to generic 

drugs, to the extent a sponsor voluntarily dispenses generic drugs in LTC facilities in 

supplies less than 30 days. Consequently, the requirement of § 423.153(b)(4)(i) will 

make § 423.154(e) unnecessary, and we believe retaining both provisions could cause 

further confusion. (Note that we propose some technical changes to the daily 

cost-sharing rate requirement in the section, entitled "Application and Calculation of 

Daily Cost-Sharing Rates" of this proposed rule) For these reasons, we propose to delete 

§ 423.154(e). 

c. Additional Waiver for LTC Pharmacies using Restock and Reuse Dispensing 

Methodologies under Certain Conditions (§ 423.154) 

 Our third proposed change to § 423.154 is to waive the short-cycle dispensing 

requirements for LTC pharmacies meeting certain conditions. Currently, § 423.154(c) 

waives the requirements for pharmacies when they dispense brand name Part D drugs to 

enrollees residing in intermediate care facilities for the mentally retarded and institutes 

for mental disease, as well as for I/T/U pharmacies. We have learned that some 

institutional pharmacies maintain custody of medications within the LTC facilities 

through operating a closed pharmacy within the facility, and as a result can ensure 

sufficient quality control over these medications to return all unused medications to stock 

for reuse that are eligible for return and reuse under applicable law. This has led us to 
 211 

believe there is another category of pharmacies, such as some on site pharmacies in 

veterans' homes, for which a waiver from the LTC short cycle dispensing requirement 

may be appropriate, if they meet certain conditions that demonstrate that applying the 

14-day dispensing requirements in these instances would not serve to reduce waste. 

 We are proposing to waive the requirements of § 423.154(a) for an LTC 

pharmacy that exclusively uses the dispensing technique of returning all unused 

medications to stock that can be restocked under applicable law for reuse and rebating 

full credit for the ingredient costs of the unused medication to the PDP sponsor. The 

proposed waiver would also require that for those drugs that cannot be returned for full 

credit and reuse under applicable law, such as controlled substances, the pharmacy uses a 

dispensing methodology that results in the delivery of no more than 14 days of a drug at a 

time. We would propose that the waiver would apply on a uniform basis to all similarly 

situated LTC pharmacies, but not to a pharmacy organization that is contracted to use this 

technique at some, but not all, of its pharmacies. Rather, the waiver would only apply to 

the qualifying pharmacies themselves. We would not require the pharmacy to credit back 

any amount of the dispensing fee when drugs are returned for reuse, since the level of 

effort for the pharmacies would not be expected to be decreased in any way. If anything, 

the level of effort would be increased to implement the appropriate internal controls for 

inspection and return to inventory of the unused medication. 

 We solicit comments on whether there are any variations in operations that may 

exist among LTC pharmacies that we need to consider in determining whether to 

implement this waiver. We also solicit comments on how such pharmacies could be 
 212 

identified in industry standard transaction coding, as well as in network contracting and 

auditing protocols. We believe that such pharmacies would be expected to have 

documentation of relevant protocols approved by Pharmacy and Therapeutics (P&T) 

committees of the LTC facility, as well as records supporting the returns to inventory that 

could be compared with billing credits. We solicit comments on this understanding as 

well. 

 We further solicit comments on our proposal that to qualify for the waiver, a 

pharmacy would have to dispense any drugs that cannot be restocked under applicable 

law, such as controlled substances, in no greater than 14-day supply increments. Our 

rationale in proposing this condition to the waiver is that we do not want the waiver to 

inadvertently result in large quantities of medications being dispensed to Part D enrollees 

serviced by the pharmacies that would qualify for the waiver because they cannot be 

restocked under applicable law. Therefore, we are proposing that such drugs should still 

effectively be subject to the short-cycle dispensing requirement. In this regard we wish 

to understand the extent of waste in pharmacies that would qualify for the waiver we are 

proposing, if we did not impose the requirement that drugs that cannot be restocked 

would be subject to a dispensing increment of 14-day supply or less if they cannot be 

restocked under applicable law. If persuaded that the waste would be insignificant, we 

may be persuaded to eliminate this condition to the waiver. 

 We acknowledge that in the aforementioned April 15, 2011 Final Rule, we 

responded to some comments requesting that we exempt from the short-cycle dispensing 

requirement those pharmacies that already utilize low waste practices or ''return for credit 
 213 

and reuse.'' In response, we stated that although "return for credit and reuse" could reduce 

unused drugs in LTC facilities, there are limitations to this approach, especially because 

not all states allow "return for credit and reuse," and reuse of controlled substances is 

limited by the Drug Enforcement Administration. Because of these limitations, we stated 

that we believe financial waste is more effectively reduced by preventing the 

accumulation of unused drugs in the first place, rather than addressing handling of 

unused drugs after they have accumulated in the LTC facilities. 

 This proposal means that we have reconsidered our decision not to waive the 

short-cycle dispensing requirement for LTC pharmacies that use "return for credit and 

reuse" dispensing practices, because we did not fully consider such a waiver previously 

in the context of comments received about return and reuse being a universal alternative 

approach to short-cycle dispensing. In addition, we continue to receive persuasive 

arguments that such pharmacies should be exempt; for example, from some veterans' 

homes with on-site pharmacies. However, as we explained previously, we are still 

concerned about waste associated with drugs that are not permitted to be returned for 

reuse and credit under applicable law in such LTC pharmacies in considering this 

additional exemption, and for this reason have specifically solicited comments on the 

extent of waste in such pharmacies that would qualify for the proposed additional waiver. 

d. Technical Change to Eliminate the Requirement that PDP Sponsors Report on the 

Nature and Quantity of Unused Brand and Generic Drugs (§ 423.154) 

 Finally, we are proposing to make a technical change to § 423.154(a)(2), which 

requires Part D sponsors to collect and report information, in a form and manner 
 214 

specified by CMS, on the dispensing methodology used for each dispensing event 

described by paragraph (a)(1) of this section, as well as on the nature and quantity of 

unused brand and generic drugs dispensed by the pharmacy to enrollees residing in a 

LTC facility. This latter reporting requirement is waived for sponsors for drugs 

dispensed by pharmacies that dispense both brand and generic drugs in no greater than 

7-day increments. 

 In a memorandum titled, "Modifications to the Drug Data Processing System 

(DDPS) in Relation to Appropriate Dispensing of Prescription Drugs in Long Term Care 

Facilities," issued by CMS on August 3, 2012, we explained that we planned to use the 

PDE data in conjunction with other CMS data (such as MDS) to determine the extent to 

which 14 day or less dispensing to enrollees in LTC facilities reduces the amount of 

unused drugs in LTC. We did this to lessen the burden on sponsors that would be created 

by a separate reporting requirement. Therefore, it is no longer necessary to waive the 

reporting requirement for any Part D sponsor, because Part D sponsors comply with the 

requirement (in the form and manner we specified in the previously-referenced 

memorandum) via PDE submission. Thus, we are deleting the first sentence of 

§ 423.154(a)(2) to eliminate any confusion that there is a separate reporting requirement. 

22. Applicable Cost-Sharing for Transition Supplies. Transition Process Under Part D 

§ 423.120(b)(3) 

We established transition requirements under § 423.120(b)(3) for Part D sponsors 

to address the needs of new Part D plan enrollees who are transitioning from other 

prescription drug coverage (Part D or otherwise), and whose current drug therapies may 
 215 

not be included on their Part D plan's formulary (including Part D drugs that are on a 

plan's formulary but require prior authorization or step therapy under the plan's utilization 

management requirements). While § 423.120(b)(3)(iii) specifies that PDP plans must 

provide a temporary fill when an enrollee requests a fill of a non-formulary drug during 

the transition time period (including Part D drugs that are on a plan's formulary but 

require prior authorization or step therapy under a plan's utilization management rules), it 

does not currently specify the cost sharing that should apply to such fills. Current 

guidance (at § 30.4.9 of Chapter 6 of the Medicare Drug Benefit Manual, found at 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/

Downloads/Chapter6.pdf) states that a Part D sponsor may charge cost sharing for a 

temporary supply of drugs provided under its transition process. Further, cost sharing for 

transition supplies for low-income subsidy (LIS) eligible beneficiaries cannot exceed the 

statutory maximum copayment amounts. However, for non-LIS enrollees, we stated that 

a sponsor must charge cost sharing based on one of its approved drug cost sharing tiers 

(if the sponsor has a tiered benefit design), and this cost sharing must be consistent with 

cost sharing that the sponsor would charge for non-formulary drugs approved under a 

coverage exception. This guidance created a great deal of confusion on the part of 

sponsors and beneficiaries. Charging the same cost sharing for non-formulary drugs, 

which are approved during transition, as for formulary drugs subject to utilization 

management edits (such as prior authorization or step therapy), that are overridden during 

transition while waiting for the utilization management requirement to be satisfied, is 

likely to be inconsistent with a tiered benefit design. It is possible that beneficiaries may 
 216 

pay more during transition than for his or her drug's normal designated formulary tier. 

Conversely, it is also possible that the beneficiary may pay more once the utilization 

management edit had been satisfied than he or she did under the transition fill. The 

following examples will illustrate these scenarios, assuming that the beneficiary is 

eligible for a transition fill, using the following hypothetical formulary structure: 

TABLE 3: HYPOTHETICAL FORMULARY STRUCTURE 

Tier Tier Description Beneficiary Cost Sharing 

1 Generics $5 copay/30-days' supply 

2 Preferred Brands $10 copay/30-days' supply 

3* Non-preferred Brands $15 copay/30-days' supply 

4 Specialty drugs (includes both 

generics & brands) 

25% coinsurance/30-days' supply 

*Tier 3 is the designated formulary exception tier 

 

 Each of the following examples shows the fill date, quantity filled, the associated 

days' supply, whether a transition fill was applied, and as a result, if either formulary 

tiering or exception tiering was applied to the enrollee's cost sharing. In all cases, if a 

transition fill was applied, the enrollee's cost sharing used exception tiering. 

TABLE 4: EXAMPLE 1 -- THE BENEFICIARY'S DRUG IS ON TIER 2 WITH A 

PRIOR AUTHORIZATION REQUIREMENT. 

Date of Fill Quantity 

Days' 

Supply 

Transition 

Fill applied 

Cost Share used 

Formulary Tiering (FT) 

or Exception Tiering (ET) 

1/1/13 30 30 Y $15.00 - ET 

The beneficiary obtains the PA, and the drug is no long considered a transition fill. 

2/1/13 30 30 N $10.00 - FT 

 In this example, if the exception tier is used on the transition fill, the beneficiary's 

cost sharing amount is reduced once he or she obtains the prior authorization approval. 

However, if the drug's designated formulary cost sharing amount had been used, the cost 
 217 

sharing amount would have stayed the same, and would have been the same cost as the 

cost sharing amount shown on the formulary. 

TABLE 5: EXAMPLE 2 - THE BENEFICIARY'S DRUG IS ON TIER 4 WITH A 

PRIOR AUTHORIZATION. 

Date of Fill Quantity 

Days' 

Supply 

Transition 

Fill applied 

Cost Share used 

Formulary Tiering (FT) 

or Exception Tiering (ET) 

1/1/13 30 30 Y $15.00 – ET 

The beneficiary obtains the PA, and the drug is no long considered a transition fill. 

2/1/13 30 30 N 25% - FT 

In this example, if the exception tier is used on the transition fill, the beneficiary's 

cost sharing amount will increase once he or she obtains the PA since the designated 

formulary tier has a higher cost sharing amount than the exception tier. If instead, the 

drug's designated formulary cost sharing had been used, the cost sharing amount would 

have remained the same for both fills. This scenario is particularly confusing for 

enrollees, since they pay more after receiving the required approval than they did under 

transition. 

TABLE 6: EXAMPLE 3 - THE BENEFICIARY'S DRUG IS NOT ON 

FORMULARY WITH A FORMULARY EXCEPTION. 

Date of Fill Quantity 

Days' 

Supply 

Transition 

Fill applied 

Cost Share used 

Formulary Tiering (FT) 

or Exception Tiering (ET) 

1/1/13 30 30 Y $15.00 – ET 

The beneficiary obtains the FE, and 

the sponsor continues to treat the drug as non-formulary. 

2/1/13 30 30 N $15.00 - ET 

Plan sponsors are currently required to designate to which tier a non-formulary 

drug will apply once a formulary exception is granted. Sponsors can continue to treat the 
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drug as non-formulary and continue the exception for the remainder of the coverage year, 

in which case, cost sharing at the exception tiering continues. 

We believe that more consistent treatment of formulary and non-formulary drugs, 

respectively, will simplify the benefit and reduce sponsor and beneficiary confusion. 

Consequently, we propose to add a paragraph at § 423.120(b)(3)(vi) clarifying that when 

providing a transition supply, the cost sharing is determined as follows: A Part D 

sponsor must charge cost sharing for a temporary supply of drugs provided under its 

transition process such that the following conditions are met: 

● For low-income subsidy (LIS) enrollees, a sponsor must not charge higher cost 

sharing for transition supplies than the statutory maximum copayment amounts. 

● For non-LIS enrollees, a sponsor must charge— 

 ++ The same cost sharing for non-formulary Part D drugs provided during the 

transition that would apply for non-formulary drugs approved through a formulary 

exception in accordance with § 423.578(b); and 

 ++ The same cost sharing for formulary drugs subject to utilization management 

edits provided during the transition that would apply once the utilization management 

criteria are met. 

23. Medicare Coverage Gap Discount Program and Employer Group Waiver Plans 

(§ 423.2325) 

Section 3301 of the Affordable Care Act, codified in section 1860D-43 and 

1860D-14A of the Act, established the Medicare Coverage Gap Discount Program 

(Discount Program), beginning in 2011. Under the Discount Program, manufacturer 
 219 

discounts are made available to applicable Medicare beneficiaries receiving applicable 

covered Part D drugs while in the coverage gap. Section 1860D-14A(c)(1)(A)(ii) of the 

Act requires the manufacturer discount to be provided to beneficiaries at the 

point-of-sale. 

Employer Group Waiver Plans (EGWPs) are customized employer-offered plans 

available exclusively to employer/union health plan Part D eligible retirees and/or their 

Part D eligible spouse and dependents. Section 423.458(c)(4) requires sponsors offering 

EGWPs to comply with all Part D requirements unless those requirements have been 

specifically waived or modified by us using our authority under section 1860D-22(b) of 

the Act. We do not regulate any supplemental benefits that EGWPs offer outside of Part 

D prescription coverage. Employers/Unions offering EGWPs must ensure that any 

supplemental benefits comply with any applicable requirements for issuance under state 

insurance laws and/or ERISA rules (see January 25, 2013 Insurance Bulletin from the 

Center for Consumer Information and Insurance Oversight: 

http://www.cms.gov/cciio/resources/Regulations-and-Guidance/index.html#Health 

Market Reforms). 

EGWP benefits are generally structured to provide additional coverage so that 

their enrollees do not actually experience a coverage gap. However, the Affordable Care 

Act did not exclude EGWP enrollees from the Discount Program. Therefore, in order for 

an applicable drug to be covered by EGWPs, it must be covered under a manufacturer 

agreement, and the manufacturer must pay applicable discounts as invoiced. Beginning 

in 2014, all EGWP benefits beyond the parameters of the defined standard benefit will be 
 220 

treated as non-Medicare Other Health Insurance (OHI) that wraps around Part D. We 

specifically excluded supplemental coverage offered through EGWPs from the definition 

of Part D supplemental benefits in § 423.100. We made this a requirement with respect 

to EGWPs so that the discount amount could be consistently and reliably determined. 

This was necessary to ensure that we can determine that the discount is always calculated 

accurately since we do not collect information on all EGWP retiree benefit arrangements 

to determine actual supplemental benefits. Not only would collecting such information 

be impractical, but we also believe instituting a requirement to collect the specific 

information on all such benefits would be so burdensome as to hinder the design of, the 

offering of, or the enrollment in employer plans. Consequently, the discount calculation 

will be based upon the Part D Defined Standard benefit for all EGWPs beginning in 

2014. While we believed that our justification for excluding any supplemental benefits 

offered through EGWPs from Part D benefits clearly indicated that the basic EGWP Part 

D benefits would be limited to Defined Standard benefit because that is the only way we 

can determine that the discount is calculated accurately, we are taking the opportunity 

now to propose this specific requirement in § 423.2325(h)(1) to remove any ambiguity. 

Treating EGWP supplemental benefits as OHI and always calculating the 

manufacturer discount based on the Defined Standard benefit means that discount 

payments likely will increase for some applicable beneficiaries enrolled in EGWPs over 

the amounts that would have been calculated when these benefits were considered as 

supplemental benefits for purposes of the coverage gap discount program. As noted 

previously, EGWPs' benefits are generally structured to provide additional coverage so 
 221 

that their enrollees do not actually experience a coverage gap. Now that the Part D 

portion of the EGWP plan is based on the Defined Standard benefit, the coverage gap 

discount pays before the EGWP supplemental benefits (that is, OHI) are applied. 

Consequently, Part D sponsors that administer EGWP plans will receive discount 

amounts that may not offset the enrollees' final out-of-pocket cost-sharing, as the 

discounts do in individual market Part D plans when it is applied after Part D 

supplemental benefits. Nevertheless, we think it is important that these discounts that are 

calculated and paid prior to the application of OHI are apparent to the employer and 

union group clients of our Part D sponsors. This transparency ensures that the parties 

who are ultimately responsible for the both the EGWPs' plan design and the financial 

integrity of the plans are aware of the discount amounts received. We anticipate that the 

employer and union group administrators will take the additional funds into account 

when negotiating and designing retiree prescription drug benefits. We believe that his 

will ultimately benefit the beneficiaries enrolled in these plans. 

We considered several approaches for ensuring that all manufacturer payments 

accrue to the benefit of beneficiaries enrolled in EGWPs. The most obvious approach 

would have been to require EGWPs to use manufacturer payments to reduce beneficiary 

premiums or cost-sharing in the non-Part D portion of benefit. While this approach 

would have offered the most straightforward benefit for beneficiaries, it has several 

serious obstacles. First, we do not believe that we have the authority to require any 

specific application of the coverage gap discount payments to OHI benefits that are by 

definition non-Medicare private market benefits outside our regulatory purview. In 
 222 

addition, since we do not collect premium or benefit information for EGWPs, monitoring 

compliance with such requirements would not be feasible. Moreover, establishing an 

affirmative requirement would necessitate establishing standards for how the discount 

amounts should be applied to the retiree benefits. We frankly do not have the depth of 

knowledge of private and public sector retiree benefits necessary to establish such 

standards. We can envision that more prescriptive requirements about how discount 

amounts can be used might interfere with critical utilization management and cost control 

features of these benefits, conflict with employment or bargaining agreements particulars, 

or have other unintended consequences. We also considered not taking any action since 

anecdotal evidence suggests that some employer groups are already using the discounts 

to reduce premiums, and we have no reason to believe that this is not generally the case. 

However, we cannot be sure that all employer groups are aware of how Discount 

Program payments are calculated or the value of the payments attributable to their 

enrollees. After consideration, we believe that our best course is to pursue full disclosure 

and transparency so that employer groups have the information they need to take full 

advantage of these discounts to strengthen and safeguard their enrollees' retiree benefits. 

Through the proposed regulation we are seeking to ensure that employer groups are fully 

aware of Discount Program payments attributable to their enrollees so that the payments 

can be accurately anticipated and incorporated into EGWP benefit designs. Equipped 

with projected and actual payments received, each employer group can design a benefit 

package that best meets the needs of its retirees. 
 223 

 To ensure that Discount Program payments are communicated to employer groups 

in a uniform fashion, we propose to codify notification requirements by amending 

§ 423.2325 to add a new paragraph (h) requiring Part D sponsors of EGWPs to disclose 

to each employer group the projected and actual manufacturer discount payments under 

the Discount Program attributable to the employer group's enrollees. We further propose 

that such disclosures happen at least annually or upon request. Part D sponsors must also 

be prepared to demonstrate to CMS that such notifications have been made upon request.

24. Interpreting the Non-Interference Provision (§ 423.10) 

 Since the MMA created the Part D benefit in 2003, we have never formally 

interpreted section 1860D-11(i) of the Act, which is known as the noninterference 

provision. In practice we have generally invoked the spirit of this provision in declining 

to intervene in negotiations or disputes involving payment-related contractual terms 

between participants in the drug distribution channel. However, it is increasingly clear 

from the many questions that continue to arise when working with stakeholders on 

matters ranging from lawsuits to policy clearance to complaint resolution that the agency 

and all Part D stakeholders would benefit from a clear, formal interpretation of these 

limits on our authority. Some stakeholders appear to believe the prohibition on 

interference in negotiations extends far beyond the boundaries that we consider relevant, 

while others insist our authority extends into arbitrating matters that seem to us to clearly 

fall within the intended prohibition. Therefore, we are proposing an interpretation 

through rulemaking in order to clarify and codify the extent of these limits on our 

authority. 
 224 

 The noninterference provision at section 1860D-11(i) of the Act provides that, "In 

order to promote competition under this part and in carrying out this part, the Secretary: 

(1) may not interfere with the negotiations between drug manufacturers and pharmacies 

and PDP sponsors; and (2) may not require a particular formulary or institute a price 

structure for the reimbursement of covered Part D drugs." In beginning with the words 

"In order to promote competition under this part and in carrying out this part..." we 

believe that the Congress intended that the activities addressed in the rest of the provision 

should take place through private market competition. We interpret this to mean two 

separate but related goals. The first goal is that the Secretary through CMS should 

promote private market competition in the selection of Part D drugs for Part D sponsor 

formularies. The second goal is that CMS should not create any policies that would be 

expected to interfere with competitive market negotiations leading to the selection of 

drug products to be covered under Part D formularies. Therefore, in light of these two 

goals we believe there is both a duty to act — to promote competition in the private 

market for Part D drugs — and a duty to refrain from acting — to avoid intervention in 

private market negotiations that take place in the context of that competitive market. 

 Economic theory on competitive markets suggests that the duty to ensure a 

competitive market means that within the limits of our authority we should seek to 

encourage certain features of the market that promote more perfect competition. This 

would include such goals as decreasing the transaction cost of acquiring information on 

products offered in the market, increasing the transparency of prices, ensuring a large 

number of buyers and sellers, and minimizing barriers to entry to the extent possible 
 225 

while still ensuring quality. We have pursued these types of goals since the start of Part 

D program implementation through such efforts as the Medicare Prescription Drug Plan 

Finder, the development of the Medicare star ratings, our extensive efforts to provide 

technical assistance to new and existing sponsors, and our meaningful differences 

policies that improve the comparability of Part D formularies and benefit packages. We 

will continue to seek opportunities to improve competition. As an initial matter, in light 

of our interpretation of the general purpose of section 1860D-11(i) of the Act, we 

propose a general rule at § 423.10(a) that CMS promotes fair private market competition 

in the market for Part D drugs. 

 There is also a duty to avoid intervention in private market negotiations that take 

place in the context of that competitive market. We believe the intent of 1860D-11(i) is 

to ensure that we do not create any policies or become a participant in any discussions 

that could be expected to interfere with negotiations leading to the selection of drug 

products to be covered under Part D formularies. By this we mean selection by Part D 

sponsors (or other intermediary contracting organizations) of specific manufacturers' 

products for inclusion on formularies, formulary tier placement, and negotiations of 

acquisition costs, rebates, and any other price concessions. We believe this interpretation 

is consistent with a textual reading of 1860D-11(i) and with how private market 

transactions determine which prescription drug products are covered under Part D plans. 

 Private market competition for prescription drugs is a complex process that has 

been described in detail elsewhere, such as in the 2007 CBO report entitled "Prescription 

Drug Pricing in the Private Sector" at: http://www.cbo.gov/publication/18275. This 
 226 

process involves specific transactions between manufacturers and distribution channel 

participants (generally wholesale distributors and dispensing pharmacies) that are 

different than the transactions that take place between manufacturers and ultimate 

purchasers (primarily health plans or self-insured employers and/or their intermediate 

contracting organizations, such as pharmacy benefit managers (PBMs)). Pharmacies will 

stock most commonly used brand medications but will selectively stock generic products 

to leverage volume in return for the best prices from competing generic manufacturers. 

Thus, generally speaking, the price negotiations between manufacturers and pharmacies 

differentially determine which generic products are stocked and dispensed by 

pharmacies. These price negotiations are generally based on discounts off manufacturer 

list prices. Health plans and PBMs, in contrast, will base decisions on which 

multiple-source or therapeutically equivalent brand drug products will be covered under a 

plan in part on the evaluation of the relative cost effectiveness of the competing drug 

products. This will be determined by comparing both the list prices of the drug products 

and the level of rebates negotiated between the sponsor and the manufacturers of the 

brand products. Thus the price negotiations between manufacturers and health plans 

determine which brand products are placed on the plan's formulary and available to 

enrollees. These additional price negotiations are generally around the level of rebates 

for both formulary and tier placement. These distinct sets of negotiations in the private 

market between manufacturers and pharmacies on the one hand, and between 

manufacturers and plan sponsors on the other hand, support our textual reading of section 

1860D-11(i)(1) of the Act to prohibit CMS involvement in negotiations between 
 227 

manufacturers and pharmacies, and between manufacturers and plan sponsors. There are 

also separate price negotiations between plan sponsors (or their intermediary contracting 

organizations) and pharmacies around the negotiated prices required for network 

participation. However, as will be discussed in more detail in this section, since the 

statute establishes numerous requirements that CMS must regulate concerning access to 

network pharmacies and negotiated prices, we believe that a CMS role in negotiations 

between plan sponsors and pharmacies is not prohibited under section 1860D-11(i)(1) of 

the Act. 

We note that in The Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 Conference Agreement (Conference Agreement), in addition 

to the statutory language, MMA drafters included the following sentence: "Conferees 

expect PDPs to negotiate price concessions directly with manufacturers." We believe 

this statement supports our understanding that the primary focus of section 1860D-11(i) 

of the Act is on the negotiations between plan sponsors (or their intermediary contracting 

organizations) and manufacturers for rebates and other price concessions that ultimately 

determine which multiple source products will be placed on a sponsor's formulary. The 

outcome of these negotiations also determine tier placement, or the level of cost sharing 

that will be charged for the drug, whether the drug will be subject to certain utilization 

management controls, and may even influence the list prices that manufacturers submit to 

the commercial databases and that form the basis of most purchasing contracts in the 

drug distribution channel. 

Section 1860D-11(i)(1) of the Act states that we "may not interfere with the 
 228 

negotiations between drug manufacturers and pharmacies and PDP sponsors". We 

believe that the term "interference" in this context should be interpreted as prohibiting 

our involvement in discussions between manufacturers and their distribution channel 

customers (such as wholesalers and pharmacies) or the ultimate purchasers of 

prescription drugs (such as plan sponsors and PBMs) leading to signed contracts. We 

believe that the negotiations addressed by the first clause should be read to apply to 

discussions manufacturers have with their customers because, as discussed previously, 

this textual reading comports with the nature of the transactions that occur in the private 

market that determine which drug products will be covered under Part D plans. We also 

believe section 1860D-11(i)(1) of the Act should be interpreted as prohibiting our 

involvement in arbitration of agreements already executed between any of these parties. 

It would not make sense to prohibit CMS involvement in discussions leading up to an 

executed agreement only to allow involvement in arbitrating the terms of the agreement 

afterwards. Thus we interpret the word "negotiations" to mean not only the initial 

discussions leading to executed agreements, but also any subsequent discussions between 

the parties as to what those agreements require. We are periodically asked to become 

involved in both initial negotiations and in disputes and renegotiations by parties trying 

to get CMS to weigh in on one side or another on the premise that failure to do so will 

lead to access issues for Medicare beneficiaries. We also periodically are asked to 

address terms and conditions of executed agreements that one of the parties believes is 

unfair. We believe that our involvement in these sorts of issues is precisely what the 

statute prohibits in section 1860D-11(i)(1) of the Act – our weighing in on a contract 
 229 

negotiation or dispute could influence the outcome. In other words, government 

involvement could affect market forces around prescription drugs in ways that change the 

value that would otherwise be assigned to these products in a competitive market. We 

believe we should not pick winners and losers in formulary selection negotiations, and 

that the remedies for disputes should be determined in accordance with the terms of the 

contracts or in the courts having jurisdiction over the contracts. 

Therefore we interpret the prohibition in section 1860D-11(i)(1) of the Act on 

interference in negotiations to pertain to discussions either between prescription drug 

manufacturers and pharmacies, or between prescription drug manufacturers and Part D 

sponsors (or their intermediary contracting organizations, hereafter included by 

association whenever we refer to Part D sponsors). Our interpretation is based on the 

sequential phrasing of the clause "negotiations between drug manufacturers and 

pharmacies and PDP sponsors." Because in general these negotiations are not among all 

three parties at once, and because manufacturers separately contract with pharmacies for 

the purchase of inventory and with sponsors for formulary placement, we believe the 

quoted phrase can be interpreted as recognizing these distinct types of negotiations. 

Under such a reading, the prohibition on interference in negotiations, as described in 

section 1860D-11(i)(1) of the Act, would not pertain to negotiations between Part D 

sponsors and pharmacies. 

This does not mean, however, that we would be free to interfere in 

sponsor-pharmacy negotiations. Indeed, we believe section 1860D-11(i)(2) of the Act 

sets forth specific limits on our ability to involve ourselves in Part D sponsors' 
 230 

arrangements with their network pharmacies, as discussed in more detail later in this 

section. However, we believe that our proposed interpretation of section 1860D-11(i)(1) 

of the Act as not applying to the sponsor-pharmacy negotiations is supported by the 

provision's context. There are numerous statutory provisions that require us to directly 

intervene in the contractual relationship between Part D sponsors and network 

pharmacies, and these provisions clearly signal that the Congress expected CMS 

involvement in at least some of these negotiations. The Congress has provided many 

contractual requirements for CMS to enforce between sponsors and pharmacies; just the 

drug-cost-related of these include: interpretation of what "access to negotiated prices" 

means, any-willing-pharmacy standard terms and conditions, prohibition on any 

requirement to accept insurance risk, prompt payment, and payment standard update 

requirements. So it is clear that Part D sponsors and pharmacies do not have sole 

discretion to interpret these specific matters. We would be obligated to intervene in 

disputes over whether proposed or finalized contractual arrangements violated our rules 

in any area where our oversight is directed under the statute. Therefore, it is clear that 

such involvement could not be what the Congress intended to prohibit. Moreover, we 

observe a growth in related-party relationships between Part D sponsors and network 

pharmacies, where the distinction between the sponsor and the pharmacy is increasingly 

unclear, and there is no reason to believe that the Congress intended that we are 

prohibited from oversight of the sponsor's dealings with itself. In addition, we believe 

the goals of the non-interference provision generally support CMS avoidance of being an 

arbiter of private disputes. Thus, we would also decline to intervene in contractual 
 231 

disputes between sponsors and network pharmacies except in matters implicating CMS 

requirements, because to do so might distort private market outcomes in unpredictable 

ways. Therefore, we propose at § 423.10(b) that CMS may not be a party to discussions 

between prescription drug manufacturers and pharmacies, or between drug manufacturers 

and Part D sponsors, and may not arbitrate the meaning of or compliance with the terms 

and conditions of agreements reached between these parties, except as necessary to 

enforce CMS requirements applicable to those agreements. Thus, we could only be 

involved in such discussions in order to explain CMS requirements and to ensure 

compliance with Part D rules and regulations. We also add that nothing in this 

prohibition limits our authority to require documentation of and access to all such 

agreements, or to require the inclusion of terms and conditions in agreements when 

necessary to implement requirements under the Act. 

 The first part of the section 1860D-11(i)(2) of the Act states that CMS "may not 

require a particular formulary". The noninterference clause must be read in context of 

the other provisions that give CMS authority with respect to formularies, so we propose 

to interpret the term "particular formulary" to mean the selection of specific manufacturer 

licensed drug products to be on formulary, or on any particular tier of a formulary, 

assuming the product meets the definition of a Part D drug. We interpret the first part of 

section 1860D-11(i)(2) of the Act to prohibit us from developing formulary guidelines 

that prefer one manufacturer's product over another's in Part D formularies, leading to 

more limited formularies such as provided by the Department of Defense and the 

Veteran's Administration. The most efficient formularies will make formulary selections 
 232 

and then exclude all or most competing multi-source and therapeutically equivalent brand 

products in order to concentrate volume and maximize rebates. Given the size of the Part 

D market, if CMS were able to similarly limit access to Part D formularies to certain 

products, this would bestow significant competitive advantage on the manufacturers of 

selected products and significant competitive disadvantage on manufacturers of 

competing products. Such limits would be expected to fundamentally alter supply and 

demand in the marketplace. This prohibited sort of selection would be distinguished 

from CMS formulary requirements that may require particular types of drug entities to be 

on all formularies, or on preferred tiers, in order to provide non-discriminatory access to 

drugs necessary to treat conditions in all Medicare beneficiaries, or to address drug 

classes of clinical concern (see section III.A.14 of this proposed rule). Therefore, we 

propose a provision prohibiting establishment of formulary drug product selection at 

§ 423.10(c) that specifies that CMS does not determine the specific drug products to be 

included on Part D sponsor formularies or any tier placement of such products, except as 

required to comply with § 423.120(b)(1)(v) or § 423.272(b)(2). 

The second part of section 1860D-11(i)(2) of the Act states that CMS "may not 

institute a price structure for the reimbursement of covered Part D drugs". Again, the 

noninterference clause must be read in context of the other provisions that give CMS 

responsibilities in a number of areas that pertain to pricing, so we interpret the phrase 

"price structure" to refer to establishing either absolute or relative indices of price for Part 

D drugs. Specifically, we believe the intent of this provision is to prohibit two types of 

intervention by CMS. The first prohibited activity is that CMS may not require Part D 
 233 

drug acquisition costs or sales prices to be a function of (be defined relative to) any 

particular published or unpublished pricing standard, either existing or future. Thus, we 

could not require that Part D prices be based on, or be any particular mathematical 

function (such as a percentage or multiple) of established pricing standards such as 

Average Wholesale Price, Wholesale Average Cost, Average Manufacturer Price, 

Average Sales Price, Federal Supply Schedule, 340b pricing, etc. The second prohibited 

activity is that CMS cannot require price concessions (from any standard or basis) to be 

at any specific (absolute) dollar amount or equal to a level specified in other legislative 

requirements for other federal programs. Thus, we could not, for example, set minimum 

or maximum dollar prices for a drug product or require that Part D prices be offered at

acquisition cost, or at the 'best price' applicable under the Medicaid program. However, 

since the statute requires us to regulate many aspects of how drug costs are made 

available and displayed to beneficiaries and treated in Part D bidding and payment 

processes, it is clear that we have an important role to play in establishing rules for 

consistent treatment of drug costs in the program. Consequently, we may establish 

definitions of what constitutes a pricing standard, a price concession, a cost, etc. We may 

also establish rules concerning how drug costs are treated under Part D, including, but not 

limited to, how such amounts are disclosed in the marketplace, projected in Part D bids, 

made available to beneficiaries at point of sale, reported in Explanation of Benefits 

(EOBs), submitted to CMS, and treated in CMS payments to Part D sponsors. Therefore, 

we propose a provision prohibiting establishment of drug price reimbursement 

methodologies at § 423.10(d) that specifies that CMS does not establish drug product 
 234 

pricing standards or the dollar level of price concessions at any stage in the drug 

distribution channel for Part D drugs. Nothing in this prohibition limits our authority to 

require full disclosure or uniform treatment and reporting of drug costs and prices. 

25. Pharmacy Price Concessions in Negotiated Prices (§ 423.100) 

We have learned that some Part D sponsors have been reporting costs and price 

concessions to CMS in different ways. This reporting differential matters because this 

variation in the treatment of costs and price concessions affects beneficiary cost sharing, 

CMS payments to plans, federal reinsurance and low-income cost-sharing (LICS) 

subsidies, and manufacturer coverage gap discount payments. Differential treatment of 

costs would also be expected to affect plan bids. We do not collect sufficient detail in 

price concession data reported to CMS to quantify this impact, but this conclusion 

follows from the admitted reporting of some pharmacy price concessions in the annual 

aggregate price concession reporting (that is, the DIR reporting) during the coverage year 

payment reconciliation process, rather than as part of the negotiated price. (This issue, 

and its financial effect, have been discussed in the Announcement of Calendar Year (CY) 

2014 Medicare Advantage Capitation Rates and Medicare Advantage and Part D 

Payment Policies and Final Call Letter (2014 Call Letter), [at 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/A

nnouncement2014.pdf] and will be discussed in more detail in the discussion which 

follows.) If the projected net costs a sponsor is liable for in its bid are understated 

because the sponsor has been reporting certain types of price concessions as direct or 

indirect remuneration (DIR) rather than as price concessions that affect the negotiated 
 235 

price, it follows that the sponsor may be able to offer a lower bid than its competitors and 

may achieve a competitive advantage stemming not from greater efficiency, but rather 

from a technical difference in how costs are reported to CMS. When this happens, such 

differential reporting could result in bids that are no longer comparable, and in premiums 

that are no longer valid indicators of relative plan efficiency. We are therefore proposing 

changes to rectify this concern. 

The MMA established Part D as a voluntary, private-market-based program that 

would rely on private plans to provide coverage and to bear some of the financial risk for 

drug costs. These private plans would determine premiums through a bid process and 

would compete with other plans based on premiums and negotiated prices. [The 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Conference 

Agreement (Conference Agreement), page 4] Premiums are set through a statutory 

formula that ensures that premium levels are commensurate with bid levels. Therefore, 

all other things being equal, the lowest premium for a given level of benefits should 

signal the most efficient plan. Premiums are established through a prospective bidding 

process in which costs are projected and evaluated in accordance with actuarial 

guidelines set by the CMS Office of the Actuary. 

Negotiated prices are the payment amounts pharmacies receive from plans for 

covered Part D drugs dispensed to plan enrollees. CMS payments to plans are based on 

the reporting of negotiated prices (through PDE reporting) that are actually paid and are 

then offset by any other price concessions (submitted in aggregate through the separate 

annual DIR reporting process). CMS establishes rules for cost and price concession 
 236 

reporting through both PDE and DIR guidance and other payment reconciliation rules, 

and has regulated the definition of negotiated price and how it is to be treated in Part D 

benefit administration and in payment reconciliation. Since 2010, the regulatory 

definition has been: "Negotiated prices means prices for covered Part D drugs that: (1) 

The Part D sponsor (or other intermediary contracting organization) and the network 

dispensing pharmacy or other network dispensing provider have negotiated as the amount 

such network entity will receive, in total, for a particular drug; (2) Are reduced by those 

discounts, direct or indirect subsidies, rebates, other price concessions, and DIR that the 

Part D sponsor has elected to pass through to Part D enrollees at the point of sale; and (3) 

Include any dispensing fees." 

We intended clause 2 to primarily refer to price concessions from parties other 

than pharmacies, since these would be price concessions that were not based on the sale 

of the drug by the pharmacy and calculated when the claim adjudicated and, in fact, could 

not be calculated until a later date. In particular, we expected these other 

non-claim-based price concessions to be in the form of rebates offered by prescription 

drug manufacturers. Since prescription drugs are dispensed by pharmacies and 

purchased through transactions between Part D sponsors (or their intermediary 

contracting organizations) and pharmacies, manufacturers are never in a position to apply 

price concessions to negotiated prices at point of sale. We now understand that clause 2 

is ambiguous and permits sponsors and their intermediaries to elect to take some price 

concessions from pharmacies in forms other than the negotiated price and report them 

outside the PDE. When this occurs, the increased negotiated prices generally shift costs 
 237 

to the beneficiary, the government and taxpayer, and when applicable to certain brand 

name drugs, to prescription drug manufacturers. (The mechanism of this sort of cost shift 

was discussed at length in the analogous context of lock-in pricing in our 2008 proposed 

rule entitled "Medicare Program; Revisions to the Medicare Advantage and Prescription 

Drug Benefit Programs" which as published on May 16, 2008 in the Federal Register, 

--FR 28563 through 28566.) 

In addition, when price concessions from pharmacies are reflected in forms other 

than the negotiated price, the degree of price concession that the pharmacy has agreed to 

is no longer reflected in the negotiated prices available at point of sale or reflected on the 

Medicare Prescription Drug Plan Finder (Plan Finder) tool. Thus, the true price of drugs 

at individual pharmacies is no longer transparent to the market. Consequently, consumers 

cannot efficiently minimize both their costs (cost sharing) and costs to the taxpayers by 

seeking and finding the lowest-cost drug/pharmacy combination. Moreover, as the 

coverage gap closes, there are fewer and fewer beneficiaries who are exposed to the full 

cost of drug products, either at the point of sale or as reflected in Plan Finder estimates. 

When this occurs, the basis of competition shifts from prices to cost sharing, and the 

pricing signals available to the market can be distorted when lower cost sharing is not 

aligned with lower prices. Thus, we believe the exclusion of pharmacy price concessions 

from the negotiated price thwarts the very price competition that the Congress intended 

when it said that private plans would compete with other plans on both premiums and 

negotiated prices. 

We are aware that certain pharmacy price concessions are being excluded from 
 238 

the determination of the negotiated price because they are being characterized as 

"network access fees", "administrative fees," "technical fees" or "service fees" that are 

frequently imposed through PBM-issued manuals rather than explicit contractual terms. 

Pharmacies and pharmacy organizations report that they do not receive anything of value 

for those fees other than the ability to participate in the Part D network. The itemized 

types of services for which their payments are offset reportedly include things such as 

transaction fees for submission of claims, help desk support, information technology and 

telecommunication systems connectivity, electronic funds transfers, and other expenses 

associated with credentialing, maintaining, and auditing pharmacy networks. These fees 

take the form of deductions from payments to pharmacies for drugs dispensed, but in our 

view clearly represent charges that offset sponsor/PBM operating costs. We believe that 

if the sponsor or its intermediary contracting organization wishes to be compensated for 

these services and have those costs treated as administrative costs, such costs should be 

accounted for in the administrative costs of the Part D bid. If instead these costs are 

deducted from payments made to pharmacies for purchases of Part D drugs, such costs 

are price concessions and must be treated as such in Part D cost reporting. This is the 

case regardless of whether the deductions are calculated on a per-claim basis or not. In 

our view, the decision on how such network management costs are funded between the 

PBM and the sponsor is not governed by our rules, but our rules do require that price 

concessions be fully disclosed and net against drug costs in reconciliation. 

We have also heard from pharmacies that some sponsors apply dispensing fees to 

claims when they are adjudicated at point of sale, but require that these fees later be 
 239 

rebated back to the sponsor and deducted from payment remittances. Such practices 

again misstate the negotiated price. Our proposal would require that dispensing fees 

could only be applied at point of sale if they are received and retained by the pharmacy in 

the negotiated price. 

In comments on our related discussion in the 2014 Call Letter, one commenter 

argued that these other amounts charged to pharmacies are actually valid administrative 

costs. In contrast, all other sponsors and PBMs that commented on that section 

acknowledged these amounts to be price concessions. More significantly, all pharmacies 

and pharmacy organizations we have heard from assert that these are price concessions. 

When reported as DIR, these price concessions have the effect of offsetting price 

concessions disproportionally against just the costs the plan is most liable for, as 

discussed in the 2014 Call Letter. If not reported at all, these amounts would result in 

another form of so-called PBM spread in which inflated prices contain a portion of costs 

that should be treated as administrative costs. That is, even if these costs did represent 

services rendered by the PBM or other intermediary organization for the sponsor, then 

these costs would be administrative service costs, not drug costs, and should be treated as 

such. Failure to report these costs as administrative costs in the bid would allow a 

sponsor to misrepresent the actual costs necessary to provide the benefit and thus to 

submit a lower bid than necessary to reflect its revenue requirements (as required at 

section 1860D-11(e)(2)(C) of the Act and at § 423.272(b)(1)) relative to another sponsor 

that accurately reported administrative costs consistent with CMS instructions. 

Therefore, we agree with the pharmacy position that an amount deducted from the 
 240 

negotiated price otherwise payable to the pharmacy for these sorts of administrative fees 

is a price concession that should be reflected in the negotiated price. Consequently, we 

believe that the best interpretation of statutory intent is that all pharmacy price 

concessions must be reflected in the negotiated price. This would preclude the 

differential reporting that is taking place today, and put all plans on a level playing field 

in reporting drug costs and price concessions from network pharmacies. Consistent and 

transparent pricing would also promote increased price competition among network 

pharmacies and will align beneficiary and taxpayer interests in minimizing costs. 

Therefore, we do not believe that other pricing arrangements that cannot be calculated at 

the point of sale, such as risk sharing or conditional payments based on volume, are 

compatible with the price competition envisioned under the statute. Such arrangements 

will tend to overstate negotiated prices at point of sale, and require the subsequent 

adjustments through DIR reporting that may increase beneficiary and government costs if 

specified targets are met. We believe that the advantages of any such incentive 

arrangement could be achieved without the cost shifting by adjusting future negotiated 

prices. For instance, if specified volume targets were met in one quarter, rather than 

retroactively adjusting that quarter's prices down through DIR reporting, the negotiated 

prices for the next quarter could be reduced, and so on. Therefore we propose to 

reinterpret section 1860D-2(d)(1)(B) of the Act such that negotiated prices are the 

amounts that a network pharmacy receives in total for covered Part D drugs, and that 

these prices must reflect all price concessions from network pharmacies. Therefore, any 

other negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, 
 241 

and (DIR) referenced in the statute would be those price concessions offered by sources 

other than network pharmacies (or their intermediary contracting organizations). In 

practice, this means prescription drug manufacturers. 

Some stakeholders have recommended that certain incentive payments to 

pharmacies, such as generic dispensing incentive fees, should not be included in 

negotiated prices. If these payments are included, they explain, the negotiated prices 

appear higher at the more efficient pharmacy as the result of the additional incentive 

payment. This higher price then proportionally increases costs borne by beneficiaries, 

the government, and manufacturers. These incentives really represent amounts that the 

sponsor is willing to bear in order to encourage the most efficient drug choices, which 

will drive down total costs overall, and thus the sponsor is willing to bear a 

disproportionate share of such expense. We agree with this argument and we believe that 

this sort of arrangement would not conflict with our proposed requirement that all price 

concessions be reflected in the negotiated price since such additional payments are the 

opposite of price concessions. Instead such incentive fees represent contingent price 

increases that cannot be predicted in advance, and cannot therefore be programmed to be 

applied at point of sale or reflected in the price posted on Plan Finder. We believe it 

would be appropriate to treat this particular sort of price increase differently than price 

decreases because including such amounts in the negotiated price (incentive fee 

component) at point of sale could disguise the relative competitiveness of the underlying 

pharmacy prices. Incentive fees also primarily benefit the plan sponsor who benefits 

from the lower costs associated with the incentivized behavior, rather than the 
 242 

beneficiary. Therefore, in this case, we agree that it would be more appropriate for such 

incentive payments to be excluded from the negotiated price, and reported later in 

reconciliation as negative DIR. When reported as negative DIR, these amounts 

disproportionately affect (increase) the amounts the sponsor is liable for in risk sharing, 

which is appropriate given the intent of the incentives to promote least-cost drug product 

selection at point of sale. Least-cost drug product selection will directly reduce the 

sponsor's allowable risk corridor costs, so any incentive paid to encourage this behavior 

would be expected to be more than offset by the ingredient costs savings achieved 

through avoidance of higher-cost drug selection. This is so because, as we learned from 

numerous commenters to the 2014 draft Call Letter, the incentive payments are generally 

in the range of a dollar or two and the difference between preferred and non-preferred 

drug products is generally much greater. 

Therefore, we propose to revise the definition of negotiated prices at § 423.100 to 

require that all price concessions from pharmacies are reflected in these 

prices. Specifically we propose to redefine negotiated prices to mean prices for covered 

Part D drugs that: 1) the Part D sponsor (or other intermediary contracting organization) 

and the network dispensing pharmacy or other network dispensing provider have 

negotiated as the amount such network entity will receive, in total, for a particular drug; 

and (2) are inclusive of all price concessions and any other fees charged to network 

pharmacies; and (3) include any dispensing fees; but (4) exclude additional contingent 

amounts, such as incentive fees, only if these amounts increase prices and cannot be 

predicted in advance; and (5) may not be rebated back to the Part D sponsor (or other 
 243 

intermediary contracting organization) in whole or in part. 

26. Payments to PDP Plan Sponsors For Qualified Prescription Drug Coverage 

(§ 423.308)) and Payments to Sponsors of Retiree Prescription Drug Plans (§ 423.882) 

We propose to revise the definition of the term actually paid at both § 423.308 

for the Part D program and § 423.882 for the Retiree Drug Subsidy program in order to 

reconcile this definition with the changes proposed to the definition of negotiated prices 

in this regulation. Since our proposal would require that all price concessions from 

network pharmacies must be reflected in the negotiated price, it would no longer be 

correct to include pharmacies in the list of sources from which price concessions could be 

received without qualification. Therefore, we propose to revise the definition of actually 

paid at § 423.308 to include references to incentive payments, and to clarify that DIR 

may include additional payments to pharmacies, such as for incentive payments, but may 

not include any other price concessions from pharmacies as these must be in the form of 

the negotiated price as proposed in § 423.100. We similarly propose to change the 

reference to "from any source" in the definition of actually paid at § 423.882 to "from any 

manufacturer or similar entity" to align these definitions. 

We also propose to remove any reference to coupons in the list of price 

concession types. The definition of "actually paid" relates to costs incurred by Part D 

sponsors, and coupons would not affect those costs. Similarly, we are considering 

whether any or all of the surrounding terms "cash discounts, free goods contingent on a 

purchase agreement, up-front payments... goods in kind, free or reduced-price services, 

[or] grants" in both of those paragraphs would affect costs paid by Part D sponsors. We 
 244 

solicit comments on this question. We similarly propose to remove any reference to 

coupons in the definition of actually paid at § 423.882 to align these definitions. We also 

solicit comments on whether the surrounding terms "cash discounts, free goods 

contingent on a purchase agreement, up-front payments... goods in kind, free or 

reduced-price services, [or] grants" in both of those paragraphs would affect costs paid by 

sponsors of qualified retiree prescription drug plans. 

Our reason for striking any such term is that we are not aware of any form of 

coupons (or the other forms of remuneration listed previously) that would affect the 

amount a Part D sponsor pays to the pharmacy on a claim. Therefore, the terms should 

be deleted to accurately reflect the types of price concessions a Part D sponsor might 

receive that would affect its financial obligation to pharmacies. Moreover, we do not 

want to signal any ambivalence with regard to the permissibility of copayment coupons 

to eliminate or reduce the cost-sharing obligations of Part D beneficiaries. The 

anti-kickback statute prohibits the knowing and willful payment of remuneration, directly 

or indirectly, in cash or in kind, to induce the recipient to purchase any item for which 

payment may be made in whole or in part under a federal health care program. 

(42 U.S.C. 1320a-7b(b)(2)). The statute also prohibits the knowing and willful receipt of 

remuneration in return for such a purchase. (42 U.S.C. 1320a-7b(b)(1)). Because 

copayment coupons are provided to consumers for the purpose of inducing them to 

purchase specific prescription drugs, knowing and willful use of such coupons to reduce 

the cost-sharing obligations of federal health care program beneficiaries is prohibited by 

the anti-kickback statute. Pharmaceutical manufacturers are aware of this prohibition and 
 245 

typically include language on copayment coupons stating that persons whose 

prescriptions are paid for by federal programs are not eligible to use them. 

27. Preferred Cost Sharing (§ 423.100 and § 423.120) 

In our original rule implementing the Part D Program, we codified an 

interpretation of section 1860D-4(b)(1)(B) of the Act at § 423.120(a)(9) that permitted 

Part D sponsors to offer lower cost sharing at a subset of network pharmacies, dubbed 

"preferred pharmacies," than at other in-network pharmacies. This lower cost sharing 

was subject to certain conditions that seemed straightforward to us at the time, but which 

have proven to need clarification. We have recently discussed this concern in the 

Announcement of Calendar Year (CY) 2014 Medicare Advantage Capitation Rates and 

Medicare Advantage and Part D Payment Policies and Final Call Letter (2014 Call 

Letter) on pages 175 – 176 [at 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/A

nnouncement2014.pdf] 

Section 1860D-4(b)(1)(B) of the Act contemplates the possibility of sponsors 

offering lower cost sharing at some network pharmacies than is offered in conjunction 

with the any willing pharmacy terms and conditions mandated in the immediately 

preceding paragraph (A). However, a plan's ability to reduce cost sharing is contingent 

upon one condition: "In no case shall such a reduction result in an increase in payments 

made by the Secretary under section 1860D-15 of the Act to a plan." In our original 

proposed rule entitled "Medicare Program; Medicare Prescription Drug Benefit; 

Proposed Rule," published on August 3, 2004 in the Federal Register, 69 FR 46658 
 246 

through 46659, we did not offer an interpretation of this language but implied that any 

assessment of whether the condition was met would be a matter of actuarial equivalence 

analysis. We proposed to codify the requirements in regulation with the following two 

conditions: "...the plan must still meet the requirements under § 423.104(e)(2) and (5); 

and [a]ny cost sharing reduction must not increase CMS payments under § 423.329." In 

the final regulation entitled "Medicare Program; Medicare Prescription Drug Benefit; 

Final Rule", published on January 28, 2005 in the Federal Register, 70 FR 4247 through 

4255, we reiterated the language from the aforementioned proposed rule (69 FR 46658). 

"However, we note that while these within-network distinctions are allowed, the statute 

also requires that such tiered cost-sharing arrangements in no way increase our payments 

to Part D sponsors. Therefore, tiered cost-sharing arrangements based on within-network 

distinctions could be included in Part D plans' benefits subject to the same actuarial tests 

that apply to formulary-based tiered cost-sharing structures. Thus, a reduction in cost 

sharing for preferred pharmacies in a Part D plan network could be offered through 

higher cost sharing for non-preferred pharmacies (or as alternative prescription drug 

coverage)." (70 FR 4254, January 28, 2005). This statement was immediately followed 

by an expression of our intent to ensure that such network benefit designs were 

non-discriminatory: "We recognize the possibility that Part D plans could effectively 

limit access in portions of their service areas by using the flexibility provided in 

§ 423.120(a)(9) of our final rule to create a within-network subset of preferred 

pharmacies. In other words, in designing its network, a Part D plan could establish a 

differential between cost-sharing at preferred versus non-preferred pharmacies — while 
 247 

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 Part D plan. We emphasize that such a network design 

has the potential to substantially discourage enrollment by certain Part D enrollees, and 

that we have the authority under section 1860D–11(e)(2)(D) of the Act to disallow 

benefit designs that are discriminatory." 

And in fact, once sponsors began to submit preferred cost sharing benefit designs, 

we imposed limits on non-preferred cost sharing in such plans (through plan benefit 

package (PBP) bid review) to ensure that non-preferred cost sharing in these designs did 

not represent a cost sharing outlier in comparison to Part D plans without preferred cost 

sharing. If we were to allow cost sharing in pharmacies not offering preferred cost 

sharing to rise above this outlier level, beneficiaries with significant utilization due to 

severe or chronic illness would clearly see that such plans were disadvantageous, and 

would avoid them. Thus, we would find any such designs to be discriminatory and 

would not approve the plan benefit package. However, what we failed to sufficiently 

explain in 2005 was that if cost sharing cannot rise beyond a certain level, then in return 

for lower cost sharing, preferred networks must reduce drug costs paid by the plan in 

order to prevent an increase in CMS payments to the plan. In part this omission may 

have been because we presumed that Part D sponsors would motivate enrollees to go to a 

subset of pharmacies through lower cost sharing only if those pharmacies offered 

significantly lower negotiated prices, and thus would provide a competitive advantage for 

the sponsor in lowering costs. As the concerns expressed in the 2014 Call Letter 
 248 

indicate, this does not seem to have been the case for some sponsors. However, if drug 

costs (negotiated prices) are not lower in return for lower cost sharing, and the lower cost 

sharing cannot be completely offset by higher cost sharing on other beneficiaries due to 

our cost-sharing-outlier limits, then the amount that must be subsidized by the 

government and the taxpayer will increase. 

As noted in the Call Letter, we conducted an analysis of 2011 Part D drug costs in 

standalone PDPs with preferred networks, and compared these to costs in their 

non-preferred networks, as well as to costs in other PDPs without preferred networks. 

(The April 2013 analysis by CMS, "Negotiated Pricing between Preferred and 

Non-Preferred Pharmacy Networks", is posted at: 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/

Downloads/PharmacyNetwork.pdf). We expected to find that costs were consistently 

lower, although we had no preconceived estimate of how much lower. Instead we found 

that aggregate unit costs weighted by utilization (for the top 25 brand and top 25 generic 

drugs) were slightly higher in a few preferred networks than in non-preferred networks in 

some plans. The majority of sponsors offering preferred networks did not have these 

higher costs, although the range of cost savings in their preferred networks ranged from a 

high of 24.2 percent to as little as 0.1 percent when measured in this particular way. 

Surprisingly, the most significant driver of excess costs in the outlier sponsor preferred 

networks appeared in mail-order claims. In these cases the retail pharmacies in the 

non-preferred network were actually offering savings through discounted generics at 

prices below those offered by pharmacies with preferred cost sharing. This is a primary 
 249 

reason we have proposed to interpret the any willing pharmacy requirements (see section 

III.A.29 of this proposed rule) to require plan sponsors to offer preferred cost sharing for 

any pharmacy that can offer sufficient discounts to qualify. Even assuming that preferred 

pharmacies were to offer lower negotiated prices than those available in the rest of the 

network, failure to allow access to any pharmacy willing to meet the pricing terms 

necessary to be included in the preferred network could mean that fewer beneficiaries 

would have convenient access to both lower cost sharing and lower negotiated prices 

than would otherwise obtain. We seek to not only ensure that preferred cost sharing is 

aligned with lower drug costs, but also to maximize the number of beneficiaries who can 

take advantage of such savings. We note that most PBMs own their mail order 

pharmacies, and we believe their business strategy is to move as much volume as 

possible to these related-party pharmacies to maximize profits from their ability to buy 

low and sell as high as the market will bear. 

Our findings -- that a few sponsors have actually offered little or no savings in 

aggregate in their preferred pharmacy pricing, particularly in mail-order claims for 

generic drugs -- are troubling. Instead of passing through lower costs available through 

economies of scale or steeper discounts, a few sponsors are actually charging the 

program higher negotiated prices. When these higher prices are combined with 

significantly lower cost sharing offered in preferred pharmacy pricing, such pricing 

increases the proportion of costs borne by the plan and the government. All other things 

being equal, this increases payments to plans in violation of section 1860D-4(b)(1)(B) of 

the Act. Moreover, the lower cost sharing provides a defective price signal that distorts 
 250 

market behavior. As the coverage gap closes, there are fewer and fewer beneficiaries 

who are exposed to the full cost of drug products, either at the point of sale or in 

Medicare Plan Finder estimates. When sponsors compete on cost sharing unrelated to the 

underlying negotiated prices of drugs, beneficiaries may make choices that are rational 

and aligned with plan interests, but not in the best interests of the Medicare program and 

the taxpayer. In these cases, the lower cost sharing does not motivate enrollees to select 

pharmacies with lower prices and thus make more efficient choices in the market, but 

rather, motivates enrollees to do the opposite. This results in higher costs to the Part D 

program overall. 

Therefore, we propose to clarify that preferred cost sharing should signal 

consistently lower costs. When lower cost sharing correctly signals the best prices on 

drugs, then choosing pharmacies on the basis of that lower cost sharing lowers not only 

beneficiary out-of-pocket costs, but also Part D plan and other government subsidy costs. 

Lower plan and government subsidies translate into lower CMS payments to plans, 

consistent with the statutory requirements at section 1860D-4(b)(1)(B) of the Act. 

Therefore, we propose to revise § 423.120(a)(9) to state: "Preferred cost-sharing in 

network pharmacies. A Part D sponsor offering a Part D plan that provides coverage 

other than defined standard coverage may reduce copayments or coinsurance for covered 

Part D drugs obtained through a subset of network pharmacies, as long as such preferred 

cost sharing is offered in accordance with the requirements of § 423.120(a)(8) and for 

Part D drugs with consistently lower negotiated prices than the same drugs when 

obtained in the rest of the pharmacy network." We propose that by 'consistently lower' 
 251 

we mean that sponsors must offer beneficiaries and the Part D program better (lower) 

negotiated prices on all drugs in return for the lower cost sharing. In practice we believe 

this would mean that whatever pricing standard is used to reimburse drugs purchased 

from network pharmacies in general, a lower pricing standard must be applied to drugs 

offered at the preferred level of cost sharing. For instance, if drugs offered at the 

standard retail level of cost sharing were reimbursed at 20 percent off the average 

wholesale price (AWP) pricing standard, then any drugs offered at the preferred level of 

cost sharing must be reimbursed at deeper discount than AWP minus 20 percent. If 

generic drugs offered at the standard retail level of cost sharing were reimbursed 

according to a sponsor's proprietary maximum allowable cost (MAC) pricing standard, 

then generic drugs offered at the preferred level of cost sharing must be reimbursed at 

deeper discount than the MAC pricing rates. We believe this is not only consistent with 

the statutory intent, but also reasonable since the mail-order operations and other large 

pharmacies where preferred cost sharing is currently offered have significantly more 

purchasing leverage with manufacturers and wholesalers than do smaller pharmacies. 

Our analysis shows that some sponsors are already achieving these levels of savings, and 

our proposed policy would apply a consistent standard across all sponsors to compete on 

negotiated prices, including in related-party pharmacy operations. We would welcome 

comments on alternative approaches to ensuring that the offering of preferred cost 

sharing does not increase our payments. We believe that any alternative methodology 

must be based solely on the level of negotiated prices and thus consistent with our 

proposal to amend that definition (section III.A.25 of this proposed rule). As discussed 
 252 

in that section, we proposed to revise the definition to specify that all price concessions 

from pharmacies must be reflected in the negotiated price in order to promote transparent 

price competition, as well as to eliminate differential cost reporting and cost shifting that 

interfere with a fair and transparent competitive bidding process. We request that any 

alternative methodology suggestions be accompanied by specific proposals for how we 

could objectively validate compliance through data we already collect. 

In addition, we solicit comments on whether we should also establish standards 

on how much lower drug costs should be in return for preferred cost sharing. We are 

aware that there is a wide range of savings projections associated with the use of limited 

networks. For instance, a January 2013 study prepared for the Pharmaceutical Care 

Management Association (PCMA) provides various estimates ranging from 5 percent to 

18 percent [at 

http://www.pcmanet.org/images/stories/uploads/2013/visante-pcma%20pharmacy%20net

works%20study%201-24-13%20final.pdf]. We solicit comment on whether Medicare 

should require a minimum level of savings, such as 10 percent or 15 percent, over the 

costs available at retail cost-sharing rates. We believe that substantial discounts in this 

range would be necessary to balance the extremely low preferred cost sharing rates 

offered by many sponsors in 2013. We also solicit comments on how broadly preferred 

cost sharing should be applied to drugs on a sponsor's formulary. For instance, is it 

reasonable to offer cost sharing as low as $0 for only the least expensive generics on 

formulary? Or should preferred cost sharing have to apply to a minimum percentage of 

formulary products to be a meaningful benefit instead? Or should preferred cost sharing 
 253 

have to apply to all drugs available at pharmacies offering preferred cost sharing? This 

would require that the prices of all drugs at those pharmacies could be no higher than the 

prices at the other network pharmacies. Such a policy would prevent sponsors from 

offering lower prices on drugs with preferred cost sharing while offering higher prices on 

other drugs not subject to preferred cost sharing. Our concern is that without such rules, 

it is possible that the beneficiary is motivated to change pharmacies in order to pay very 

low copays on some drugs, but the program may end up paying higher costs on other 

drugs the beneficiary purchases at the same pharmacy out of convenience. 

 We also propose a clarification in terminology to better describe the application 

of the policy to a sponsor's approved Part D pharmacy network. As illustrated in the 

proposed revision to § 423.120(a)(9), we would like to change the point of reference in 

our guidance away from "preferred pharmacies" to "preferred cost sharing". This is not 

only a more accurate interpretation of the statute, but it also avoids the use of the 

corollary term "non-preferred". We regret the unintended connotation that some network 

pharmacies are "non-preferred pharmacies" when, in most cases, these pharmacies have 

had no opportunity to meet the terms and conditions for qualifying for preferred cost 

sharing. The use of the term non-preferred also has caused confusion for some 

stakeholders since non-preferred is also a term of art referring to non-contracted and, 

therefore, non-network pharmacies. In addition, we believe it is generally misleading for 

our sponsors to refer to preferred pharmacies, when only a limited number of tiers (for 

instance, generics) may be available at the lower preferred cost sharing rates at these 

pharmacies. Consequently, we are proposing to delete the definitions of "preferred 
 254 

pharmacy" and "non-preferred pharmacy" from § 423.100 and to add a new definition of 

preferred cost sharing. "Preferred cost sharing" would mean lower cost sharing for 

certain covered Part D drugs at certain network pharmacies offered in accordance with 

the requirements of § 423.120(a)(9). We would then require that Part D sponsors would 

revise any marketing materials to reflect the revised nomenclature, and eliminate any 

references to preferred or non-preferred network pharmacies. We solicit comment on 

whether any further clarifications of terminology are needed for this policy proposal. 

28. Prescription Drug Pricing Standards and Maximum Allowable Cost 

(§ 423.505(b)(21)) 

We are proposing a change to the regulations governing the disclosure and 

updating of prescription drug pricing standards used by Part D sponsors to reimburse 

network pharmacies to make clear that drug pricing based on maximum allowable cost 

(MAC) is subject to these regulations. Section 173 of MIPPA amended sections 1860D–

12(b) and 1857(f)(3) of the Act to add a provision requiring the regular updating of 

prescription drug pricing standards. Thus, for plan years beginning on or after January 1, 

2009, CMS's contracts with Part D sponsors must include a provision requiring sponsors 

to update any standard they use to reimburse network pharmacies based on the cost of the 

drug to accurately reflect the market price of acquiring the drug. These updates must 

occur not less frequently than once every 7 days, beginning with an initial update on 

January 1 of each year. 

We codified this requirement in § 423.505(b)(21). We also amended 

§ 423.505(i)(3) with respect to contracts or written arrangements between Part D 
 255 

sponsors and pharmacies or other providers, first tier, downstream and related entities, to 

ensure that Part D sponsors' contracts with these entities include provisions for regularly 

updating any prescription drug pricing standard used by sponsors to reimburse their 

network pharmacies, as provided in § 423.505(b)(21). Specifically, 

§ 423.505(i)(3)(viii)(A) requires that sponsors' pharmacy contracts include a provision 

establishing regular updates of any prescription drug pricing standard used by the Part D 

sponsor, consistent with § 423.505(b)(21), and § 423.505(i)(3)(viii)(B) requires that a 

Part D sponsor's pharmacy contract indicate the source used by the Part D sponsor for 

making any such pricing updates. We finalized these regulations in a final rule entitled, 

"Medicare Program; Medicare Advantage Program and Prescription Drug Benefit 

Programs" at 76 FR 54600 (September 1, 2011) ("September 2011 final rule"). 

When we finalized these regulations, we did not provide a specific definition for 

"prescription drug pricing standard," because we believed that it was unnecessary at that 

time. Instead, we provided the following examples of prescription drug pricing 

standards: ones that are based on ''wholesale average cost, average manufacturer price, 

and average sales price.'' At the time, we believed these examples sufficiently illustrated 

what is meant by a prescription drug pricing standard, which we described as "an 

accepted methodology based on published drug pricing." We also stated that defining the 

standard beyond this may be overly prescriptive and might not be flexible enough to 

evolve with industry changes. 

Since publication of the September 2011 final rule, we have concluded that our 

description of "prescription drug pricing standard" in the preamble to the final rule was 
 256 

unintentionally too restrictive. Pharmacy representatives have noted that many contracts 

between Part D sponsors/PBMs and their network pharmacies set reimbursement through 

the application of MAC prices. It is our understanding that MAC prices generally refer 

to lists of drugs that include the maximum amount that a plan will pay for multi-source 

drugs, whether generics or multi-source brands. Based on numerous conversations with 

pharmacy representatives, we further understand that there is no standardization in the 

pharmacy benefits industry as to the criteria used to determine inclusion of drugs on 

MAC lists or as to the methodology used to determine the MAC prices, but that the latter 

is based in part on the costs of the drugs and fluctuate, sometimes frequently. We also 

understand that MAC prices seem to be set in some relation to a lowest cost generic 

product alternative available on the market at a given time. Additionally, we understand 

that MAC prices are not typically based exclusively on published drug pricing, but are 

based at least in part on internal Part D sponsor/PBM methodologies. Finally, we 

understand that many Part D sponsors and PBMs have asserted that because MAC prices 

are not based solely on published drug pricing, MAC prices are not a "prescription drug 

pricing standard," and thus, not subject to the updating requirements. 

Pharmacy representatives further report to us that pharmacies are forced to sign 

contracts that reimburse based on MAC prices that change without notice. These 

representatives state that pharmacies consequently do not know exactly what price they 

will be paid for which drugs, and thus the pharmacies cannot confirm that their 

reimbursements are correct nor engage in proper business planning. 

As noted previously, we stated in the preamble to the final regulation that a 
 257 

"prescription drug pricing standard" is an accepted methodology based on published drug 

pricing. This is because we were unaware at the time that there is at least one standard 

based on costs of the drugs that is not based strictly on published drug pricing. Now that 

we have become aware of these types of pricing standards, we wish to clarify our 

regulatory requirement. We believe that the updating requirement should apply to 

pricing standards based on the cost of a drug, even when the standard is not based on 

published drug pricing, an approach consistent with the intent of the statute. The text of 

MIPPA section 173 itself indicates the provision's purpose -- Part D sponsors must 

update their prescription drug pricing standards regularly "to accurately reflect the market 

price of the drug." We believe that this statement of purpose indicates that the Congress 

intended to provide pharmacies with a means of ensuring that they have current data on 

the amount of reimbursement that they can expect. 

When the source of a prescription drug pricing standard is published publicly, 

such as with AWP or WAC, pharmacies can determine their reimbursement for all drugs 

at any given time and can monitor these sources to ensure they are being reimbursed 

correctly. However, when a prescription drug pricing standard is not published publicly, 

network pharmacies are unable to promptly determine whether their reimbursement is 

consistent with their contractual arrangements. This, in turn, presents risks to the 

Medicare Part D program in a number of ways. For example, disclosure of the source 

used to determine drug prices is necessary for pharmacies to ensure accurate payment of 

their claims, which is necessary for accuracy in the costs submitted to CMS by Part D 

sponsors on PDEs without unnecessary later adjustments that are disruptive to the 
 258 

operation of the Part D program. 

In addition, when network pharmacies are unable to determine whether their 

reimbursement is consistent with their contractual arrangements, the accuracy of the 

prices displayed in the Medicare Prescription Drug Plan Finder ("MPDPF") is 

questionable. While these prices only provide an estimate of Part D drugs costs at 

particular pharmacies, beneficiaries do use the MPDPF to make drug purchasing choices. 

 If a pharmacy does not know what it will be paid for drugs on any given day, it cannot 

test the MPDPF and validate the prices. Thus, there is no assurance that the posted prices 

are accurate, and pharmacies are deprived of the opportunity to compete based on more 

accurate prices, and beneficiaries may make choices based on erroneous estimated drug 

costs. This is contrary to the public policy goal of facilitating competition in the health 

care system and supporting consumers to be informed purchasers of health care. Also, 

when CMS compares posted prices to prices submitted on PDEs to evaluate the estimates 

provided in the MPDPF, there can be no assurance that those values correspond to the 

payments pharmacies actually receive. 

For these reasons, we now believe it is necessary to define "prescription drug 

pricing standard" in regulation. Therefore, we propose to add a definition to § 423.501 

that would state that a "prescription drug pricing standard" means "any methodology or 

formula for varying the pricing of a drug or drugs during the term of a pharmacy 

reimbursement contract that is based on the cost of a drug, which includes, but is not 

limited to, drug pricing references and amounts that are based upon average wholesale 

price, wholesale average cost, average manufacturer price, average sales price, maximum 
 259 

allowable cost (MAC), or other cost, whether publicly available or not." We propose to 

include the phrase, "includes, but is not limited to," to signify that the examples specified 

in the regulation text are not exhaustive. 

We expect some commenters may ask what pharmacy reimbursement method 

would not be considered a "prescription drug pricing standard," since the regulations 

apply only "if" a Part D sponsor uses a standard for reimbursement that is based on the 

cost of the drug. In our view, a fixed fee drug price schedule that is not expected by the 

parties to vary during the term of the contract between the Part D sponsor/PBM would be 

not be a "prescription drug pricing standard," as there would be no reason to update the 

list at least every 7 days. 

In addition, in order to make the regulations regarding prescription drug pricing 

standards easier to reference, we are proposing the following technical changes for 

consolidation purposes: (1) to combine the current requirements contained in 

§ 423.505(b)(21) (i) and (ii) into (i) and eliminate the reference to the effective contract 

year 2009 as no longer necessary. These requirements generally state that Part D 

sponsors agree to update any prescription drug pricing standard (as would be defined in 

§ 423.501) on January 1 of each contract year and not less frequently than once every 

7 days thereafter. We also propose to move the current requirement to indicate the 

source used for making any such updates to (b)(21)(ii) from § 423.505(i)(3)(viii)(B). We 

propose this latter move of regulation text, so that it is clearer by its placement in the 

regulation that this requirement is on Part D sponsors. 

For new paragraph § 423.505(b)(21)(iii), to be clear, we are proposing a new 
 260 

requirement and not a technical change. We are proposing that Part D sponsors agree in 

their contracts with CMS to disclose all individual drug prices to be updated to the 

applicable pharmacies in advance of their use for reimbursement of claims, if the source 

for any prescription drug pricing standard is not publicly available. This means, in 

conjunction with the proposed definition of a "prescription drug pricing standard" 

discussed previously, that Part D sponsors would have to convey to network pharmacies 

in advance the actual MAC prices to be changed. We are requiring that the actual MAC 

prices be disclosed in advance because, if the pharmacies are not able to use the updates 

as a reference against which they can check their reimbursements, there would be no 

point to the statutory requirement. 

As a final technical change, we are proposing to eliminate language in 

§ 423.505(i)(3)(viii)(A) about establishing regular updates of any prescription drug 

pricing standard used by the Part D sponsor which is and would be duplicative to 

language in 423.505(b)(21). As a result of the changes described previously, there would 

be no paragraphs (A) and (B) to § 423.505(i)(3)(viii), and this provision would simply 

require that, if applicable, each and every contract governing Part D sponsors and first 

tier, downstream, and related entities, must contain provisions addressing the prescription 

drug pricing standard requirements of § 423.505(b)(21). We believe these proposed 

technical changes will make the regulation text easier to reference and understand. 

29. Any Willing Pharmacy Standard Terms & Conditions (§ 423.120(a)(8)) 

 Section 1860D-4(b)(1)(A) of the Act requires Part D plans to permit any 

pharmacy meeting the standard Terms and Conditions (T&C) to participate in the plan's 
 261 

network. We used this authority to establish requirements under § 423.120(a)(8) and 

§ 423.505(b)(18) that plan sponsors have reasonable and relevant T&C for network 

participation in their standard contract, and allow any pharmacy meeting the T&C to 

participate as a network pharmacy for that plan. Section 1860D-4(b)(1)(B) of the Act 

permits sponsors to reduce cost sharing "below the level otherwise required," 

notwithstanding paragraph (A). Thus, the statute permits a "preferred" cost sharing level 

(using the definition specified in section III.A.27 of this proposed rule) to be offered at 

some network pharmacies. Since the beginning of the program, we have required 

sponsors to offer standard T&Cs to any willing pharmacy in order to achieve broad 

network access, but have permitted sponsors to offer different T&Cs in return for 

preferred cost sharing to a smaller subset of its network. We have previously stated that 

we believed our interpretation of these two seemingly conflicting statutory provisions 

struck an appropriate balance between the need for broad pharmacy access and the need 

for Part D plans to have appropriate contracting tools to lower costs. In this section we 

are proposing that in place of sponsors having one contract with standard terms for any 

willing pharmacy and a second preferred cost sharing contract for a limited subset of 

pharmacies, that sponsors instead have standard T&C for network participation that list 

all combinations of cost sharing and negotiated prices possible for retail settings under 

the plan, allowing any willing pharmacy the opportunity to offer preferred cost sharing if 

the pharmacy can offer the requisite level of negotiated prices. 

 When discussing cost sharing, distinctions are made in this section between plans 

offering a preferred cost sharing level and plans that do not. For the purposes of this 
 262 

section, the cost sharing levels offered at retail pharmacies not contracted to offer 

preferred cost sharing (previously referred to as "non-preferred pharmacies") are referred 

to as standard cost sharing levels. Cost sharing levels offered at retail pharmacies at the 

preferred T&C (previously referred to as "preferred pharmacies"), are referred to as 

preferred cost sharing levels. 

Because under our proposal for preferred cost sharing, pricing terms for 

pharmacies offering preferred cost sharing could not exceed the pricing terms for 

pharmacies offering standard cost sharing (see discussion in section III.A.27 of this 

proposed rule), we will use the terms "ceiling price" and "floor price" to refer to the 

upper and lower limits put on pricing terms. As proposed, the negotiated prices charged 

by pharmacies offering preferred cost sharing must be at or below the agreed upon 

ceiling price (determined by using the defined preferred cost sharing T&C pricing), 

which must be less than the floor price, or lowest negotiated price, charged at network 

pharmacies offering standard cost sharing. 

We heard from many pharmacies, many of them small independent community 

pharmacies, that plans do not offer any willing pharmacy the opportunity to offer 

preferred cost sharing. Instead, some pharmacies are being offered only the plan's 

standard T&C, at the highest level of beneficiary cost sharing. We received more than 

200 comments in response to our discussion of this topic in the Announcement of 

Calendar Year (CY) 2014 Medicare Advantage Capitation Rates and Medicare 

Advantage and PDP Payment Policies and Final Call Letter (2014 Call Letter) pp. 175–

176 at 
 263 

http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/A

nnouncement2014.pdf. Most of these comments were from pharmacies concerned about 

barriers to entry for participation in preferred networks, and many of these argued that 

such limited networks violate the statutory intent of the network access provisions at 

section 1860D-4(b)(1) of the Act. In particular, these commenters disagreed that such 

barriers were consistent with the any willing pharmacy requirement as stated in 

1860D-4(b)(1)(A) of the Act. 

Consequently, we have reviewed our original regulatory interpretation of these 

provisions, not only in light of these complaints, but also in light of our experience in the 

Part D program. We believe that an alternative reading of sections 1860D-4(b)(1)(A) of 

the Act and (B) of the Act to reduce barriers is not only permissible, it would have the 

following key policy benefits, which we describe as follows: 

● Increased access for beneficiaries to preferred level cost sharing with any 

willing pharmacy able to agree to the T&C that include preferred cost sharing. 

● Improved opportunity for competition among pharmacies contracting with the 

sponsor to charge no more than the ceiling price stated in the contract for preferred cost 

sharing, reducing costs charged to the program. 

● Improved clarity for beneficiaries surrounding cost sharing levels available at 

retail and mail order pharmacies. 

Elsewhere in this proposed regulation we discuss clarifications to the 

requirements for offering preferred cost sharing within a sponsor's network (see section 

III.A.27 of this proposed rule). In III.A.27 we discuss our analysis of 2011 benefit 
 264 

designs incorporating preferred cost sharing. We found that some retail pharmacies are 

actually offering to sell Part D drugs (particularly generic versions) at prices below those 

offered by the network pharmacies eligible for preferred cost sharing. In such cases, the 

lower negotiated prices offering the program superior savings are offered to enrollees at 

the higher standard cost sharing levels, while the same drugs being offered to enrollees at 

lower preferred cost sharing levels may be costing the program as much or more. The 

lower cost sharing "price" signal is not aligned with either the true price of the drug or 

better overall value to the program, and therefore the defective signal incentivizes 

inefficient purchasing decisions from the perspective of the Part D program. If some 

retail pharmacies are willing to provide deeper discounts than those that sponsors are 

currently negotiating with pharmacies in return for offering preferred cost sharing, we 

can conclude that, all other things being equal, competition will be increased and 

aggregate negotiated prices will be reduced if these more competitive retail pharmacies 

have the opportunity to qualify for preferred cost sharing. Therefore, we now believe 

that this opportunity for pharmacies to gain entry into previously limited networks should 

be a component of the any willing pharmacy requirements for retail pharmacies, allowing 

more pharmacies the option to offer preferred level cost sharing if they are willing to 

charge no more than the ceiling price stated in the contract. 

We have heard the assertion that limited networks achieve greater savings than 

broader networks, and that moreover, allowing more participants into a limited network 

than those hand-picked by the sponsor will necessarily lead to increased prices. 

However, we have been running a natural experiment of sorts relative to this assertion in 
 265 

the Part D program. If limited networks per se led to significantly lower costs, we would 

see consistently significant savings in those network segments relative to the rest of the 

sponsors' networks. However, an April 2013 analysis by CMS, "Negotiated Pricing 

Between Preferred and Non-Preferred Pharmacy Networks", reviewed actual program 

experience and indicated that this is not the case across the board (see 

http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/

Downloads/PharmacyNetwork.pdf). As the 2012 claims show, there is wide variation in 

discounting across sponsors. Consistent savings are not seen uniformly. In some cases, 

pharmacies extending high discounts are ones that have been excluded from limited 

networks offering preferred cost sharing, while some pharmacies within the limited 

networks offer effectively no discounts compared to the rest of the network. Therefore, 

we believe that opening up these limited networks to any pharmacy willing to charge no 

more than the contract's ceiling price to qualify for offering the lower preferred cost 

sharing is necessary to restore price competition in these networks. Consequently, for 

any sponsor that offers both standard and preferred cost sharing under any of its benefit 

packages, we propose that the sponsor's contracts for network retail pharmacies include 

not only the T&C for standard cost sharing, but also the T&C for offering preferred cost 

sharing, stating negotiated pricing levels that must be agreed upon to qualify for offering 

preferred cost sharing. As discussed previously, the ceiling price that a pharmacy can 

charge for a drug filled at a preferred cost sharing level, must be less than the floor price, 

or minimum price, charged by network pharmacies under that plan offering standard cost 

sharing levels. Retail pharmacies would elect to participate according to one set of terms 
 266 

or the other, but not both. 

We have also heard the argument that the pharmacies in currently limited 

networks are offering deeper discounts solely in return for increased market share and 

that they will withdraw such offers if the limited network is opened up to other 

pharmacies that can meet those T&C. We are skeptical that such participants in the 

highly competitive retail market will abandon their market share by returning to the 

broader network T&C. As some network pharmacies offering standard cost sharing have 

been able to extend discounts in pricing even deeper than what is seen in some 

pharmacies offering preferred cost sharing, it is not obvious that negotiated prices would 

necessarily increase in the aggregate in the event that a limited number of pharmacies 

consider changing from preferred to standard cost sharing. We have also been informally 

told by one sponsor with preferred cost sharing in a limited network that its preferred cost 

sharing T&C already are offered to any willing pharmacy. For these reasons, we do not 

believe that our proposal would result in increased prices. We note that our proposed 

alternative statutory interpretation still would permit sponsors to limit preferred cost 

sharing to those pharmacies accepting T&C with stated ceiling prices. Aggressive price 

concessions to fall below the stated ceiling price (solely in the form of lower negotiated 

price, in accordance with our proposed change to that definition at § 423.100 discussed at 

section III.A.25 of this proposed rule) would have to be met by all pharmacies offering 

preferred cost sharing, including pharmacies that are related parties of the Part D sponsor 

or its PBM. Sponsors could not offer preferred cost sharing for higher negotiated prices 

than the ceiling price listed in the T&C, but would be free to negotiate even deeper 
 267 

discounts from individual pharmacies in the limited network. Publicly posted pricing 

standards would effectively set a pricing floor for all pharmacies accepting a plan's 

standard T&C and set a pricing ceiling for pharmacies accepting the preferred cost 

sharing T&C. These benchmarks better align price with value, while maintaining 

sponsor flexibility to negotiate with all pharmacies in its network. Therefore, we are 

confident that requiring that a Part D plan sponsor offer T&C for every level of cost 

sharing approved in its benefit packages to any willing pharmacy would not limit 

competitive negotiations, nor would it in and of itself lead to increased negotiated prices. 

 We also believe that there is a limit to the number of cost sharing levels offered 

under a benefit plan that can be well understood by beneficiaries. When establishing its 

network, a Part D sponsor does not offer identical T&C for network participation to 

every pharmacy. Certain terms will necessarily differ among contracts with the different 

types of pharmacies needed to provide all Part D drugs, if for no other reason than to 

address the different access and service standards established by CMS. These various 

types include at a minimum: retail, mail-order, long-term care institutional, 

limited-distribution-drug specialty, and home infusion therapy pharmacies. Terms will 

also differ with respect to negotiated prices and the level of cost sharing that a 

pharmacy's claims will be subject to. For instance, long-term care institutional, specialty, 

and infusion pharmacies are generally offered at the standard level of cost sharing (for 

the applicable formulary tier) for a month's supply of a covered drug. Retail and 

mail-order pharmacies, in contrast, currently may contract with plans to be offered at 

more than one cost sharing level. 
 268 

Cost sharing at retail and mail-order pharmacies currently vary on three 

dimensions: whether the cost sharing is standard or preferred, on the quantity dispensed 

(or "days' supply"), and on dispensing location. 

a. Preferred Cost Sharing 

Under § 423.120(a)(9), sponsors can offer lower preferred cost sharing levels to 

some retail and mail order pharmacies in their network who agree to offer superior price 

concessions. While beneficiaries may actively seek out preferred cost sharing among 

retail and mail order pharmacies, this is less common among long term care, specialty, 

and infusion pharmacy settings. Any preferred cost sharing structure would be required 

to meet certain conditions as previously proposed and would be required to be submitted 

to CMS for approval as part of a sponsor's plan benefit package. Plans are not currently 

required to offer a preferred cost sharing level, nor would they be required to if this 

proposal is implemented. However, for pharmacies that do contract to offer preferred 

cost sharing, our proposal means that preferred cost sharing must be available to all 

enrollees covered by that plan's contract and electing to use that pharmacy. This would 

include consistently charging preferred cost sharing and consistently billing no more than 

the ceiling price for all prescriptions, whether a one month or extended days' supply is 

dispensed. 

b. Extended Days' Supply 

Additionally, different cost sharing levels may be offered for extended days' 

(generally greater than 34 and no more than 102) supplies, at both retail and mail order 

pharmacies. To avoid unnecessarily complicated benefit designs, plans should create no 
 269 

more than two cost sharing distinctions based on days' supply: one month supply (not to 

exceed 34 days) or extended days' supply (greater than 34-days' supply). In manual 

guidance (see section 50.10 of Chapter 5 of the Medicare Prescription Drug Benefit 

Manual) we have further interpreted the "level playing field" provision to mean that 

sponsors electing to offer extended days' supplies of covered Part D drugs need to make 

available to retail pharmacies, upon request, an "Extended Supply Addendum" to their 

standard contracting terms and conditions for retail pharmacies. This Addendum 

provides one of two extended-days'-supply contracting options: (1) to be offered at the 

same cost sharing rate as mail order if a retailer can match the mail-order T&C, or (2) to 

be offered at another higher cost-sharing level, but in no case higher than three times the 

amount enrollee would have paid at the same retail pharmacy had the enrollee had his or 

her prescription filled in multiple 1-month supply increments at the applicable retail 

pharmacy cost sharing (standard or preferred) cost sharing rate. The nature of long term 

care, specialty, and infusion pharmacy dispensing makes a price differential based on 

days' supplies largely unnecessary. 

c. Mail Order Cost Sharing 

Section 1860D-4(b)(1)(D) of the Act (and § 423.120(a)(10)) require sponsors to 

provide for extended days' supplies at retail when extended days' supplies are available at 

mail, but explicitly permits differential cost sharing between the two settings. For plans 

offering both preferred cost sharing and mail order options, the mail order cost sharing 

for an extended days' supply can be less than the preferred cost sharing for an extended 

days' supply filled at retail. However, for 1-month supplies, we propose that the cost 
 270 

sharing at mail order (for prescriptions for 34 days or less) cannot be less than the 

standard cost sharing at retail (for prescriptions for 34 days or less), regardless of whether 

a preferred cost sharing level is available. In general, we believe that filling initial 

prescriptions or routine 30-day supplies at mail-order is not good practice. Given the 

need to order or re-order mail order prescriptions well in advance of when the medication 

runs out (to allow time for shipping), the opportunity for gaps in therapy caused by 

delayed orders rises. When using mail order for one month supplies, a beneficiary would 

have to order the next month's supply shortly after receiving a new order, and complaints 

received by CMS indicate that billing errors and delayed shipments occur. It is our 

understanding that mail order is most efficient when processing extended days supplies, 

when all billing and processing can be addressed well in advance of needing to ship the 

next supply. However, we recognize that for some populations, monthly mail order 

supplies are an acceptable option, so we are not seeking to disincentivize this option. 

Rather, we are proposing that 1-month supplies filled by mail order pharmacies cannot 

have cost sharing lower than a comparable one month supply filled at retail, so as not to 

provide an incentive to fill short supplies of chronic medications through mail order. 

We believe that a more simplified benefit design, incorporating these three 

variables and accommodating a more clearly defined set of cost sharing levels, would 

promote better understanding of Part D plan benefits, both in terms of beneficiary cost 

sharing and prices charged to the program, as well as streamlined contracting options. 

We also find it important to expressly state the total number of possible cost-sharing 

levels, to clarify expectations and to preempt the introduction of additional or 
 271 

unauthorized cost-sharing levels in the future. 

For prescriptions not subject to Long Term Care, specialty pharmacy, or home 

infusion pricing, the interaction of the following four provisions of section 1860D-4(b)(1) 

of the Act point to three authorized levels of cost sharing: standard, preferred, and 

extended days' supplies for retail and mail order pharmacies. 

● Section 1860D-4(b)(1)(A) of the Act details the participation of Any Willing 

Pharmacy in a plan's network, provided that they meet T&C offered by the plan, 

authorizing a standard cost sharing level. This proposal offers retail and mail order 

pharmacies a chance to not just participate in the plan's network, but to select among a 

plan's various T&C for participation. By listing the T&C required for offering preferred 

cost sharing on the contract offered to any willing pharmacy, instead of only offering 

these T&C to select pharmacies, a greater percentage of network pharmacies can offer 

beneficiaries the lower cost sharing, while also offering reduced negotiated prices and 

savings to the Part D program. 

● Section 1860D-4(b)(1)(B) of the Act permits discounting for some network 

pharmacies, authorizing a preferred cost sharing level. This proposal continues to permit 

both a standard and preferred cost sharing level within a plan's network. 

● Section 1860D-4(b)(1)(C) of the Act defines the authority to establish rules 

defining convenient access, permitting a mail order cost sharing level. Expanding 

requirements for any willing pharmacy contracts, with any pharmacy (and presumably a 

greater number of pharmacies) now offered the opportunity to compete for preferred cost 

sharing if the pharmacy can offer the requisite level of negotiated prices, would expand 
 272 

beneficiary access to lower cost sharing options within the network. 

● Section 1860D-4(b)(1)(D) of the Act creates a level playing field by ensuring 

that if extended days' supply benefits are available at mail order, beneficiaries can get the 

same benefit at retail pharmacies. Extended days' supply cost sharing at mail order does 

not have to equal extended days' supply cost sharing at retail, however, we propose to 

require that it cannot be less than the standard cost sharing offered at retail pharmacies 

for extended days' supply. As previously discussed, it is our understanding that mail 

order is most efficient when processing extended days supplies, when all billing and 

processing can be addressed well in advance of needing to ship the next supply. While 

we are not proposing to disincentivize mail order for supplies of less than 90 days, nor do 

we believe it is appropriate to incentivize through lower cost sharing the use of mail 

order in situations where gaps in therapy may be more likely to occur. 

When assessed together, we believe these four sections direct Part D plans to 

create a network offering convenient access not only to various types of pharmacies but 

also to various types of cost sharing. Permitting three retail cost sharing levels, as the 

statute implies, reflects the levels of cost sharing also observed in the commercial market. 

However, unique to Part D, the available cost sharing levels must also meet the Medicare 

requirements assuring pharmacy access for Medicare beneficiaries. 

We would like to minimize the number of variations on these three levels to the 

following options and to ensure that standard T&C for network participation offer every 

level available for each respective pharmacy type. First, we propose to limit long term 

care, specialty, and infusion pharmacy cost sharing to the standard monthly rate, as is 
 273 

industry practice today. Second, we propose to limit retail pharmacies to the three 

authorized levels; either the standard or preferred monthly rate (for supplies up to 

34 days), and one extended days' supply cost sharing rate not exceeding three times the 

monthly retail rate (either three times the standard monthly retail rate or three times the 

preferred monthly retail rate, depending upon the T&C of the pharmacy's contract). 

Third, we propose to limit the levels of cost sharing at mail-order pharmacies to one 

monthly rate and one extended day mail order cost sharing rate (for any supplies greater 

than 34 days) for reasons discussed previously. We additionally solicit comments on the 

frequency of mail order being used to fill prescriptions lasting one month or less. We 

note that these proposals would not alter our requirements around the dispensing of any 

days' supplies less than 30 days, which is still subject to the "daily cost sharing" 

provision at § 423.153(b)(4) (which we propose to further clarify in in section III.E.9 of 

this proposed rule). 

In summary, we propose to use the authority in section 1860D-4(b)(1)(C)(i) of the 

Act to establish rules defining convenient access within a Part D pharmacy network, 

combined with the authority in section 1860D-4(b)(1)(A) of the Act to revise the any 

willing pharmacy requirements, to ensure that any pharmacy that can meet the applicable 

T&C for offering standard or preferred cost sharing can join the network on those terms. 

We believe the network access provisions in section 1860D-4(b)(1) of the Act support 

expanding § 423.120(a)(8) to all levels of cost sharing offered under a sponsor's benefit 

plans. We believe that doing so supports the Congressional intent to have plans compete 

on negotiated prices by making this price competition more open and accessible to 
 274 

pharmacies. Specifically, we propose to revise § 423.120(a)(8) to require that, in 

establishing its contracted pharmacy network, a Part D sponsor offering qualified 

prescription drug coverage must comply with all of the following requirements:- 

● Must offer and publicly post standard terms and conditions for network 

participation for each type of pharmacy in the network subject to the following: 

 ++ May not require a pharmacy to accept insurance risk as a condition of 

participation in the PDP sponsor's contracted pharmacy network. 

 ++ Must offer payment terms for every level of cost sharing offered under the 

sponsor's plans consistent with CMS limitations on the number and type of cost sharing 

levels, and for every type of similarly situated pharmacy. 

● Must contract with any willing pharmacy able to meet one set of the terms and 

conditions offered by that plan for that type of pharmacy. 

We also propose to make conforming changes to the contracting provisions at 

§ 423.505(b)(18) to require Part D sponsors to agree to have standard T&C for network 

participation that meet the requirements described in § 423.120(a)(8), with reasonable 

and relevant T&C of participation for each type of pharmacy in its network. We believe 

these proposed requirements would better ensure that each Part D plan: (1) provides 

convenient access to Part D drugs in all Part D settings and to the extent practical, at all 

cost sharing levels; and (2) offers cost sharing levels that encourage beneficiaries to make 

choices that minimize costs not only for themselves, but also to the Medicare Part D 

program as a whole. 

We solicit comments on these proposals to expand the any willing pharmacy 
 275 

T&C and to streamline the levels of cost sharing offered under those standard T&C. 

Based on the current level of negotiated prices in the Part D program, we conclude that if 

a greater number of pharmacies were given the option to compete for each cost-sharing 

level offered under the plan, that beneficiaries would have more pharmacy options 

offering the lowest cost-sharing level for reduced prices. We cannot compel sponsors to 

negotiate lower negotiated prices, nor can we compel pharmacies to accept plan sponsors' 

T&C for participation, but we can create benefit specifications and network access 

standards that promote streamlined benefit comparisons and that maximize opportunities 

for price competition. We believe these proposals will increase beneficiary 

understanding of and access to cost sharing that is better aligned with the lowest 

negotiated prices, improve market competition, and increase downward pressure on total 

program costs. 

30. Enrollment Requirements for the Prescribers of Part D Covered Drugs 

(§ 423.120(c)(5) and (6)) 

To improve our ability to oversee the Medicare Part D program, we are proposing 

to implement section 6405(c) of the Affordable Care Act effective January 1, 2015. This 

section provides the Secretary with authority to require that prescriptions for covered Part 

D drugs must be prescribed by a physician enrolled under section 1866(j) of the Act (42 

U.S.C. 1395cc(j)) or an eligible professional as defined at section 1848(k)(3)(B) of the 

Act (42 U.S.C. 1395w–4(k)(3)(B)). We are proposing in revised 42 CFR 423.120(c)(5) 

and new (6) that a prescriber of Part D drugs must have: (1) an approved enrollment 

record in the Medicare FFS program (that is, original Medicare); or (2) a valid opt-out 
 276 

affidavit on file with a Part A/Part B Medicare Administrative Contractor (A/B MAC) for 

a prescription to be eligible for coverage under the Part D program. 

Our long-standing Part D policy has been that drugs cannot be eligible for Part D 

coverage unless they are dispensed upon prescriptions that are valid under applicable 

state law. We incorporated this policy (§ 423.100 and § 423.104) in the April 12, 2012 

final rule (77 FR 22072) entitled, "Medicare Program: Changes to the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 

and Other Changes." 

Inherent in this policy is the notion that valid prescriptions of covered Part D 

drugs are written by qualified prescribers, meaning prescribers who have an active 

professional health care license that conveys prescribing privileges to them under 

applicable state law. A prescription is not valid under any state law if it is not written by 

a qualified prescriber. Indeed, we note that not all of the eligible professional types 

under section 1848(k)(3)(B) of the Act can necessarily prescribe drugs under state law. 

To help ensure that Part D drugs are prescribed only by qualified prescribers, we 

are proposing that physicians and eligible professionals enroll in the Medicare program in 

order to prescribe covered Part D drugs. We are proposing an enrollment deadline of 

January 1, 2015, which would provide physicians and eligible professionals with at least 

6 months after the publication of a final rule to initiate and complete the Medicare 

enrollment process for the purposes of prescribing covered Part D drugs. We are 

soliciting comments regarding the effective date of this provision and the reason(s) why 

we should consider an earlier or later implementation date for this provision. 
 277 

 Our proposal to implement section 6405(c) of the Affordable Care Act with 

respect to Part D prescribers complements our recent steps to help ensure that 

prescriptions covered by the Part D program are written by qualified health care 

practitioners. In 2012, we provided sponsors with guidance in an October 1, 2012 HPMS 

memorandum titled, "Revised Reporting Requirements for Prescriber Identifiers and 

Other Prescription Drug Event Fields." We also required every PDE record submitted by 

a Part D sponsor to CMS to contain an active and valid individual prescriber national 

provider identifier (NPI) beginning January 1, 2013. PDE records are summary records 

of every prescription filled under the Part D program and contain prescription drug cost 

and payment data that enables CMS to make payments to plans and otherwise administer 

the Part D benefit. Thus, the PDE NPI requirement ensures that we have a record of the 

prescriber's active and valid individual NPI for every prescription covered under the 

program. 

In the final rule implementing the NPI PDE requirement, we explained that the 

consistent use of a single validated identifier would enable us to provide better oversight 

over possible fraudulent activities in the Part D program. When promulgating 

§ 423.120(c)(5) (77 FR 22143, April 12, 2012), we stated that CMS, the National Benefit 

Integrity Medicare Drug Integrity Contractor, and oversight agencies would be able to 

more efficiently, and therefore more effectively, identify patterns of unusual prescribing 

that may be associated with improper and/or fraudulent activities. 

While requiring NPIs on every PDE record was an important first step in 

identifying and monitoring prescribers in the Part D program, the system that assigns and 
 278 

maintains NPI data-- the National Plan and Provider Enumeration System (NPPES)--is 

not a practitioner credentialing system. The information stored in NPPES is self-reported 

by the applicant and is not required to be independently verified by HHS or CMS. This 

has left open some program vulnerabilities as described in recent OIG reports on this 

issue. For instance, in a June 2013 report, the OIG found that the Part D program 

inappropriately paid for drugs ordered by individuals who clearly did not appear to have 

the authority to prescribe. (See "Medicare Inappropriately Paid for Drugs Ordered by 

Individuals Without Prescribing Authority" (OEI-02-09-00608). This raises concerns 

about patient safety and the appropriateness of Part D payments. In addition, there have 

been reports that the prescriptions of physicians with suspended licenses have been 

covered by the Part D program. This should not happen, and we believe we can better 

address this type of vulnerability by verifying the credentials of prescribers as physicians 

or eligible professionals through either their enrollment in the Medicare FFS program 

with an approved enrollment record or their submission of a valid opt-out affidavit on file 

with a NPI at an A/B MAC. 

The Medicare FFS enrollment process requires that an A/B MAC screen and 

validate each enrollment application submitted by a physician or eligible professional 

prior to the decision to approve or deny enrollment in the Medicare program. Thus, 

when a physician, including an intern or resident, or eligible professional submits an 

enrollment application (for example, the CMS-855I or CMS-855O or the Internet-based 

Provider Enrollment, Chain and Ownership System (PECOS) version of these enrollment 

forms) to an A/B MAC, the A/B MAC approves or denies the application to enroll into 
 279 

the Medicare FFS program based on whether the practitioner meets the program 

requirements for his/her for medical specialty. The Medicare FFS enrollment application 

collects and verifies identifying information about the applicant, and his or her 

credentials, such as the license number. For example, an A/B MAC verifies each 

applicant's social security number and NPI at the time of enrollment, when changes or 

updates are submitted, and during the 5-year revalidation process. The A/B MAC also 

verifies state licensing board information prior to enrolling an individual practitioner, and 

monthly thereafter, to determine if the state suspended or revoked a physician or eligible 

professional's medical license. In addition, A/B MACs verify that physician and eligible 

professionals are not excluded from receiving payments under any federal health program 

by checking the System for Award Management (SAM), a process similar to that which 

Part D sponsors currently use to ensure that physicians and eligible professionals are not 

excluded by the OIG). Thus, by leveraging the state licensing and OIG exclusion 

information maintained within PECOS, CMS' national fee-for-service enrollment 

database, we believe that we can help ensure that physicians and eligible professionals 

are State licensed to prescribe covered Part D drugs. 

As an alternative to submitting an enrollment application for Medicare billing 

privileges, physicians and certain eligible professionals may enroll in Medicare for the 

sole purpose of ordering and certifying services in the Medicare program by completing 

the Medicare enrollment application - Registration for Eligible Ordering and Referring 

Physicians and Non-Physician Practitioners (CMS-855-O). Once an A/B MAC 

determines that a physician or eligible professional meets all program requirements to 
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solely order services, they are enrolled in the Medicare program and are placed into an 

approved status in PECOS. A physician or eligible professional may submit a 

CMS-855O application as a means of complying with our proposed requirement, if he or 

she is enrolling solely to order or certify Medicare items or services. 

Section 1861(r) of the Act, defines a physician as a doctor of medicine, doctor of 

osteopathy, doctor of dental surgery or dental medicine, doctor of podiatric medicine, 

doctor of optometry, or a chiropractor who is acting within the scope of his license when 

he/she prescribes a drug within Part D of Medicare. We note that physicians and eligible 

professionals may enroll in the Medicare program, but whether these individuals can 

prescribe is a matter of state law where the physician specialty or eligible professionals 

practices. For instance, a doctor of optometry may enroll in Medicare, but only be able 

to prescribe certain drugs within a state, and a clinical psychologist may enroll in 

Medicare, but may or may not be able to prescribe medications under state law. Our 

proposal to require physicians and eligible professionals to enroll in the Medicare 

program to prescribe covered Part D drugs does not solicit comment on the types of 

health care physicians and eligible professionals who can write a valid prescription under 

state law. We will continue to defer to state law regarding the physicians and eligible 

professionals that can prescribe covered Part D drugs. As such, a Part D sponsor would 

remain responsible for ensuring that a prescriber has the authority to prescribe under state 

law. 

Depending on state law, interns and residents may enroll in the Medicare FFS 

program to receive Medicare billing privileges or to solely order/certify services in Part 
 281 

A and Part B of the Medicare program. Under our proposal, interns and residents with 

an approved enrollment record in PECOS would also be allowed to prescribe covered 

Part D drugs in the Medicare program as long as the state permits this practice. We 

believe that this approach is consistent with the policy that we previously established in 

the April 27, 2012 final rule (77FR 25284) entitled, "Medicare and Medicaid Programs: 

Changes in Provider and Supplier Enrollment, Ordering and Referring, and 

Documentation Requirements; and Changes in Provider Agreements. 

A small number of physicians and eligible professionals elect to opt out of 

enrolling in the Medicare program for a 2-year period by submitting an affidavit to the 

A/B MAC and only bill the Medicare program for covered emergency or urgent care 

furnished to a Medicare beneficiary. Under section 1802(b) of the Act and the 

implementing regulations at 42 CFR 405.400 et seq., certain physicians and eligible 

professionals can opt out of the Medicare program and enter into private contracts with 

Medicare beneficiaries. By entering into these types of contracts, these individuals do 

not bill the Medicare program for non-emergency services that they furnish to Medicare 

beneficiaries. In addition, § 422.220 states, "An MA organization may not pay, directly 

or indirectly, on any basis, for services (other than emergency or urgently needed 

services as defined in § 422.2) furnished to a Medicare enrollee by a physician (as 

defined in section 1861(r)(1) of the Act) or other practitioner (as defined in section 

1842(b)(18)(C) of the Act) who has filed with the Medicare carrier an affidavit promising 

to furnish Medicare-covered services to Medicare beneficiaries only through private 

contracts under section 1802(b) of the Act with the beneficiaries. An MA organization 
 282 

must pay for emergency or urgently needed services furnished by a physician or 

practitioner who has not signed a private contract with the beneficiary." 

Generally, a physician or eligible professional makes the decision to opt out of the 

Medicare program because they have decided to furnish services on a private contracting 

basis. Therefore, we are proposing a similar opt-out policy as the Medicare FFS program 

uses for ordering services within Part B of the Medicare program and certifying services 

within Part A of the Medicare program. We believe that allowing opt-out physicians and 

eligible professionals to continue to prescribe covered Part D drugs to a Medicare 

enrollee would ensure consistency with the Part B program in this regard. In addition, an 

A/B MAC verifies medical licensure for opt-out physicians and eligible professionals on 

a monthly basis. Accordingly, we are soliciting comments on whether a prescription of 

opted-out physicians and eligible professionals should be considered covered under the 

Part D program as long as the opt-out physician or eligible professional furnishes their 

NPI to an A/B MAC. 

Under our proposal, the prescriptions of physicians or eligible professionals who 

are not enrolled in the Medicare FFS program or who are not enrolled in Medicare in an 

approved status would not be coverable under the Part D program. Specifically, in 

revised § 423.120(c)(5), we are proposing that beginning January 1, 2015, a Part D 

sponsor must deny or must require its PBM to deny a claim for a Part D drug from a 

pharmacy, including at the point of sale, if the claim does not contain an active and valid 

physician or eligible professional NPI. Also, the Part D sponsor must deny or must 

require its PBM to deny a pharmacy claim for a Part D drug if: (1) the physician or 
 283 

eligible professional is not enrolled in Medicare in an approved status and (2) the 

physician or eligible professional does not have a valid opt-out affidavit on file with an 

A/B MAC. We believe that the implementation of this policy will promote quality health 

care and prevent fraud by ensuring that prescribers of Part D drugs are physicians and 

eligible professionals who have a valid state license. We note that a prescriber NPI is 

essential on the pharmacy claim for Part D sponsors and PBMs to determine whether the 

prescriber is enrolled in Medicare in an approved status or has a valid opt-out affidavit on 

file with the Medicare FFS program. 

 We also note this provision, if adopted, would preclude almost all 

prescribers located outside of the United States, Puerto Rico, Guam, the Virgin Islands, 

and the Northern Mariana Islands from prescribing covered Part D drugs to a Medicare 

beneficiaries, since these physicians and eligible professionals may not be eligible to 

enroll in the Medicare program. In the April 12, 2012 final rule entitled, "Medicare 

Program; Changes to the Medicare Advantage and Medicare Prescription Drug Benefit 

Programs for Contract Year 2013 and Other Changes" (77 FR 22144), we stated that it 

was our understanding that seven states (Arizona, Florida, Maine, North Dakota, Texas, 

Vermont and Washington) currently permit pharmacies to fill prescriptions from foreign 

prescribers, to varying degrees. Under our current requirements (see Publication 100-18, 

Chapter 5 (Medicare Prescription Drug Benefit Manual), section 90.2.1 (Foreign 

Prescribers) of the Internet-Only Manual), Part D sponsors must pay a claim with an 

active and valid NPI of a foreign prescriber. If there is not one at point of sale, sponsors 

do not have to cover the claim and research the NPI, as they do with domestic prescribers 
 284 

under current 423.120(c). Our proposed policy would change this, as no prescription 

would be covered if the prescriber is not enrolled in Medicare and does not have a valid 

opt-out affidavit on file with an A/B MAC. 

We are also proposing that beginning January 1, 2015, a beneficiary's request for 

reimbursement from a Part D sponsor must be for a Part D drug that was dispensed in 

accordance with a prescription written by a physician or eligible professional who -- 

● Is identified by his or her legal name in the request; and 

● Is enrolled in Medicare in an approved status; or 

● Has a valid opt-out affidavit on file with an A/B MAC. 

Finally, we are also proposing to add provisions to 42 CFR 423.120(c)(6) that a 

Part D sponsor would not be able to submit a PDE to CMS, unless it pertains to a claim 

for a Part D drug that was dispensed pursuant to a prescription written by a physician or, 

when permitted by applicable law, an eligible professional who: (1) is enrolled in 

Medicare in an approved status; or (2) has a valid opt-out affidavit on file with the A/B 

MAC. Proposed § 423.120(c)(6) would also provide that a Part D sponsor must submit 

to CMS only a PDE that contains an active and valid prescriber NPI. 

 Under our proposal, CMS would furnish or make available to Part D sponsors a 

list of physicians and eligible professionals that have an approved enrollment record 

within the Medicare FFS program or who have a valid opt-out affidavit on file with the 

A/B MAC. Part D sponsors would no longer be required to check the NPPES database to 

determine whether a prescriber has an active and valid individual prescriber NPI. For 

these reasons, the language of 423.120(c)(5) would be revised, as Part D sponsors would 
 285 

have to determine from the list whether the prescriber is enrolled in the Medicare FFS 

program in an approved status or has a valid opt-out affidavit on file with an A/B MAC 

before allowing coverage of a prescribed Part D drug. We believe that verifying whether 

a prescriber is enrolled in Medicare with an approved enrollment record (or valid opt-out 

affidavit) would involve an effort similar to the one sponsors use now to determine if a 

prescriber has an active and valid individual NPI. If the prescriber were not listed as 

enrolled in Medicare in an approved status or on file with the A/B MAC with a valid 

opt-out affidavit, the drug would not be covered under the Part D program and a claim, 

including a non-standard claim from a Medicare enrollee, would be denied by a 

pharmacy or the sponsor. Our proposal to require a prescriber to be enrolled in the 

Medicare FFS program or have an opt-out affidavit on file with an A/B MAC, would 

allow a sponsor to confirm that a prescriber's license had been previously verified to 

ensure that the prescriber is a physician or eligible professional and has an active health 

care license under applicable state law. 

With more than 1 million physicians and eligible professionals enrolled in the 

Medicare FFS program and more than 9,000 valid opt-out affidavits on file with an A/B 

MAC, we do not believe that there are a large number of physicians or eligible 

professionals who prescribe covered drugs for Part D enrollees who are not enrolled in an 

approved status in Medicare. Our proposed revisions to § 423.120 reflect the existing 

usage of the CMS-855I, Medicare Enrollment Application - Physicians and 

Non-Physician Practitioners (OMB Approval Number 0938-0685) and the CMS-855O 

(OMB Approval number 0938-1135), and, as such, we do not believe that it is necessary 
 286 

to change our existing paperwork burden estimates associated with completing the 

CMS-855I or the CMS-855O. 

 We are also soliciting comments on whether we should consider requiring all 

pharmacies (for example, network, non-preferred, home infusion, non-retail or mail 

order, and out-of-network) to enroll or maintain enrollment in the Medicare FFS program 

in order to dispense covered Part D drugs. In a May 2013 OIG report titled, "Retail 

Pharmacies with Questionable Part D Billing, (OEI-02-09-00600)," the OIG found that 

2,637 or approximately 4.4 percent of pharmacies, had questionable billing in 2009. The 

report also highlighted several cities (Miami, Florida, Los Angeles, California, and 

Detroit, Michigan) with significantly high levels of questionable billing than the national 

average. 

We believe that requiring Medicare FFS enrollment for network pharmacies 

would leverage the credentialing, identity verification and other safeguards that are part 

of the FFS enrollment process, allowing Part D sponsors to leverage an important 

program integrity tool for their networks. Alternatively, we seek comment on whether 

requiring FFS enrollment for network pharmacies is a "best practice" in pharmacy 

contracting by plan sponsors, and should be an integral part of sponsors' required fraud, 

waste and abuse programs. 

Finally, we are soliciting public comments from doctors of dental surgery or 

dental medicine, including family dentists, regarding our proposal that doctors of dental 

surgery or dental medicine enroll in the Medicare program in order to prescribe covered 

Part D drugs. While many dentists have enrolled in Medicare program within the last 2 
 287 

years to order bill the Medicare program or order services within the Medicare program, 

we will continue to conduct outreach to professional organizations/associations to increase 

the likelihood that all dentists have sufficient notice and therefore time to enroll in the Medicare 

program in order to prescribe covered Part D drugs. 

31. Improper Prescribing Practices (§ 424.535) 

a. Background and Program Integrity Concerns 

Notwithstanding our proposal discussed in the previous section, we believe that 

additional program safeguard enhancements are necessary to protect the Medicare Trust 

Funds from fraud, waste and abuse while ensuring that Part D enrollees and Part B 

Medicare beneficiaries maintain access to quality health care. 

 As alluded to earlier, the OIG has conducted several studies addressing program 

integrity issues related to the Medicare Part D program. Two such reports are of 

particular relevance to the provisions we are proposing in this section. 

 The first, which we have already referenced, is titled, "Medicare Inappropriately 

Paid for Drugs Ordered by Individuals Without Prescribing Authority" 

(OEI-02-09-00608), issued on June 21, 2013. The report found that Medicare paid $26.2 

million for drugs prescribed by individuals with National Plan & Provider Enumeration 

System (NPPES) taxonomy codes indicating that they did not have the authority to 

prescribe these drugs. Such persons included counselors, chiropractors, social workers, 

physical therapists, registered nurses, occupational therapists, and speech-language 

pathologists. Some of these individuals – specifically, chiropractors, physical therapists, 

occupational therapists, and speech language pathologists – are eligible to enroll in the 
 288 

Medicare program to furnish Part B services. 

 The second study is titled, "Prescribers with Questionable Patterns in Medicare 

Part D" (OEI-02-09-00603), also issued in June 2013. This report highlighted a number 

of instances in which physicians and eligible professionals prescribed inordinate amounts 

of drugs to Part D beneficiaries in 2009. For example-- 

● Medicare paid a total of $9.7 million - 151 times more than the average - for 

one California physician's prescriptions; most of this physician's prescriptions were filled 

by two independent pharmacies, both of which the OIG had identified as having 

questionable billing; 

● One hundred and eight general-care physicians each ordered an average of 71 

or more prescriptions per beneficiary, more than 5 times general-care physicians' national 

average of 13;and 

● An Ohio physician ordered more than 400 drugs each for 13 of his 665 

beneficiaries. 

● A Texas physician ordered more than 400 prescriptions each for 16 

beneficiaries and prescribed 700 or more drugs for 3 of these beneficiaries. 

 The OIG also noted examples of physicians prescribing a high percentage of 

Schedule II and III drugs in 2009. In one case, 78 percent of the prescriptions a Florida 

physician ordered were for Schedule II drugs even though the OIG found that 4 percent 

of the prescriptions ordered by prescribers nationwide were for Schedule II drugs. For 

one beneficiary, the physician prescribed a 605-day supply of morphine sulfate, a 

524-day supply of oxycodone HCl, a 460-day supply of fentanyl, and a 347-day supply 
 289 

of hydromophone HCl. 

In both reports, as well as in other Part D studies, the OIG recommended that 

CMS exercise greater oversight of the Part D program, not only to curb the specific 

practices outlined previously but also to stem the overall risk of fraud and abuse that the 

program presents. The OIG has expressed particular concern over the potential for 

beneficiaries to become addicted to or otherwise be seriously harmed by certain drugs if 

they were inappropriately prescribed in dangerously excessive amounts. We share this 

concern. 

 Although we have recently taken steps to tighten and strengthen our supervision 

of the Part D program, problems remain. We continue to receive reports of questionable 

prescribing practices. Some of these prescribers have been referred to our Medicare 

Drug Integrity Contractor (MEDIC) for investigation. Yet even if we find improper 

practices, such as a particular physician's unreasonably high volume or unsafe amounts of 

Schedule III controlled substance prescriptions, CMS does not possess the legal authority 

to take administrative action against the prescriber. This means, in many cases, that the 

prescriber can continue prescribing drugs that will be covered under Part D and, if he or 

she is enrolled in Medicare FFS, remain so enrolled to furnish medical services. We 

believe this is inconsistent with the OIG's recommendations in its various Part D reports, 

and with our goal of protecting and promoting the health and safety of Medicare 

beneficiaries and safeguarding the Medicare Trust Funds. 

b. Drug Enforcement Administration (DEA) Certification of Registration 
 290 

The DEA implements and enforces Titles II and III of the Comprehensive Drug 

Abuse Prevention and Control Act of 1970, and the Controlled Substances Import and 

Export Act, as amended, and collectively referred to as the Controlled Substances Act 

(CSA) (21 U.S.C. 801-971); the implementing regulations for these statutes are in 21 

CFR Parts 1300 through 1321. The CSA makes possession of authority under state law 

to dispense controlled substances a requirement for both obtaining and maintaining a 

DEA Certificate of Registration. Consistent with 21 U.S.C. 822(e), 21 CFR 1301.12(a) 

states: "A separate registration is required for each principal place of business or 

professional practice at one general physical location where controlled substances are 

manufactured, distributed, imported, exported, or dispensed by a person." The term 

"dispense" under 21 U.S C. 802(10) means "to deliver a controlled substance to an 

ultimate user or research subject by, or pursuant to the lawful order of, a practitioner, 

including the prescribing and administering of a controlled substance . . ." 

We view a DEA Certificate of Registration to prescribe controlled substances as 

similar to a state's requirement that a physician or eligible professional be licensed or 

certified by the state to furnish health care services. We have required that physicians 

and eligible professionals meet state licensure or certification requirements in order to 

enroll in the Medicare FFS program to furnish health care services. In fact, certain 

suppliers, such as air ambulance suppliers, must also meet national certification standards 

by a federal agency (the Federal Aviation Administration (FAA)) to enroll or remain 

enrolled in the Medicare program. Failure to obtain or maintain appropriate licensure or 
 291 

certification can result in the denial or revocation of the provider or supplier's Medicare 

under § 424.530 and § 424.535, respectively. 

We believe there is a similarity between the need to obtain and maintain DEA 

registration to dispense controlled substances, and the need for an air ambulance supplier 

to meet FAA certification requirements, and for a physician or eligible professional to 

meet state licensure or certification requirements in order to enroll in and maintain 

enrollment in Medicare FFS. The Medicare FFS licensure and certification requirements 

are designed to ensure that physicians, eligible professionals, and other suppliers are 

qualified to furnish health care services within the Medicare program. In a similar way, 

the DEA Certificate of Registration is designed to ensure that physicians and eligible 

professionals meet the statutory criteria established by the CSA to dispense controlled 

substances. 

Physicians, eligible professionals, and pharmacies with a valid DEA Certificate of 

Registration are allowed to dispense controlled substances. A DEA Certificate of 

Registration is not required to dispense non-controlled substances, including covered Part 

D drugs that are not considered to be controlled substances. Thus, under our current 

regulations, a physician or eligible professional may prescribe covered Part D 

non-controlled drugs to a Part D enrollee even though his or her DEA Certificate of 

Registration has been suspended or revoked. As the agency that administers the Part D 

drug program, we believe it is both appropriate and necessary to expand our Medicare 

FFS provider enrollment requirements to ensure that only physicians and eligible 
 292 

professionals who are in good standing with state licensing boards and, as applicable the 

DEA, are writing prescriptions for covered Part D drugs in the Medicare program. 

c. Proposed Provisions 

In light of the foregoing discussion, we are proposing several changes to 42 CFR 

Part 424, subpart P, in order to enhance our Medicare Part D and Part B program 

integrity efforts. 

(1) DEA Certificate and State Authority 

We propose to add a new § 424.530(a)(11) granting CMS the authority to deny a 

physician or eligible professional's Medicare enrollment application if: (1) his or her 

DEA Certificate is currently suspended or revoked; or (2) the applicable licensing or 

administrative body for any state in which the physician or eligible professional practices 

has suspended or revoked the physician or eligible professional's ability to prescribe 

drugs; and (3) such suspension or revocation is in effect on the date he or she submits his 

or her enrollment application to the Medicare contractor. We believe this approach is 

consistent with our policy under § 424.530(a)(1) of denying enrollment to providers and 

suppliers that do not meet applicable licensure and certification requirements. 

Similarly, we propose to add a new § 424.535(a)(13) granting CMS the authority 

to revoke a physician or eligible professional 's Medicare enrollment if (1) his or her 

DEA Certificate is suspended or revoked, or (2) the applicable licensing or administrative 

body for any state in which the physician or eligible professional practices suspends or 

revokes the physician or eligible professional's ability to prescribe drugs. Again, this 
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approach is consistent with our requirement that providers and suppliers maintain 

compliance with all applicable licensure and certification requirements. 

We believe that the loss of the ability to prescribe drugs via a suspension or 

revocation of a DEA Certificate or by state action is a clear indicator that a physician or 

eligible professional may be misusing or abusing his or her authority to prescribe such 

substances. This raises concerns that the physician or eligible professional's improper 

practices may be duplicated in the Medicare program. We must therefore take steps to 

ensure that Medicare beneficiaries are protected and the Medicare Trust Funds. 

(2). Patterns or Practices of Prescribing 

(a). Grounds for Revocation 

 We also propose to add a new § 424.535(a)(14) that would permit CMS to revoke 

a physician or eligible professional's Medicare enrollment if CMS determines that he or 

she has a pattern or practice of prescribing Part D drugs that-- 

● Is abusive and represents a threat to the health and safety of Medicare 

beneficiaries, or 

● Fails to meet Medicare requirements. 

We believe we have several bases for the legal authority for this proposal. First, 

sections 1102 and 1871 of the Act give the Secretary the authority to establish 

requirements for the efficient administration of the Medicare program. Second, section 

1866(j) of the Act states that the Secretary shall establish by regulation a process for the 

enrollment of providers of services and suppliers. 
 294 

We also note that on April 29, 2013, we published in the Federal Register a 

proposed rule entitled, "Medicare Program: Requirements for the Medicare Incentive 

Reward Program and Provider Enrollment" (78 FR 25013). We proposed therein to add a 

new § 424.535(a)(8)(ii) that would give CMS the discretion to revoke a provider or 

supplier's Medicare enrollment if the provider or supplier has a pattern or practice of 

submitting claims for services that fail to meet Medicare requirements. Our purpose was 

to place providers and suppliers on notice that they were under a legal obligation to 

always submit correct and accurate claims and that failure to do so may result in the 

revocation of Medicare enrollment if such failures establish a pattern of incorrect or 

inaccurate claims. We believe that this concept should also extend to revoking Medicare 

enrollment for Part D prescribers who engage in abusive prescribing practices. In our 

view, if a physician or eligible professional repeatedly and consistently fails to exercise 

reasonable judgment in his or her prescribing practices, we should have the ability to 

remove such individuals from the Medicare program to protect beneficiaries' safety and 

health as well as Medicare Trust Funds. 

(b) Criteria to Be Considered 

 Many patterns and practices of prescribing, though perhaps questionable on their 

face, do not upon investigation involve abusive or fraudulent behavior nor involve 

substandard medical care. Therefore, we are proposing to base any revocation under 

proposed § 424.535(a)(14) on situations that fall outside the norm of appropriate 

prescribing, and only after carefully considering the factors outlined later in this section. 

A thorough, detailed investigation by CMS of the physician or eligible professional's 
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prescribing practices would be a prerequisite for the use of § 424.535(a)(14). Honest 

physicians and eligible professionals who engage in reasonable prescribing activities 

would not be impacted by our proposal. We note further that CMS, rather than the Part D 

plans, would make all determinations under our proposed provisions, though information 

contained in referrals from Part D Plan sponsors may be used as part of CMS' analysis to 

make revocation decisions. 

 We choose not to define "abusive" and "threat to the health and safety of 

Medicare beneficiaries" in this proposed rule, primarily because the myriad of 

questionable situations that warrant the possible application of § 424.535(a)(14) requires 

that CMS have the flexibility to address each case on its own merits. We believe that the 

sounder approach would be to propose a list of criteria that CMS would use in 

determining whether a prescriber is engaging in prescribing practices sufficient to 

warrant a revocation. 

In determining instances of a pattern or practice of prescribing that is abusive and 

a threat to the health and safety of Medicare beneficiaries, CMS proposes to consider 

several factors, including-- 

● Whether there are diagnoses to support the indications for which the drugs 

were prescribed; 

● Whether there are instances where the necessary evaluation of the patient for 

whom the drug was prescribed could not have occurred (for example, the patient was 

deceased or out of state at the time of the alleged office visit); 
 296 

● Whether the physician or eligible professional has prescribed controlled 

substances in excessive dosages that are linked to patient overdoses; 

● The number and type(s) of disciplinary actions taken against the physician or 

eligible professional by the licensing body or medical board for the state or states in 

which he or she practices, and the reason(s) for the action(s); 

● Whether the physician or eligible professional has any history of "final adverse 

actions" (as that term is defined under § 424.502); 

● The number and type(s) of malpractice suits that have been filed against the 

physician or eligible professional related to prescribing that have resulted in a final 

judgment against the physician or eligible professional or in which the physician or 

eligible professional has paid a settlement to the plaintiff(s) (to the extent this can be 

determined); 

● Whether any State Medicaid program or any other public or private health 

insurance program has restricted, suspended, revoked, or terminated the physician or 

eligible professional's ability to prescribe medications, and the reason(s) for any such 

restriction, suspension, revocation, or termination; and 

● Any other relevant information provided to CMS. 

 In determining whether a physician or eligible professional has a pattern or 

practice of prescribing that fails to meet Medicare requirements, CMS would consider 

the following factors, including whether the physician or eligible professional -- 

● Has a pattern or practice of prescribing without valid prescribing authority; 

● Has a pattern or practice of prescribing for controlled substances outside the 
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scope of the prescriber's DEA Certificate of Registration; 

● Has a pattern or practice of prescribing drugs for indications that were not 

medically accepted—that is, for indications neither approved by the Food and Drug 

Administration (FDA) nor medically accepted under 1860D-2(e)(4) of the Act - and 

whether there is evidence that the physician or eligible professional acted in reckless 

disregard for the health and safety of the patient. 

 To be covered under Part D, Medicare requires that a drug be dispensed upon a 

prescription that is valid under state law, that the drug meets the definition of a Part D 

drug, and that it be prescribed by a valid prescriber for a medically accepted indication. 

Therefore, a physician or eligible professional evidencing a pattern or practice of 

prescribing without valid prescribing authority, or for controlled substances outside the 

scope of the prescriber's DEA Certificate of Registration, would face potential revocation 

of Medicare enrollment. In addition, a physician or eligible professional with a 

consistent pattern or practice of prescribing drugs for indications that were not medically 

accepted—that is, for indications neither approved by the FDA nor medically accepted 

under 1860D-2(e)(4) of the Act—could potentially face revocation. In the latter 

example, we would anticipate revoking enrollment only in cases where there is evidence 

of reckless disregard for the health and safety of the patient, not when the prescribing is 

based on peer reviewed literature or community standards of medical practice. 

 We reiterate our earlier statement that all criteria would be carefully examined 

before determining whether a revocation under § 424.535(a)(14) is warranted. In the vast 

majority of cases, no single factor would or could be dispositive. Nonetheless, there are 
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certain criteria that, if met, would weigh very heavily and perhaps decisively towards a 

finding that a revocation is justified. A primary example would be that the physician or 

eligible professional is prescribing drugs without legal authorization. Even if a review of 

the other criteria did not indicate a pattern of improper activity, unauthorized prescribing 

is so serious a matter that the practitioner's continued retention of his or her Medicare 

enrollment would be unacceptable. 

 We stated in section III.A.30, of this proposed rule that prescriptions ordered by 

physicians and eligible professionals who are not enrolled in Medicare in an approved 

status would not be coverable under the Part D program. 

 We welcome and indeed encourage comments on our proposed additions of 

§ 424.530(a)(11) and of § 424.535(a)(13) and (14). We are especially interested in 

receiving comments on the following issues: 

● Whether certain proposed criteria should not be used. 

● Whether criteria that we did not propose should be used. 

● Whether certain criteria should be given more or less weight than others. 

● Whether our proposed additions of § 424.530(a)(11) and of § 424.535(a)(13) 

and (14) should be expanded to include pharmacy activities. 

32. Transfer of TrOOP Between PDP Sponsors Due to Enrollment Changes during the 

Coverage Year (§ 423.464) 

Sections 1860D-23 and 1860D-24 of the Act specify that requirements for Part D 

sponsor coordination of benefits with State Pharmaceutical Assistance Programs and 

other plans providing prescription drug coverage, including treatment of expenses 
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incurred by these payers toward a beneficiary's out-of-pocket (TrOOP) threshold. Part D 

coordination of benefit requirements are codified at § 423.464 which define "other 

prescription drug coverage" for COB purposes to include, among other entities, other 

Part D plans and specify Part D plan requirements for determining when an enrollee has 

satisfied the out-of-pocket threshold. 

Related regulations at § 423.104(d), codifying the requirements in section 

1860D-2(b) of the Act, require sponsors to track beneficiary TrOOP and gross covered 

drug costs and correctly apply these costs to the benefit limits to correctly position the 

beneficiary in the benefit and provide the catastrophic level of coverage at the 

appropriate time. When a beneficiary transfers enrollment between Part D plans during 

the coverage year, the enrollee's gross covered drug costs and TrOOP must be transferred 

between plans and applied by the subsequent plan in its administration of the Part D 

benefit. The procedures for a prior plan to report these TrOOP-related data and for the 

plan of record to receive, upload, and use the data position the beneficiary in the correct 

phase of the benefit was expressed in guidance outlining sponsor responsibilities related 

to the 2006 Enrollment Reconciliation process. CMS April 2006 guidance detailing 

instructions for the Enrollment Reconciliation-related data transfer noted the process 

would be applicable on an on-going basis when a beneficiary's enrollment in a plan 

terminated due to enrollment in another plan. 

This initial manual data transfer process was replaced in 2009 by an automated 

process for TrOOP-related data transfer developed by CMS and the industry in 

collaboration with National Council for Prescription Drug Programs (NCPDP). Our 
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guidance released in 2008 describing sponsor implementation of the automated TrOOP 

balance transfer process reiterated sponsor requirements for data reporting by the prior 

plan and use of the data for proper positioning of the beneficiary in the benefit by the 

current plan. We have continued to specify these requirements in subsequent updated 

versions of the guidance. 

Automated TrOOP balance transfer is supported by the NCPDP Financial 

Information Reporting (FIR) transaction standard, which is used to electronically transfer 

TrOOP-related data between plans. When a beneficiary transfers enrollment to another 

plan during the coverage year, transactions are sent sequentially by the CMS Part D 

Transaction Facilitator to all Part D plans in which the beneficiary was enrolled during 

the coverage year or that paid claims on the beneficiary's behalf. Sponsors must receive 

and respond to each transaction, accept the data reported by the enrollee's prior plan, and 

use these data in the administration of the Part D benefit. 

To ensure Part D benefits are correctly administered when a beneficiary transfers 

enrollment during the coverage year, we propose to codify these requirements in federal 

regulations. Specifically, we propose to amend § 423.464(f)(2) by adding a new 

paragraph (C) requiring Part D sponsors to-- 

● Report benefit accumulator data in real-time in accordance with the procedures 

established by CMS; 

● Accept in real-time data reported in accordance with CMS-established 

procedures by any prior plans in which the beneficiary was enrolled, or that paid claims 

on the beneficiary's behalf, during the coverage year; and 
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● Apply these costs promptly. 

In our guidance on automated TrOOP balance transfer, we express our expectation that 

sponsors successfully transfer accumulator data for beneficiaries making enrollment 

changes during the coverage year in a timely manner 100 percent of the time. Although 

sponsors may be reporting and accepting these data in accordance with our expectations, 

we have been informed that some sponsors may not be promptly loading the data 

received into their systems so it is available for claims processing. As a result, the 

beneficiary's previously incurred costs and gross covered drug costs are not considered in 

the processing of claims received by the new plan sponsor soon after the enrollment 

change. With this change we seek to clarify that, since the automated TrOOP transfer 

process enables the accumulators to available to the new plan within a day or 2 of the 

new enrollment effective date or, if later, the date CMS processes the enrollment change, 

we expect the new plan sponsor to apply the data promptly after receipt and use it in 

benefit administration. 

33. Broadening the Release of Part D Data (§ 423.505) 

 We are proposing to revise our regulations governing the release of Part D data to 

expand the release of unencrypted prescriber, pharmacy, and plan identifiers contained in 

prescription drug event (PDE) records, as well as to make other changes to our policies 

regarding release of Part D PDE data. In the May 28, 2008 Federal Register 

(76 FR 30664) we published a final rule entitled "Medicare Program; Medicare Part D 

Claims Data," (hereinafter referred to as the Part D data final rule) to implement 

regulations that govern the collection of PDE data under the authority of section 
 302 

1860D-12(b)(3)(D) of the Act and the disclosure of this data in accordance with section 

1106 of the Act. The provisions governing the collection and disclosure of PDE data are 

codified at § 423.505(b)(8), (f)(3) and (l). 

 PDE data are summary records of individual claim transactions at the pharmacy 

containing CMS-defined standard fields submitted by Part D sponsors that document the 

final adjudication of a Part D dispensing event. The Part D data final rule governed the 

collection and disclosure of the original 37 elements of PDE data, but was updated to 

apply to any additional elements that were added to the PDE record. This update was in 

a final rule issued in April 2010 (75 FR 19678) entitled, "Medicare Program; Policy and 

Technical Changes to the Medicare Advantage and the Medicare Prescription Drug 

Benefit Programs" (hereinafter referred to as the April 2010 final rule). 

 In the preamble to the Part D data final rule (73 FR 30671), we stated, "we [ ] 

believe that it is in the interest of public health to share the information collected under 

[the authority of 1860D-12(b)(3)(D)] with entities outside of CMS." We explained that 

the release of PDE data assists CMS in evaluating the Medicare Part D program and 

assessing related policies. We further stated such release was in the interest of public 

health and would improve the clinical care of beneficiaries. 

 In addition to setting forth the significant public policy reasons for disclosure of 

PDE data, we made clear in the preambles of both the Part D data final rule and the April 

2010 rule that our primary concerns in releasing PDE data are protecting the 

confidentiality of beneficiary identifiable information and commercially sensitive data of 

Part D sponsors. Part D sponsors are private organizations that contract with the federal 
 303 

government to administer the Part D benefit by offering prescription drug plans to 

Medicare beneficiaries who may voluntarily enroll in one. Therefore, as described in the 

Part D data final rule and the April 2010 rule, the release of PDE data is subject to certain 

protections, described here generally, such as encryption of beneficiary information and 

aggregation of commercially sensitive data of Part D sponsors. In addition, whenever 

PDE data is released, we only release the minimum data necessary for a given purpose, as 

determined in the sole discretion of CMS after review of the requestor's detailed request 

for data. If releasing data to an external entity, in the Part D data final rule, CMS 

indicated that the requestor must be a legitimate researcher, meaning the requestor has 

the requisite experience and is working for, or on behalf of, a reputable institution. (In 

the preamble to the Part D data final rule (73 FR 30674 citing 45 CFR 164.501), we used 

the definition of "research" contained in the HIPAA Privacy Rule, which defines the term 

as "a systematic investigation, including research development, testing, and evaluation, 

designed to develop or contribute to generalizable knowledge." In the Part D data final 

rule (73 FR 30674), we also indicated that, consistent with our current policies for Part A 

and B data, identifiable Part D data would not be disclosed for commercial purposes. 

 The following describes the current policy for the release of Part D data more 

specifically by PDE element: Beneficiary, prescriber, pharmacy, and plan identifiers are 

generally encrypted when released. We only release unencrypted beneficiary, prescriber, 

pharmacy, or plan identifiers to other government agencies or states, if these identifiers 

are necessary for the project, and we only release unencrypted beneficiary, prescriber, 

and pharmacy identifiers to external entities if needed to link to another dataset. We do 
 304 

not release unencrypted plan identifiers to external entities, except to HHS grantees, as 

permitted under the criteria described in the April 2010 rule and codified in the 

regulations at 42 CFR 423.505(m)(1)(iii)(C). 

 Under the Part D data final rule, drug cost data in PDE records are generally 

aggregated when released. Drug cost data are available in disaggregated format only to 

other HHS entities and congressional oversight agencies. Drug costs data in PDE records 

consist of the drug ingredient cost, applicable dispensing fee and any required state sales 

tax. However, upon request we would exclude sales tax from the aggregation at the 

individual claim level if necessary for a project. 

 As this is a time of unprecedented change for CMS and the health care system in 

general, we believe the current regulations governing the release of PDE data need to be 

re-considered. The agency has an important role to play in supporting opportunities to 

accelerate the transition to a data-driven and information-based health care delivery 

system in this country. CMS itself is transforming from a passive payer of claims 

towards a value-based purchaser of health care, while at the same time, other health care 

payer and provider incentives have shifted toward broader coverage and coordinated 

care. These trends are all a positive and expected outgrowth of the passage and 

implementation of the Affordable Care Act. 

 Concurrent with the changes to CMS' role and the health care system in general is 

the fact that we now have several years of experience with release of PDE data from the 

Medicare Part D program. We believe the current limitations on the release of certain 

data elements hinder the use of PDE data in this new health care environment, and inhibit 
 305 

accompanying insights into prescription drug benefit plans that could result from broader 

release of the data. Our experience has led us to conclude that broader release of PDE 

data to external entities can increase the positive contributions researchers make to the 

evaluation and function of the Part D program, and improve the efficiency of the program 

and the clinical care of its beneficiaries, which is in the interest of public health. 

Expanded access to PDE data by external entities will allow the researchers to study 

additional aspects of the Medicare program and health care, and their findings will be 

released publicly. Such contributions are in the interest of the Medicare Part D program 

and public health now more than ever as the Affordable Care Act transforms CMS's role 

and the nation's health care system. 

 For these reasons, we believe increased access to prescriber, pharmacy, and plan 

identifiers by all categories of requestors is of utmost importance. This new policy 

would facilitate research by entities outside CMS that involves identifiable plans, 

prescribers, and pharmacies. Furthermore, we believe we can relax the current policies 

on the release of this PDE data, while still protecting beneficiary confidentiality and 

commercially sensitive data of Part D sponsors. 

 Accordingly, we are proposing to permit the release of unencrypted prescriber, 

pharmacy, and plan identifiers contained in PDE records to all current categories of 

requestors (including, other HHS entities and the Congressional oversight agencies, 

non-HHS executive branch agencies and states, and external entities). We note that 

because the minimum necessary policy will still apply to all such releases, this proposed 

policy change with respect to HHS entities/Congressional oversight agencies and 
 306 

non-HHS executive branch agencies/states is more a formality, since this data is available 

in unencrypted format to these same entities under the current Part D data regulations "if 

needed." For this reason, we focus on the release of unencrypted prescriber, pharmacy, 

and plan identifiers to external entities as discussed later in this section. 

 We emphasize that we are not proposing any changes to our release policies with 

respect to beneficiary identifiable data and the drug cost data of Part D sponsors. In 

addition, other data that is still viewed by some at this time to be commercially-sensitive 

data of Part D sponsors, for example, data on bids, rebates and other price concessions, 

are outside the scope of the changes to current PDE data release policies that we are 

proposing here. We note that bid data is not collected through PDE records, and while 

rebates and other price concessions may be reflected in PDE records, we are not 

proposing to make any changes to the policies governing release of such data. 

 We understand that there may be concerns about releasing unencrypted 

prescriber, plan, and pharmacy identifiers to external entities, as they have been raised in 

the past, and we would like to address them upfront. In the preamble to the Part D data 

final rule (73 FR 30675), we addressed specific concerns about expanding access to 

prescriber information by external entities, particularly for pharmaceutical companies and 

others who may want to influence physicians' prescribing patterns and interfere with a 

physicians' professional judgment. We stated that an encrypted version of the prescriber 

identifier, which allows for the linkage of all of a prescriber's claims without divulging 

the prescriber's identity, would meet the needs of most researchers. 
 307 

 However, in our view today, the vast majority of physicians have prescribed and 

do prescribe what they believe are the appropriate medications for their patients, and they 

should have no concerns with transparency in their prescribing patterns. Moreover, there 

are other measures in place to prevent inappropriate influence by external entities on 

prescribers. For example, section 6002 of Affordable Care Act requires applicable 

manufacturers of drugs covered under the Part D program to report annually to the 

Secretary certain payments or other transfers of value to physicians. This requirement 

was implemented through a final rule that appeared in the February 8, 2013 Federal 

Register (78 FR 9458) entitled, "Medicare, Medicaid, Children's Health Insurance 

Programs; Transparency Reports and Reporting of Physician Ownership of Investment 

Interests ". In addition, the federal Anti-Kickback Law (section 1128B(b) of the Act) 

provides that anyone who knowingly and willfully solicits, receives, offers, or pays 

anything of value to influence the referral of federal health care program business, 

including Medicare and Medicaid, can be held accountable for a felony. Finally, we 

would point out that when data are completely transparent, it is easier for the attempts of 

some to use the data for purposes of inappropriate manipulation to be countered by others 

who have access to the same data. We note that it appears that prescriber data are already 

available commercially from pharmacy data aggregators. For these reasons, we believe 

that our earlier concerns about the release of unencrypted prescriber identifiers in PDE 

data to external entities are no longer warranted. 

 Our proposal to release unencrypted prescriber identifiers means that legitimate 

external researchers will be able to conduct research that involves identifiable prescribers 
 308 

using PDE data. In the Part D data final rule (73 FR 30676), a commenter argued that 

providing access to linked physician identifiable claims in order to pool them with 

employer data would allow analysis to reduce cost of care delivery and improve the 

quality of care. In response, we did not disagree with the commenter, but referenced a 

variety of pay for performance and value-based health care initiatives being undertaken 

by CMS in an effort to encourage health care providers to furnish high quality health care 

and to provide cost and quality information to consumers. We noted that we intended to 

use PDE data in those activities. We declined, however, to adopt a policy that would 

include making unencrypted prescriber identifiers available for release to external entities 

(except when needed to link to another data set). 

 However, in light of the goals of the Affordable Care Act to improve the quality 

of health care, including through better access to information, we now acknowledge our 

agreement with the commenter regarding the importance of providing access to 

prescriber-identifiable claims. As we noted previously in this section, now more than 

ever, it is vital that researchers have more data to investigate ways to reduce the cost of 

care and improve its quality. Studying the prescribing trends of identifiable prescribers 

can assist all stakeholders in the health care system, from both public and private health 

care payers, to patients, and even to physicians themselves, by identifying prescribing 

benchmarks and determining the reasons for variations. 

 With respect to the release of plan identifiers, we recognized that it might be 

asserted that in the Part D data final rule and April 2010 rule we included this data when 

discussing commercially sensitive data of Part D sponsors that would generally be 
 309 

encrypted when released to external entities. However, we point out that we focused on 

the separate costs paid by Part D sponsors for ingredient costs or dispensing fees as being 

the confidential data on the claim (73 FR 30668), and we are not proposing any changes 

to our policies with respect to the release of ingredient costs or dispensing fees. 

However, we are proposing to release unencrypted plan identifiers to all categories of 

requestors. 

 In comments in response to the Part D data proposed rule, commenters requested 

clarification that the plan-specific information we were proposing to disclose related only 

to Part D claims data and would not include competitively sensitive financial data 

regarding rebates, discounts, or other negotiated price concessions. The commenters 

expressed concerns that release of competitively sensitive data could undermine the 

competitive bid process, asserting that plans would be able to adjust their bids on the 

basis of knowledge of each other's data, resulting in higher drug costs for all. In response 

to these concerns, we replied in the preamble to the Part D data final rule that we shared 

the commenters' concerns about the need to protect sensitive data under the Part D 

program. We stated that because the Medicare drug benefit is based on a competitive 

business model, we believe releasing commercially or financially sensitive data to the 

public could negatively impact Part D sponsors' ability to negotiate for better prices, and 

ultimately could affect the ability of sponsors to hold down prices for beneficiaries and 

taxpayers. Therefore, we explained (73 FR 30668) that we were adopting a number of 

protections to mitigate these concerns, which include our minimum necessary, legitimate 

researcher, and aggregation policies described previously. 
 310 

 These policies would also not change under our current proposal, except that plan 

identifiers (including internal plan/pharmacy identification numbers on the claim that 

represent reference numbers assigned by the plan at the time a drug is dispensed), would 

be available for release to all categories of requestors without encryption. In other words, 

our current policy on release of ingredient cost and dispensing fee data would not change 

under our proposal, meaning the minimum necessary data regarding ingredient costs and 

dispensing fees would continue to be available for release in disaggregated form only to 

other HHS entities and congressional oversight agencies. Non-HHS executive branch 

agencies and external entities could still only obtain the minimum necessary ingredient 

cost and dispensing fee data, only in aggregated form, and only if it is released to a 

legitimate researcher. 

 We are proposing this change to our regulations governing the release of plan 

identifiers, because we no longer believe plan identifiers in PDE data are commercially 

sensitive data of Part D sponsors that should not be available for release (unless 

encrypted). Indeed in the April 2010 rule (75 FR 19675 through 19676), in which we 

expanded access to unencrypted plan identifiers to include HHS grantees under certain 

conditions on the basis that it would allow for the study of beneficiary plan choices, 

which would assist CMS in better understanding and improving the Medicare program, 

we responded to opposing comments that we believed allowing broader access by 

grantees of non-HHS entities and external researchers could also further assist CMS, 

even though we declined to adopt such broader access at the time, because we believed 

that additional time was needed to evaluate the issue. 
 311 

 Moreover, an analysis of Part D plans, their network pharmacies, and average 

drug costs, can already be accomplished through data posted on CMS' website and/or 

purchased in public use files. Additionally, the MPDPF allows users to view and 

compare all available prescription drug plan choices, including plan and pharmacy 

specific estimates of the costs of individual drugs. These data can be manipulated by 

researchers to reveal information about specific plans and pharmacies that contributes to 

the evaluation and functioning of the Part D program and can be used to improve the 

public health. Therefore, in light of the public policy rationale for increasing access to 

PDE data by all categories of requestors, we believe that plan identifiers should be 

available in unencrypted format. 

 We did not respond to any comments specifically addressing pharmacy identifiers 

in our Part D data final rule and April 2010 rule. However, for the same reasons that we 

are proposing to make prescriber and plan identifiers available for release in an 

unencrypted format, we no longer see a reason that pharmacy identifiers should not be 

available for release in unencrypted format. Accordingly, we also propose to release 

unencrypted pharmacy identifiers to all categories of requestors, which would also be a 

change in the current regulations governing the release of PDE data. 

 We would like to address one final aspect of our policies governing the release of 

Part D data. As discussed previously, in the preamble to the Part D data final rule, we 

explained that consistent with CMS's existing policies with respect to Parts A and B data, 

CMS would not release PDE data for commercial purposes (but external researchers may 

be funded by commercial firms if the researchers are free to publish their results 
 312 

regardless of the findings). However, given reasons that we have highlighted previously 

which provide the impetus for the changes that we are proposing to make to our rules 

governing the release of PDE data, we are also soliciting comment on the current 

restriction on the release of PDE data for commercial purposes. We are not making a 

specific proposal in this regard, but rather wish to receive comments for consideration in 

light of the proposed changes to the requirements governing the release of Part D data 

that are included in this proposed rule. 

 In addition to the proposed changes with respect to prescriber, pharmacy, and 

plan identifiers described previously, and our request for comment on the restriction on 

the release of Part D PDE data for commercial purposes, we are proposing a few other 

changes to our regulations governing the release of PDE data and also wish to clarify our 

existing policies with respect to several issues related to the PDE data. First, we are 

proposing to add supporting program integrity purposes, including coordination with 

states, as an additional purpose deemed necessary and appropriate by the Secretary for 

which a Part D sponsor must agree to submit all data elements included in all its drug 

claims under section 1860D-12(b)(3)(D) of the Act. The regulation at § 423.505(f)(3) 

currently contains a non-exclusive list of purposes deemed necessary and appropriate. 

We believe that the use of these data for supporting program integrity purposes has 

always been included, even though not explicitly listed. However, given the importance 

of our ability to release PDE data for program integrity purposes, including for 

coordination with states on program integrity, we are proposing to add this purpose 

explicitly to the non-exclusive list in § 423.505(f)(3). 
 313 

 Second, we are clarifying that non-final action data (for example, information on 

claims subject to subsequent adjustment) are available to entities outside of CMS. 

Non-final action data are captured through the data element, "Original versus Adjusted 

PDE (Adjustment/Deletion code)." This is a PDE field which distinguishes original from 

adjusted or deleted PDE records, so CMS can adjust claims and make accurate payment 

for revised PDE records, and is thus not point-of-sale data. With the increasing focus on 

coordination of care, requests for access to non-final action PDE data have also 

increased. Such data are also routinely requested for evaluation and research projects. 

The Part D data final rule (73 FR 30683) included an appendix that explained in more 

specific detail the restrictions relative to the available PDE elements for the different 

categories of requestors. This appendix stated (73 FR 30685) that the data element 

"Original versus Adjusted PDE (Adjustment/Deletion code)" was available to other (that 

is, non-CMS) HHS entities and the congressional oversight agencies, while for non-HHS 

executive branch agencies, states, and external entities, it stated that "Final Action claims 

would be provided, so this element should not be needed." Thus, this appendix did not 

explicitly address the question of whether non-final action data would be available for 

release to these entities, because such data were not expected to be needed. However, 

since it is clear that these entities do need access to non-final data, we are clarifying that 

non-final action data are also available for release to non-HHS executive branch 

agencies, states, and external entities under the Part D data final rule. 

 Finally, we believe these proposed changes to the Part D regulations governing 

PDE data release do not raise any new issues under the Privacy Act and that the changes 
 314 

are consistent with the System of Records that currently applies to the relevant data. 

Thus, we are not proposing any changes to the System of Records, ''Medicare Drug Data 

Processing System (DDPS),'' System No. 09–70–0553, as we are not proposing any 

changes to the data we are collecting, to how the data may be used, to the entities that 

may receive the data, or to the manner of transmission of the data. Rather we are 

proposing a change in the format in which the data may be provided when released to 

certain categories of requesters. 

 In light of the proposed changes to our policies governing the release of PDE data 

described previously, we are proposing changes to the current applicable regulatory text 

as described later in this section. We are also proposing to eliminate the appendix that 

accompanied the Part D data final rule (73 FR 30683) that explained in more specific 

detail which PDE elements would be available to different categories of requestors, and 

any restrictions that applied. We believe this appendix is no longer necessary, as our 

proposals would eliminate most of the distinctions with respect to the PDE data available 

for release to the different categories of requesters, with the exception of Total Drug 

Costs, which will continue to be available in disaggregated form only to other (that is, 

non-CMS) HHS entities and the congressional oversight agencies, and we propose to 

revise the regulation at § 423.505(m)(1)(iii)(B) to account for this distinction. We also 

clarify that we will exclude sales tax from the aggregation, if necessary for the project. 

We also propose changes to the regulatory text to incorporate notes from the current 

Appendix that are not addressed by the existing reference to CMS data sharing 

procedures in § 423.505(m)(1)(ii). 
 315 

 Therefore, consistent with the foregoing, we propose the following revisions to 

the applicable regulatory text: 

● Section 423.505(f)(3) would be revised to add supporting program integrity 

purposes, including coordination with states, as an additional purpose. 

● Section 423.505(m)(1)(iii) would be revised to remove references to 

encrypting certain identifiers since prescriber, plan, and pharmacy identifiers would no 

longer be subject to encryption when released. 

● Section 423.505(m)(1)(iii)(A) would be revised to clarify that, subject to the 

restrictions contained in paragraph (m)(1), all elements on the claim are available not 

only to HHS, but also to other executive branch agencies and states, since there is no 

longer any distinction between the two categories. 

● Section 423.505(m)(1)(iii)(B) would be revised to incorporate a note from the 

appendix, which states: "Upon request, CMS excludes sales tax from the aggregation at 

the individual level, if necessary for the project" at the end of the provision. 

● Section 423.505(m)(1)(iii)(C) would be deleted as no longer necessary since 

unencrypted plan identifiers, including the internal plan/pharmacy identification 

numbers, would be available for release. 

● Section 423.505(m)(1)(iii)(D) would be re-lettered as (C) and references to 

encryption of pharmacy and prescriber identifiers would be deleted, since these 

identifiers would be available for release in unencrypted format. Additional language 

regarding beneficiary identifiers would be added to the existing provision to reflect the 

current policy on release of this identifier as reflected in the appendix that would be 
 316 

eliminated. 

● Section 423.505(m)(3) would be revised to incorporate a note from the 

appendix that would be eliminated about the status of the Congressional Research 

Service as an external entity when it is not acting on behalf of a Congressional committee 

in accordance with 2 U.S.C. 166(d)(1). 

34. Establish Authority To Directly Request Information From First Tier, Downstream, 

and Related Entities (§ 422.504(i)(2)(i), and § 423.505(i)(2)(i)) 

Pursuant to section 1857(d)(2) and 1860D-12(b)(3)(c) of the Act, existing 

regulations at 42 CFR 422.504(i) and 42 CFR 423.505(i) establish various conditions that 

entities contracting as a first tier, downstream, or related entity (FDR) to an MA 

organization or Part D sponsor must agree to in order to participate in the MA or Part D 

program. One such condition at § 422.504(i)(2)(i) and § 423.505(i)(2)(i) is that HHS, the 

Comptroller General, or their designees have the right to audit, evaluate, and inspect any 

books, contracts, computer or other electronic systems, including medical records and 

documentation of the first tier, downstream, and related (FDR) entities related to CMS' 

contract with the Part C and D sponsor. 

 CMS (or its designee(s)) conduct routine audits of Part D sponsors and MA 

organizations, as well as conduct audits to investigate allegations of noncompliance with 

Part C and/or Part D rules and requirements. While § 422.504(d) and § 423.505(d) 

address Part D and MA organizations' own maintenance of records and the rights of CMS 

to inspect those records, § 422.504(i)(2)(i) and § 423.505(i)(2)(i) also require plan 

sponsors require that their FDRs agree to this CMS right to inspection. Plan sponsors 
 317 

regularly contract with FDRs to perform critical Part C and D operating functions. For 

example, many (if not most) Part D sponsors delegate critical Part D functions to their 

PBMs. As a result, many of the records that we or our designees would need to review 

and evaluate when we audit a Part D sponsor or MA organization reside with its FDRs. 

 Our existing regulation at § 423.505 (i)(3)(iv) states that the contracts between the 

Part D sponsor and its FDRs must indicate whether records held by the FDR pertaining to 

the Part D contract will be provided to the sponsor to provide to CMS (upon request), or 

will be provided directly to CMS or its designees by the FDR (the Part C regulation is 

silent on this matter). As such, we have not previously required Part C or Part D FDRs to 

provide information directly to CMS. 

Two separate reports by the OIG (OEI-03-08-00420, dated October 2009 and OEI 

03-11-00310, dated January 2013), have highlighted barriers experienced by the 

Medicare Drug Integrity Contractor (MEDIC), the entity contracted by CMS to be 

responsible for detecting and preventing fraud, waste, and abuse in the Medicare Parts C 

and D programs nationwide, in obtaining requested information in an expeditious 

manner. The 2009 OIG report discussed that CMS' and its designees' (in this case, the 

MEDIC) lack of authority to directly obtain information from pharmacies, PBMs, and 

physicians has hindered the MEDIC's ability to investigate potential fraud and abuse and 

the OIG recommended that CMS change its regulations to establish its authority to obtain 

necessary information directly from FDRs. The OIG's 2013 report reiterated the 

recommendation that CMS have a more direct route to obtain records held by FDRs so 

that CMS would be able to obtain necessary records in a timely fashion. While the 2013 
 318 

report pointed out that sponsors and their FDRs generally cooperate in providing the 

information requested by the MEDIC, it often takes months for it to reach the MEDIC 

because the MA organization or Part D sponsor acts as a gatekeeper. 

In the past, we chose not to be prescriptive regarding whether a first tier, 

downstream, or related entity must make its books and records available to us directly or 

through the Part C or D sponsor. As a consequence of what we have learned through the 

OIG investigations and the seriousness with which we approach our fraud, waste, and 

abuse oversight obligations, we are now proposing to specify at § 422.504(i)(2)(ii) and 

§ 423.505(i)(2)(ii) that HHS, the Comptroller General, or their designees have the right to 

audit, evaluate, collect, and inspect any records by obtaining them directly from any first 

tier, downstream, or related entity. This proposed regulatory change would not grant 

CMS any investigative or audit authority that we do not already possess. It would merely 

guarantee us a direct and expeditious route to the information we need to obtain for 

purposes of program oversight. This regulatory change would also reduce the burden on 

the plan sponsor. The plan sponsor would no longer need to act as the gatekeeper 

between CMS and its first tier, downstream, or related entity. Upon making contact with 

the first tier, downstream, or related entity, we would simultaneously notify the plan 

sponsor concerning the nature of the request. This will ensure that the plan sponsor will 

have notice that we are contacting one of its subcontractors. 

We are proposing to revise the regulation at § 422.504(i)(2)(i) and 

§ 423.505(i)(2)(i) to make clear that CMS and its designees may "collect" records, in 

addition to our existing authority to "audit, evaluate, and inspect" information. The 
 319 

addition of "collect" removes any doubt that, in addition to our other options for 

obtaining records, we have the authority to request information to be reviewed in some 

location other than onsite at a sponsor's or FDR's facility. Furthermore, the proposed 

provision is intended to clarify only that CMS may contact FDRs directly and request 

that they provide Part C or D-related information directly to CMS. The question as to 

whether CMS has the authority to enter the premises of FDRs, is to be determined by 

interpreting other applicable statutory and regulatory authority. 

We also propose to delete the existing provision at § 423.505(i)(3)(iv) which 

gives Part D sponsors the choice as to how information sought from their FDRs will be 

provided to CMS. Section 423.505 would be renumbered so that paragraphs (v) – (viii) 

would become paragraphs (iv) – (vii). 

35. Eligibility of Enrollment for Incarcerated Individuals (§ 417.1, § 417.460, § 422.74, 

and § 423.44)

Entitlement and enrollment in the Medicare program (Part A and Part B) is 

contingent on entitlement to Social Security retirement and disability benefits as outlined 

in sections 226 and 226A of the Act, and enrollment in the Medicare program for 

individuals not receiving retirement or disability benefits is outlined in sections 1818 and 

1818A of the Act. These sections do not preclude entitlement to or enrollment in the 

Medicare program for individuals who are incarcerated in prisons or other penal 

facilities. However, section 1862(a)(3) of the Act excludes Medicare payment for 

services which are paid directly or indirectly by another government entity, including 

federal, state and local prisons, and penal facilities. Given that Medicare entitlement 
 320 

flows from entitlement to Social Security retirement and disability benefits, we 

established regulations at § 411.4(b) and implemented section 1862(a)(3) of the Act 

through a payment exclusion process in the FFS program, outlined in section 50 of 

Chapter 16 of the Medicare Benefit Policy Manual and section 10.4 of the Medicare 

Claims Payment Manual. 

The Medicare payment exclusion process includes the receipt of incarceration 

status for individuals via regular data exchanges from the SSA to CMS. Once we receive 

the data, the incarceration status is noted on the individual's record and is retained in the 

FFS claims processing systems. Upon receipt of submitted FFS claims, CMS denies 

payment of both Part A and Part B claims for individuals with records on which 

incarceration is denoted. The denial of claims continues until the individual is no longer 

considered incarcerated and that information is reported by SSA to CMS. Individuals 

who are entitled to premium-free Part A will maintain their entitlement and will remain 

enrolled in Part B as long as premiums are paid. Similarly, individuals who are enrolled 

in premium Part A and/or Part B maintain their enrollment as long as premiums are paid. 

 Sections 1851(a)(3)(B), 1860D-1(a)(3)(A), and 1876(a)(1)(A) of the Act outline the 

eligibility requirements to enroll in MA, Part D, and Medicare Health Maintenance 

Organization/Competitive Medical Plans (cost plans). In all options, individuals must 

have active Medicare coverage. Specifically, to enroll in MA, an individual must be 

entitled to Part A and enrolled in Part B; to enroll in a PDP, an individual must be 

eligible for Part D by either being entitled to Part A and/or enrolled in Part B; to enroll in 

a Medicare cost plan, an individual must be enrolled in Part B but Part A is not required. 
 321 

In addition, sections 1851(b)(1)(A), 1860D-1(b)(1)(B)(i), and 1876(d) of the Act 

provide that Medicare beneficiaries are eligible to enroll in an MA plan, PDP, or cost 

plan only if they reside in the geographic area served by the plan, known as the plan's 

"service area." As noted earlier, an individual who is incarcerated still meets the 

eligibility requirements for Part A and Part B and is eligible generally to enroll in an MA 

plan, PDP, or cost plan. However, residence in a plan's service area is also a condition 

for eligibility to enroll in an MA plan, PDP or cost plan. See § 422.50(a)(3)(i) for MA 

plans, § 423.30(a)(1)(ii) for PDPs, and § 417.422(b) for cost plans. If a member no 

longer resides in the service area, plans must disenroll that individual per rules at 

§ 422.74(a)(2)(i) and § 422.74 (d)(4) for MA plans, § 423.44(b)(2)(i) for PDPs, and 

§ 417.460(b)(2)(i) for cost plans. 

a. Changes in Definition of Service Area for Cost Plans (§ 417.1) 

In order to implement the exclusion from Medicare coverage for incarcerated 

individuals under section 1862(a)(3) of the Act in the case of MA plans and PDPs, we 

explicitly excluded facilities in which individuals are incarcerated from an MA plan's 

service area by including this exclusion in the definition of "service area" (54 FR 41734 

and 72 FR 47410). Specifically, "service area" is defined in § 422.2 for MA plans and 

§ 423.4 for PDPs and both definitions indicate that facilities in which individuals are 

incarcerated are considered outside of the service area. 

We did not include a similar service area exclusion in the case of cost plans. To 

the extent that cost plans do not incur costs for incarcerated enrollees because their health 

care costs are covered by the facility, there would be no costs claimed on the cost report, 
 322 

and no Medicare payment. Nonetheless, to ensure that no cost payments are made, we 

propose to revise the definition of service area in § 417.1 to specifically note that 

facilities in which individuals are incarcerated are not a part of the service area. This 

adjustment will ensure parity among the various Medicare plan coverage options and be 

the basis for ensuring that services are not paid for by the Medicare Trust Funds for those 

who are not eligible for them. 

b. Involuntary Disenrollment for Incarcerated Individuals Enrolled in MA, PDP and cost 

plans (§ 417.460, § 422.74, and § 423.44) 

Sections 1860D-1(b)(1)(B)(i), 1851(b)(1)(A), and 1876(a)(1)(A) of the Act 

provide that individuals whose permanent residence is outside the plan's service area are 

ineligible to enroll in or to remain enrolled in the MA, Part D, or cost plan. Based on the 

definition of service area established in § 422.2 and § 423.4, this applied to individuals 

who were incarcerated as well. As such, individuals who became incarcerated while 

enrolled were ineligible to remain enrolled because they did not meet the eligibility 

criterion of residing in the MA plan or PDP's service area. As noted previously, the 

regulations for cost plans currently do not exclude incarcerated individuals from 

enrolling or remaining enrolled in these plans. 

At the time of the implementation of Part D, the data regarding incarceration were 

not as robust as they are at the present time. To compensate, we provided instructions in 

sub-regulatory guidance that required MA plans and PDPs to investigate a notification 

from CMS of an individual's incarcerated status. If a plan could not confirm the status, 

the plan would then apply the policy for investigation of a possible out-of-area status 
 323 

which would allow an incarcerated individual to remain enrolled in the plan for up to 6 or 

12 months for MA plans or PDPs, respectively. Cost plans, on the other hand, are not 

currently subject to similar instructions and therefore individuals are not disenrolled 

solely because they are determined to be incarcerated. 

Today we believe that the data that CMS receives from SSA regarding the 

incarceration status of Medicare beneficiaries are reliable enough for the purpose of 

involuntary disenrollment from MA, Part D, and cost plans. Thus, we propose to amend 

§ 417.460(b)(2)(i), § 417.460(f)(1)(i), § 422.74(d)(4)(i), § 422.74(d)(4)(v) and add 

§ 423.44(d)(5)(iii) and § 423.44(d)(5)(iv) to establish that MA organizations, PDPs, and 

cost plan organizations must disenroll individuals incarcerated for 30 days or more upon 

notification of such status from CMS. As a part of this change, CMS will review the 

incarceration data provided by SSA. Where possible, CMS will involuntarily disenroll 

individuals who are incarcerated based on the data provided by SSA, and will notify the 

plan in which the individual is enrolled of this action. For all such disenrollments, the 

effective date of disenrollment will be the first of the month after the start of 

incarceration date as reported by SSA. We believe these proposed changes will prevent 

months of improper payments to MA, Part D, and cost plans and significantly lessen the 

burden for MA plans and PDPs by not requiring investigation to verify residence as 

outlined in section 50.2.1 in Chapter 2 of the Medicare Managed care Manual and 

Chapter 3 of the Medicare Prescription Drug Benefit Manual. 

In connection with this change, we would also propose to deny enrollment 

requests for individuals if CMS data indicates an active incarceration status of at least 
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30 days. Based on the data received from SSA, if incarceration is denoted, we will deny 

that enrollment based on the data provided by SSA and will notify the plan of the denial. 

 This would replace the current process requiring plans to accept the enrollment and 

immediately begin the process to verify that the individual was out of the plan's service 

area. We will provide operational instructions in subregulatory guidance. 

In addition, we will clarify that in instances where a plan receives information 

about an individual's possible incarceration from a source other than CMS or learns of 

some other permanent residence change, the existing requirements to research a possible 

change in address would still apply. Finally, we note that the exceptions to involuntary 

disenrollment for not residing in the plan's service area (§ 417.460(f)(2) and 

§ 422.74(d)(4)(iii)) would not apply to members who are determined to be incarcerated. 

However, individuals involuntarily disenrolled will be able to enroll in a plan following 

their release from incarceration using an existing special enrollment period outlined in 

section 30.4.1 in Chapter 2 of the Medicare Managed Care Manual and section 30.3.1 in 

Chapter 3 of the Medicare Prescription Drug Benefit Manual (Special Enrollment Periods 

(SEP) for Changes in Residence). Individuals wanting to enroll in an open cost plan may 

do so as long as the cost plan is accepting applications for enrollment, following 

section30.1 of Chapter 17-D of the Medicare Managed Care Manual. 

36. Rewards and Incentives Program Regulations for Part C Enrollees (§ 422.134) 

CMS has provided subregulatory guidance regarding the types of rewards and 

incentives that may be offered to current Medicare Advantage (MA) plan enrollees. (See 

Section 70.2, Chapter 3 of the Medicare Managed Care Manual). Generally, such 
 325 

activities are limited to a set monetary cap, and cannot be offered in the form of cash or 

other monetary rebates or considered a health benefit. This guidance generally flows 

from our authority to regulate marketing by MA organizations and our recognition that 

certain marketing efforts may be targeted to current enrollees to encourage continued 

enrollment and reenrollment in a particular plan. 

Every year, CMS receives inquiries from MA organizations that wish to expand 

the scope of the rewards and incentives that currently may be offered to beneficiaries 

enrolled in their MA plans. In some cases, MA organizations wish to extend rewards and 

incentives already offered to their commercial members to their Medicare enrollees and 

there is some evidence to suggest that health-driven reward and incentive programs for 

currently enrolled members of health plans may lead to meaningful and sustained 

improvement to their health behaviors and health outcomes. 

CMS would like to enable MA organizations to offer health-driven rewards and 

incentives programs that may be applied to more health-related services and activities 

than are allowed under current guidance. We are concerned about the possibility that 

such programs would be targeted only to healthier enrollees, and discourage sicker 

enrollees from participating in such incentives and in remaining enrolled in the plan. 

Furthermore, we would like to strengthen our existing subregulatory guidance and offer 

the opportunity for public review and comment on our requirements for rewards and 

incentives programs. We propose to amend our regulations to establish parameters for 

rewards and incentives programs offered to enrollees of MA plans. We also propose to 

include specific requirements regarding rewards and incentives so as to ensure that such 
 326 

programs do not discriminate against beneficiaries, including those who are sick or 

disabled. 

Section 1856(b)(1) of the Act provides authority for the establishment of MA 

standards by regulation, and section 1857(e)(1) of the Act provides authority to impose 

contract requirements that CMS finds "necessary and appropriate." Section 

1852(b)(1)(a) of the Act states that MA organizations may not discriminate against 

beneficiaries on the basis of health status and that CMS may not approve an MA plan if 

that offering is susceptible to discrimination based on an individual's health status. 

Further, section 1857(g)(1)(D) of the Act provides authority for taking intermediate 

sanction action against an MA organization which "engages in any practice that would 

reasonably be expected to have the effect of denying or discouraging enrollment by 

eligible individuals" as a result of their health status or history. We propose to rely upon 

the aformentioned rulemaking and substantive authority to establish requirements for 

rewards and incentives programs offered by MA organizations to Medicare beneficiaries 

enrolled in their MA plans. 

Specifically, we propose adding a new provision at § 422.134 that would allow 

MA organizations to offer reward and incentive programs to their current Medicare 

enrollees to encourage their participation in activities that focus on promoting improved 

health, preventing injuries and illness, and promoting efficient use of health care 

resources. We would require that reward-eligible activities be designed so that all 

enrollees are able to earn rewards without discrimination based on race, gender, chronic 

disease, institutionalization, frailty, health status, and other impairments. Any rewards 
 327 

and incentives program implemented by an MA organization under our proposal must 

accommodate enrolled beneficiaries who are institutionalized or who need a modified 

approach to enable effective participation. 

To meet the proposed CMS requirements, a reward or incentive would have to be 

earned by completing the entire health-related service or activity and may not be offered 

for completion of less than all required components of the eligible service or activity. 

Under this proposal, rewards and incentives would be subject to a monetary cap in an 

amount CMS determines could reasonably be expected to affect enrollee behavior while 

not exceeding the value of the health-related service or activity itself. We intend to 

provide guidance on this qualitative standard on a regular basis. 

In addition, our proposal would require MA organizations that offer rewards and 

incentives programs to provide information about the effectiveness of such programs to 

CMS upon request. If we determine that the rewards and incentives programs are not 

compliant with our regulatory standard, we may require that the MA organization modify 

the basic parameters of the program. 

37. Expand Quality Improvement Program Regulations (§ 422.152) 

Section 1852(e) of the Act requires MA organizations to have an ongoing quality 

improvement program for the purpose of improving the quality of care provided to 

enrollees. Our current regulations at § 422.152 require an MA organization to have a 

quality improvement program that measures, records, and reports on the quality of care it 

is providing to enrollees and to develop criteria for a chronic care improvement program. 

 We have recently expanded our quality improvement program to include more specific 
 328 

and structured chronic care improvement program requirements that are outcomes based 

and health driven as well as require each MA organization to have a written quality 

improvement program plan (approved form CMS-10209). Currently, chronic care 

improvement programs must be measurable, reported on annually, and has a clinical 

focus (as determined by CMS). 

We propose revising paragraph (a) of § 422.152 in order to codify our recent 

expansion of the quality improvement program policies and revising paragraph (c) of 

§ 422.152 to codify our recently expanded chronic care improvement program policies. 

These revised paragraphs will more accurately reflect current quality care improvement 

program policies and requirements. 

Additionally, paragraph (g) of § 422.152 lists quality improvement program 

requirements that are specific to special needs plans (SNPs). We propose revising 

paragraph (g) to clarify that the requirements listed there are in addition to program 

requirements listed in paragraphs (a) and (f) of § 422.152 and are not instead of the 

regular quality improvement program requirements. 

Finally, we propose to delete paragraph (h)(2) of § 422.152 as it pertains to plan 

year 2010 and is no longer relevant. 

38. Authorization of Expansion of Automatic or Passive Enrollment Non-Renewing 

Dual Eligible SNPs (D-SNPs) to another D-SNP to Support Alignment Procedures 

(§ 422.60) 

At this time, SNPs are only authorized through 2014. This proposed provision, 

which would take effect in 2015, is contingent upon, and would only apply, if SNPs 
 329 

continue to be authorized after 2014. 

Since D-SNPs were implemented in 2006, expectations for them to serve as a 

vehicle for aligning Medicare and Medicaid benefits for dually eligible individuals have 

been articulated. In 2007, the Congress passed the Medicare Improvements for Patients 

and Providers Act (MIPPA), which set 2013 as the deadline for all D-SNPs to have 

contracts with states to coordinate their enrollees' Medicaid coverage. In 2010, the 

Congress passed the Affordable Care Act, section 2602 of which established a new CMS 

office charged with implementing goals to improve the coordination between the federal 

government and states for individuals eligible for benefits under both Medicare and 

Medicaid programs in order to ensure that such individuals get full access to the items 

and services to which they are entitled. Specifically listed in sections 2602(c)(2) and (6) 

of the Affordable Care Act, we are tasked with simplifying the processes for 

Medicare-Medicaid enrollee to access the items and services they are entitled to under 

the Medicare and Medicaid programs, and improving care continuity and ensuring safe 

and effective care transitions for Medicare-Medicaid enrollees. 

Our current authority does not allow us to limit involvement in the D-SNP 

program to fully integrated D-SNPs; thus, the majority of Medicare-Medicaid enrollees 

enrolled in D-SNPs continue to receive their Medicare and Medicaid benefits and 

services from two different organizations. At the same time, some states are approaching 

this problem from a slightly different angle, and are attempting to align care for 

Medicare-Medicaid enrollees under the same organization by requiring that the same 

organization that provides Medicaid benefits also provide Medicare benefits. However, 
 330 

states' efforts stall when the Medicare-Medicaid enrollee is enrolled with one 

organization for his/her Medicaid coverage, but in a D-SNP offered by another MA 

organization. The statute generally requires that Medicare beneficiaries make an active 

choice of their health plan, so neither plans nor states can choose where the beneficiary 

enrolls. 

The resulting fragmentation of care can generally be addressed through existing 

mechanisms. For example, State Medicaid Agencies may pursue waiver authority from 

CMS to require Medicare-Medicaid enrollees to enroll in Medicaid Managed Care 

Organizations (MCO) that also offer a D-SNP. Likewise, anMA organization offering a 

D-SNP could novate its contract with CMS to the organization offering the Medicaid 

MCO, so that the entire contract, including the D-SNP, and its enrollees, is now held by 

the same organization that offers the enrollees' Medicaid managed care plan. However, 

while we can approve novations, we cannot mandate that the parties enter into such 

arrangements. Moreover, when an MA organization elects to non-renew its Medicare 

contract, rather than novate the contract, we do not have the authority to move enrollees 

under that contract to another MA organization offering a D-SNP. 

Another possible solution to the problem of fragmented care lies in section 

1851(c)(1) of the Act, which we have interpreted to provide flexibility in developing 

mechanisms by which beneficiaries may complete voluntary MA enrollment elections 

(per section 1851(a)(1) of the Act). These flexibilities include a process described as 

"passive enrollment," whereby beneficiaries are notified of the enrollment opportunity 

and provided sufficient advance information to determine if they will accept this option. 
 331 

A beneficiary who is offered a passive enrollment completes the request to enroll by not 

declining the offer. However, we have limited passive enrollment to situations in which 

enrollees in MA plans that are terminating immediately have little or no time to choose 

another MA plan option or stand-alone PDP, and are at risk for losing their prescription 

drug coverage (see 42 CFR 422.60(g)). 

Generally, we have declined to afford ourselves such discretion to provide passive 

enrollment in more situations, in part, because of concerns raised by beneficiary 

advocates about the challenges beneficiaries face in navigating a new provider network 

and understanding information about new benefits. In addition, we have also been 

concerned that, were we to widen the scope of our authority to allow passive enrollment 

in other situations not involving an immediate termination, we would be faced with the 

seemingly impossible task of sorting through requests by MA organizations to passively 

enroll members to other plans within their organization, or across organizations, and 

granting or denying such requests without appearing to act in an arbitrary and capricious 

manner, or unintentionally interfering with the voluntary nature of the MA program. 

Thus, we have limited our use of our passive enrollment authority by regulation to those 

situations in which beneficiaries faced an immediate plan termination or potential harm, 

and where we could, through passive enrollment, ensure that beneficiaries maintained 

access to affordable coverage, including prescription drug coverage. 

To date, we have not considered D-SNP non-renewals to fall under either 

category, because, by definition, non-renewals occur with appropriate, 90 days' notice to 

affected enrollees, just prior to the start of the annual enrollment period, when enrollees 
 332 

have access to the Medicare & You handbook and other materials, as well as ample time 

to consider their health care choices. 

However, it is worth noting that returning to Original Medicare, whether due to 

an immediate contract termination or non-renewal, poses potential disadvantages for the 

beneficiary as well, that is, the loss of supplemental benefits such as dental or vision 

benefits, and beneficiary confusion as he or she attempts to navigate the health care 

system (and two sets of benefits) without case management or other support that may 

have been provided by the MA plan. We have the authority to widen the scope of the 

regulation slightly to allow for passive enrollment when a Medicare-Medicaid enrollee is 

enrolled in a D-SNP that is non-renewing its contract with Medicare, and is enrolled in a 

Medicaid MCO (Managed Care Organization) that also offers a D-SNP, and the networks 

and benefits of the non-renewing D-SNP and the future D-SNP are substantially similar. 

By exercising passive enrollment in this additional limited circumstance, we could better 

ensure better continuity of care, particularly prescription drug coverage, but also possibly 

supplemental benefits, and ensure beneficiaries enjoy use of the same providers, with 

little or no change in the benefits offered. Our use of passive enrollment in this case 

would also further promote alignment of Medicare and Medicaid benefits offered by the 

same organization. Through sub-regulatory guidance, we would interpret the 

"substantially similar" standard as it relates to the networks, benefit packages, 

formularies, and out of pocket costs of the non-renewing and gaining D-SNP. As already 

required by § 422.60(g)(2), we would ensure beneficiaries are notified of the costs and 

benefits of the plan, and of their ability to decline enrollment or choose another plan. As 
 333 

part of our proposal to add this additional basis for passive enrollment, we propose to 

restructure paragraph (g). 
 334 

B. Improving Payment Accuracy

1. Implementing Overpayment Provisions of Section 1128J(d) of the Social Security Act 

(§ 422.326 and § 423.360) 

This section of the proposed rule would implement section 6402 of the Affordable 

Care Act, which established new section 1128J(d) of the Act entitled Reporting and 

Returning of Overpayments. Section 1128J(d)(4)(B) of the Act defines the term 

overpayment as any funds that a person receives or retains under title XVIII or XIX to 

which the person, after applicable reconciliation, is not entitled under such title. The 

definition of person at section 1128J(d)(4)(C) of the Act includes a Medicare Advantage 

organization (as defined in section 1859(a)(1) of the Act) and a Part D sponsor (as 

defined in section 1860D-41(a)(13) of the Act). The definition does not include a 

beneficiary. 

 Section 1128J(d)(1) of the Act requires a person who has received an 

overpayment to report and return the overpayment to the Secretary, the state, an 

intermediary, a carrier, or a contractor, as appropriate, at the correct address, and to 

notify the Secretary, state, intermediary, carrier or contractor to whom the overpayment 

was returned in writing of the reason for the overpayment. Section 1128J(d)(2) of the 

Act requires that an overpayment be reported and returned by the later of: (1) the date 

which is 60 days after the date on which the overpayment was identified; or (2) the date 

any corresponding cost report is due, if applicable. Section 1128J(d)(3) of the Act 

specifies that any overpayment retained by a person after the deadline for reporting and 

returning an overpayment is an obligation (as defined in 31 U.S.C. 3729(b)(3)) for 
 335 

purposes of 31 U.S.C. 3729. 

 Finally, section 1128J(d)(4)(A) of the Act defines "knowing'' and "knowingly'' as 

those terms are defined in 31 U.S.C. 3729(b). Specifically, the terms "knowing'' and 

"knowingly'' mean that “a person with respect to information: (1) has actual knowledge 

of the information; (2) acts in deliberate ignorance of the truth or falsity of the 

information; or (3) acts in reckless disregard of the truth or falsity of the information.'' 

There need not be "proof of specific intent to defraud.'' 

 To implement section 1128J(d) of the Act for the Part C Medicare Advantage 

program and the Part D Prescription Drug program, we are proposing two new sections, § 

422.326 and § 423.360, respectively, both titled, "Reporting and Returning of 

Overpayments." These sections propose rules for MA organizations and Part D sponsors 

to report and return an identified overpayment to the Medicare program. We are using 

the term Part D sponsor, as defined at § 423.4, to refer to the entities that offer 

prescription drug plans (PDPs) under part 423 and thus are subject to section 1128J(d) of 

the Act. 

 We propose conforming amendments to § 422.1, § 422.300, and § 423.1 that add 

a reference to section 1128J(d) of the Act to the existing list of statutory authorities for 

the regulations governing the MA organizations and Part D sponsors. We also propose to 

amend § 422.504(l) and § 423.505(k) to incorporate a reference to the proposed 

§ 422.326 and § 423.360, respectively, in order to extend the existing data certification 

requirement to data that MA organizations and Part D sponsors submit to CMS as part of 

fulfilling their obligation to return an overpayment under section 1128J(d) of the Act. 
 336 

Section 422.504(l) refers to certification of data "as a condition for receiving a monthly 

payment" and § 423.505(k) refers to certification of data for enrollees "for whom the 

organization is requesting payment." Our proposal to implement section 1128J of the Act 

contains requirements that apply after CMS has completed prospective monthly 

payments for a year, and organizations are no longer "requesting payment" because 

applicable reconciliation has occurred. Applicable reconciliation is the point when 

organizations submit their final data for the previous payment year. Accordingly, if an 

MA organization or Part D sponsor has identified an overpayment, there clearly is a 

different state of "best knowledge, information, and belief" than the state of knowledge, 

information, and belief that existed prior to applicable reconciliation. Thus, we propose 

to require that the CEO, CFO, or COO must certify (based on best knowledge, 

information, and belief) that information the MA organization or Part D sponsor submits 

to CMS for purposes of reporting and returning of overpayments under § 422.326 and 

§ 423.360 is accurate, complete, and truthful. 

 We remind all stakeholders that even in the absence of a final regulation on these 

statutory provisions, MA organizations and Part D sponsors are subject to the statutory 

requirements found in section 1128J (d) of the Act and could face potential False Claims 

Act liability, Civil Monetary Penalties (CMP) Law liability, and exclusion from Federal 

health care programs for failure to report and return an overpayment. Additionally, MA 

organizations and Part D sponsors continue to be obliged to comply with our current 

procedures for handling inaccurate payments. 

a. Terminology (§ 422.326(a) and § 423.360(a)) 
 337 

 We propose to adopt the statutory definition of overpayment, where an 

overpayment exists when – after "applicable reconciliation" – an MA organization or Part 

D sponsor is not entitled to funds it has received and/or retained. In order to clarify the 

statutory definition of overpayment, we propose definitions of two key terms at § 

422.326(a) and § 423.360(a): "funds" and "applicable reconciliation." 

 We propose to define "funds" as payments an MA organization or Part D sponsor 

has received that are based on data that these organizations submitted to CMS for 

payment purposes and for which they have responsibility for the accuracy, completeness, 

and truthfulness of such data under existing § 422.504(l) and § 423.505(k). For Part C, 

the data submitted by the MA organization to CMS includes § 422.308(f) (enrollment 

data) and § 422.310 (risk adjustment data). For Part D, data submitted by the Part D 

sponsor to CMS includes data submitted under § 423.329(b)(3), § 423.336(c)(1), 

§ 423.343, and data provided for purposes of supporting allowable costs as defined in 

§ 423.308 of this part which includes data submitted to CMS regarding direct or indirect 

remuneration (DIR). 

 There are additional payment-related data CMS uses to calculate Part C and Part 

D payments that are submitted directly to CMS by other entities, such as the Social 

Security Administration (SSA), which is the authoritative source for data they submit to 

CMS. We believe that MA organizations and Part D sponsors cannot be held 

accountable for the accuracy of data controlled and submitted to us by other entities. 

 For example, the SSA is the authoritative source for date of death. An MA 

organization or Part D sponsor generally do not submit a date of death directly to CMS' 
 338 

systems; it comes from the SSA data feed. When the SSA submits to CMS corrected 

data regarding a beneficiary's date of death, CMS' systems recalculate the payments made 

to the plan for that beneficiary and recoup the incorrect payment in a routine retroactive 

payment adjustment process. 

 When CMS recoups an incorrect payment from an MA organization or Part D 

sponsor based on data corrections submitted by authoritative sources such as the SSA, 

CMS would not consider this recoupment to be the return of an overpayment by an MA 

organization or Part D sponsor under proposed § 422.326 and § 423.360. Therefore, the 

proposed meaning of “funds” refers to a payment amount that an MA organization or 

Part D sponsor received from CMS that is based on data that the MA organization or Part 

D sponsor controls and submits to CMS. 

 The term “applicable reconciliation” refers to an event or events after which an 

overpayment can exist under section 1128J(d) of the Act. We propose definitions of the 

term applicable reconciliation that are specific to the Part C and Part D. 

 For Part C, we propose that applicable reconciliation occurs on the date that CMS 

announces as the final deadline for risk adjustment data submission. (See section II.B.6 

of this proposed rule for a discussion of the final deadline for risk adjustment data 

submission established at § 422.310(g).) For each payment year, we apply three sets of 

risk scores to adjust payments: initial and midyear risk scores during the payment year 

(both sets are based on incomplete diagnosis data from the data collection year); and final 

risk scores after the payment year using data MA organizations submit on or before the 

final deadline for risk adjustment data (which reflects complete data for the data 
 339 

collection year). Currently, the final deadline for risk adjustment data submission is a 

month after the end of the payment year. In future years, we expect to announce a date 

that will be about 6 to 8 weeks after the end of the payment year to accommodate the 

current subregulatory requirement that MA organizations review the monthly enrollment 

and payment reports they receive from CMS within 45 days of the availability of the 

reports. Moving this deadline means that the risk adjustment data submission deadline 

would also function as the Part C applicable reconciliation date. We would announce a 

final risk adjustment data submission deadline that falls on or just after the conclusion of 

this 45-day period for the January payment. 

 For Part D sponsors, we propose that applicable reconciliation is the later of 

either: the annual deadline for submitting prescription drug event (PDE) data for the 

annual Part D payment reconciliations referred to in § 423.343 (c) and (d) or the annual 

deadline for submitting DIR data. The annual deadline for submitting PDE data is the 

last federal business day prior to June 30th of the year following the benefit year being 

reconciled. The annual deadline for submitting DIR data is announced annually through 

subregulatory guidance and generally occurs around the last business day in June the year 

following the benefit year being reconciled. We select these events to define the Part D 

applicable reconciliation because these data are used for the purposes of determining 

final Part D payment reconciliation. Note that MA organizations would still have to 

submit all final risk adjustment diagnoses for Part D on the final deadline for risk 

adjustment data submission. 

 The proposed approach to defining applicable reconciliation establishes dates that 
 340 

differ for Part C and Part D. One effect of this approach is that risk adjustment and 

enrollment data for Part D are subject to the § 423.360 overpayment requirements at a 

later date than risk adjustment and enrollment data for Part C. The final risk adjustment 

data submission deadline for Parts C and D data would continue to be earlier than the 

deadline for final submission of PDE and DIR data. For this reason, we considered an 

alternative approach to defining applicable reconciliation, where there is one date for 

applicable reconciliation for both Parts C and D risk adjustment data and enrollment data 

(which would be about 6 to 8 weeks after the end of the payment year, going forward), 

and then the Part D program would be subject to a second applicable reconciliation date 

the date for final submission of PDE data or DIR data, whichever is later. We are 

proposing a single date for each program, and we seek comment on these two 

approaches. 

 Note that payment errors identified as a result of any corrections to risk 

adjustment data submitted by MA organizations (and other organizations required to 

submit risk adjustment data to CMS) on or before the annual final risk adjustment data 

submission deadline are handled as part of the current annual process of risk adjustment 

payment reconciliation. Because these payment errors are prior to the date defined in this 

proposed rule as "applicable reconciliation," we do not consider these errors to be 

overpayments for the purpose of § 422.326 and § 423.360. That is, any deletions of risk 

adjustment data in the file submitted on or before the final risk adjustment data 

submission deadline for a payment year, would result in payment errors that are 

addressed with processes that have been in place prior to our codification of section 
 341 

1128J(d) of the Act in proposed § 422.326 and § 423.360. 

 Likewise, for Part D, any payment errors identified as a result of any corrections 

to PDE or DIR data submitted on or before the later of the annual deadline for submitted 

PDE and DIR data are handled as part of the current Part D reconciliation process. 

 It is our expectation that MA organizations and Part D sponsors must be 

continuously diligent regarding the accuracy and completeness of payment-related data 

they submit to CMS for a payment year, whether during or after that payment year, and 

whether before or after applicable reconciliation dates. This expectation is based on 

existing requirements at § 422.310, § 422.504(l), § 423.329(b)(3)(ii), and § 423.505(k), 

and our proposed amendments that clarify and strengthen these requirements. 

b. General Rules for Overpayments (§ 422.326(a) through (c); § 423.360(a) through (c)) 

 We propose at § 422.326(b) and § 423.360(b) that if an MA organization or Part 

D sponsor has identified that it has received an overpayment, the MA organization or 

Part D sponsor must report and return that overpayment in the form and manner set forth 

in the section. In paragraphs § 422.326(c) and § 423.360(c), we propose that the MA 

organization or Part D sponsor has identified an overpayment if it has actual knowledge 

of the existence of the overpayment or acts in reckless disregard or deliberate ignorance 

of the existence of the overpayment. The terms "reckless disregard" and "deliberate 

ignorance" are part of the definitions of the "knowing" and "knowingly" in section 1128J 

of the Act, which provides that the terms "knowing" and "knowingly" have the meaning 

given those terms in the False Claims Act (31 U.S.C. 3729(b)(3)). Without such a 

proposal to include “reckless disregard” and “deliberate ignorance”, some MA 
 342 

organizations and Part D sponsors might avoid performing activities to determine 

whether an overpayment exists. We also provide that if an MA organization or Part D 

sponsor has received information that an overpayment may exist, the organization must 

exercise reasonable diligence to determine the accuracy of this information, that is, to 

determine if there is an identified overpayment. 

 Finally, in paragraphs § 422.326(d) and § 423.360(d), we propose the 

requirements for reporting and returning an identified overpayment. An MA 

organization or Part D sponsor must report and return any overpayment it received no 

later than 60 days after the date on which it identified it received an overpayment. The 

statute provides an alternative deadline: the date any corresponding cost report is due, if 

applicable. We propose that this alternative deadline is not applicable to the Parts C or D 

programs because, in general, MA organizations and Part D sponsors are paid based on 

their bids, and not based on their actual incurred costs. 

The MA organization or Part D sponsor must notify CMS, using a notification 

process determined by CMS, of the amount and reason for the overpayment. Also within 

this 60-day time period, the organization must return identified overpayments to CMS in 

a manner specified by CMS, including the amount and reason for the overpayment. We 

codify at paragraph (3) the statutory requirement that any overpayment retained by an 

MA organization or Part D sponsor after the 60-day deadline for reporting and returning 

is an obligation under 31 U.S.C. 3729(b)(3). 

 It also is important to note that the MA organization and Part D sponsor are 

deemed to have returned the overpayment when they have taken the actions that we will 
 343 

specify, in forthcoming operational guidance, to submit the corrected data that is the 

source of the overpayment. We will recover the returned overpayment through routine 

processing according to the systems schedule established in the annual operations budget. 

 That is, payments are recovered through the established payment adjustment process, not 

on the 60-day schedule that applies to each MA organization or Part D sponsor that has 

identified an overpayment. Rerunning reconciliation each time an entity identifies an 

overpayment that triggers its 60-day clock is simply not feasible for CMS. 

 Further, there will be circumstances when we may ask the MA organization or 

Part D sponsor to provide an auditable estimate of the overpayment amount, reason for 

overpayment, and make a payment to CMS. This may occur, for example, when the Part 

D reopening occurs prior to the end of the look-back period or if an MA organization or 

Part D sponsor had a thoroughly-documented catastrophic loss of stored data. 

Information about the nature of such a request would be detailed in forthcoming 

operational guidance. 

c. Look-back Period For Reporting and Returning Overpayments 

 We propose at § 422.326(e) and § 423.360(e) to codify a look-back period for 

MA organizations and Part D sponsors. MA organizations and Part D sponsors would be 

required to report and return any overpayment that they identify within the 6 most recent 

completed payment years. The statute of limitations related to the False Claims Act is 6 

years from the date of the violation or 3 years from the date the relevant government 

official learns of the situation, but in no case more than 10 years from the date of the 

violation. CMS proposes 6 years as the look-back period because we believe this best 
 344 

balances government's interest in having overpayments returned with entities' interest in 

finality. Six years also is consistent with the CMP provisions, and maintenance of 

records requirements under the contracts. Note that overpayments resulting from fraud 

would not be subject to this limitation of a look-back period. 

2. Determination of Payments (§ 423.329) 

 Section 423.329 (d) describes the low-income cost-sharing subsidy payment 

amount. Currently, that amount is defined as the amount described in § 423.782. 

However, § 423.782 refers to the cost-sharing paid by the beneficiary, not the 

cost-sharing subsidy paid on behalf of the low-income subsidy eligible individual. As 

such, we propose a technical change to § 423.329(d) to correctly describe the low-income 

cost-sharing subsidy payment amount as it is intended by statute and has been 

implemented and described in interpretive guidance by CMS. 

 The low-income cost-sharing subsidy amount is correctly described in Chapter 13 

of our Medicare Prescription Drug Benefit Manual, Premium and Cost-Sharing Subsidies 

for Low-Income Individuals (Rev. 13, July 29, 2011). Under the basic benefit defined at 

§ 423.100, the low-income cost-sharing subsidy payment amount is the difference 

between the cost sharing for a non-LIS beneficiary under the Part D plan and the 

statutory cost-sharing for the LIS eligible beneficiary. Under an enhanced alternative 

plan described at § 423.104(f), the cost-sharing subsidy applies to the beneficiary liability 

after the plan's supplemental benefit is applied. We propose to amend § 423.329(d) 

consistent with this guidance. 

 Pursuant to § 423.2305, any coverage or financial assistance other than basic 
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prescription drug coverage, as defined in § 423.100, offered by an employer group health 

or waiver plans is considered "other health or prescription drug coverage." This 

definition applied to all of Medicare Part D. (See 77 FR 22071 and 22082; April 12, 

2012). Therefore, the subsidy amount received by an employer group health or waiver 

plan is the subsidy amount received by a Part D plan offering defined standard coverage, 

as defined in § 423.100. 

 Based on the preceding, we propose to amend § 423.329(d) by deleting the 

reference to § 423.782 and amending § 423.329(d) to define the low-income cost-sharing 

subsidy payment amount on behalf of a low-income subsidy eligible individual enrolled 

in a Part D plan for a coverage year as the difference between the Part D cost-sharing for 

a non-low-income subsidy eligible beneficiary under the Part D plan and the statutory 

cost-sharing for a low-income subsidy eligible beneficiary. 

3. Reopening (§ 423.346) 

a. Part D Plan Payments Reopening 

 As stated in our final rule entitled, "Medicare Program; Medicare Prescription 

Drug Benefit" published on January 28, 2005 (70 FR 4194, 4316), the Secretary's right to 

inspect and audit any books and records of a Part D 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. Therefore, we established reopening provisions that 

would allow us to ensure that the discovery of any overpayment or underpayment could 

be rectified. In the rule, we established that a reopening was at our discretion and could 
 346 

occur for any reason within 1 year of the final determination of payment, within 4 years 

for good cause, or at any time when there is fraud or similar fault. We now propose to 

amend the reopening provisions such that we may perform one reopening within 5 years 

after the date of the notice of the initial determination to the Part D sponsors. We also 

propose to amend the provision to accommodate reopening the Coverage Gap Discount 

Reconciliation described at § 423.2320(b). 

 At the time the proposed regulations for reopening were published in our 

proposed rule entitled, “Medicare Program; Medicare Prescription Drug Benefit" in the 

Federal Register on August 3, 2004 (69 FR 46694), we had no experience in Medicare 

Part D to be able to gauge the need for a reopening of an initial payment determination. 

We patterned the provisions after the Medicare claims reopening regulations found in 

part 405. The proposed reopening provisions were subsequently adopted in our final rule 

published on January 28, 2005 (70 FR 4316) entitled, “Medicare Program; Medicare 

Prescription Drug Benefit. 

 Under the current regulation at § 423.346 (a), CMS may reopen for any reason 

within 1 year of the final determination of payment, within 4 years for good cause, or any 

time for fraud or similar fault. "Good cause" is defined in the regulation at § 423.346 (b) 

as: new and material evidence that was not readily available at the time the final 

determination was made; a clerical error in the computation of payments; or when 

evidence that was considered in making the determination clearly shows on its face that 

an error was made. We now better understand the need for reopening a payment 

determination and modify our regulation at § 423.346 to align with our experience. 
 347 

 We have generally performed global reopenings as a result of plan sponsor 

requests, and substantial revisions of PDE and DIR data due to plan corrections, CMS 

corrections of systems error, post reconciliation claims activity, and audit and other post 

reconciliation oversight activity. To date, contract years 2006, 2007, and 2008 have been 

reopened, and we have already released guidance stating that we intended to eventually 

perform a global reopening of 2011 once there is stability in the data for that year. This 

experience indicates to us that we will likely have to perform a reopening of the initial 

payment determination for every contract year. Therefore, we propose to remove the 

current timeframes for a reopening described in § 423.346 (a)(1) through (a)(3), remove 

paragraphs (b) describing good cause referred to in paragraph (a)(2), modify paragraph 

(c) to eliminate the reference to "good cause," and amend paragraph (a) such that CMS 

may reopen one time within 5 years of notice of the initial payment determination. 

 Based upon our experience, we believe that 5 years is adequate time to allow for 

data stability. By 5 years after the initial payment determination, additional PDEs or 

PDE adjustments associated with coordination of benefits will be submitted by Part D 

sponsors consistent with the timeframe described at § 423.466(b). We know that audits 

and other post reconciliation oversight activity often take place more than 5 years from 

notice of the initial payment determination. However, in light of the overpayment 

provision at section 6402(a) of the Affordable Care Act, which established section 

1128J(d) of the Act and that we propose to codify at § 423.360, we do not believe that it 

is necessary to reopen a payment reconciliation after that 5-year period, nor do we 

believe it is necessary to reopen a reconsidered payment determination. Therefore, we 
 348 

propose to amend § 423.346 (a) such that CMS will only reopen the initial payment 

determination and will not reopen a reconsidered payment determination. 

 As stated in our final rule entitled, “Medicare Program; Medicare Prescription 

Drug Benefit” published in the Federal Register on January 28, 2005 (70 FR 4194), 

CMS can initiate a reopening on its own or an organization could request a reopening, 

but such reopenings are at CMS' discretion. In determining whether to reopen, we will 

consider a number of issues, including, but not limited to, whether the contract has 

terminated and received a final settlement. We will not approve a request to reopen for a 

contract that has terminated and received a final settlement. In addition, when we 

perform a reopening on its own initiative, contracts that have been terminated and settled 

will not be included in the reopening. 

b. Coverage Gap Discount Reconciliation Reopening 

 Under § 423.2320(b), CMS performs a Coverage Gap Discount Reconciliation in 

which CMS reconciles interim payments with invoiced manufacturer discount amounts 

made available to each Part D plan's enrollee under the Discount Program. Since the 

interim coverage gap payments are estimates (76 FR 63017, 63027 (October 11, 2011)) , 

a cost-based reconciliation is performed to ensure that Part D sponsors are paid dollar for 

dollar for all manufacturer discount amounts as reported on invoiced PDE data submitted 

for Part D payment reconciliation. Manufacturer discount amounts reported on PDE 

records submitted after the PDE submission deadline for reconciliation continue to be 

invoiced to manufacturers within a maximum of 3 years of the date of dispensing, and 

manufacturers remit payments for invoiced coverage gap discount amounts to Part D 
 349 

sponsors. 

 We propose to establish a reopening provision for the Coverage Gap Discount 

Reconciliation for the same reasons and under the same authority that we established a 

reopening provision for the Part D payment reconciliation process described in our final 

rule, "Medicare Program; Medicare Prescription Drug Benefit" published on January 28, 

2005 (70 FR 4194, 4316). In a Health Plan Management System (HPMS) memorandum 

dated April 30, 2010, we stated that the final reconciled discount program payments are 

subject to the reopening provision in § 423.346. We anticipate rarely needing to reopen 

the Coverage Gap Discount Reconciliation as a result of the invoicing process that 

continues to occur after the reconciliation process. However, we want to leave open the 

option to reopen if unforeseen events result in underpayments or overpayments to Part D 

sponsors. Therefore, we propose to amend § 423.346 to accommodate reopening a 

Coverage Gap Discount Reconciliation. 

 Based on the preceding, we propose to revise § 423.346 by removing the phrase 

"or reconsidered" from paragraph (a), amending paragraph (a) to account for the 

proposed timing of the Part D reopening, removing paragraphs (a)(1) through (3) and 

(b)(1) through (3); adding a new paragraph (b) to accommodate a Coverage Gap 

Discount Reconciliation reopening; and revising paragraph (c) to eliminate the reference 

to "good cause." 

4. Payment Appeals (§ 423.350) 

 Pursuant to § 423.2320 (b), we perform a Coverage Gap Discount Reconciliation 

in which we reconcile interim payments with invoiced manufacturer discount amounts 
 350 

made available to each Part D plan's enrollee under the Discount Program. Current 

regulations do not describe the appeals process for a Coverage Gap Discount 

Reconciliation. We propose to establish an appeals provision for the Coverage Gap 

Discount Reconciliation for the same reasons and under the same authority that was used 

to establish the Part D payment reconciliation appeals process described in our final rule, 

"Medicare Program; Medicare Prescription Drug Benefit" published on January 28, 2005 

(70 FR 4194, 4317). In an HPMS memorandum dated April 30, 2010, CMS stated that 

the final reconciled discount program payments are subject the appeals provisions in 

§ 423.350, and we now propose to revise § 423.350 to accommodate a Coverage Gap 

Discount Reconciliation appeals process. 

 Consistent with the Part D payment appeals process currently described at 

§ 423.350, the proposed changes establish an appeals process whereby the final 

reconciliation of the interim Coverage Gap Discount Program payments may be subject 

to appeal. As stated in our final rule describing the Part D payment appeals process (70 

FR 4317 (January 28, 2005)), the Part D payment appeals process only applies to 

perceived errors in the application of the payment methodology and the payment 

information submitted by the Part D sponsor cannot be appealed through this process. In 

the January 28, 2005 final rule (70 FR 4317), Part D plans are expected to submit 

payment information correctly and within the established timelines. We codified at 

§ 423.350(a)(2) that payment information submitted to CMS under § 423.322 and 

reconciled under § 423.343 is final and may not be appealed nor may the appeals process 

be used to submit new information after the submission of information necessary to 
 351 

determine retroactive adjustments and reconciliations. We propose to amend 

§ 423.350(a)(2) to include information that is submitted and reconciled under 

§ 423.2320(b) is final and may not be appealed nor may the appeals process be used to 

submit new information after the submission of information necessary to determine 

retroactive adjustments and reconciliations. 

 Also consistent with the Part D payment appeals process, we propose that the 

request for a reconsideration of the Coverage Gap Discount Reconciliation must be filed 

within 15 days from the date of the final payment, which is the date of the final 

reconciled payment made under § 423.2320 (b). Therefore, we propose to amend 

§ 423.350(b)(1) by adding a new paragraph (iv) to define the timeframe for filing a 

reconsideration of the Coverage Gap Discount Reconciliation. 

 Based on the preceding, we propose to revise § 423.350 by adding a new 

paragraph (a)(1)(v) to allow for an appeal of a reconciled coverage gap payment under 

§ 423.2320 (b), by revising paragraph (a)(2) to indicate that the payment information 

submitted to CMS and reconciled under § 423.2320(b) is final and may not be appealed, 

and by adding a new paragraph (b)(1)(iv) to define the timeframe for appealing the final 

reconciled payment under § 423.2320(b). 

5. Payment Processes for Part D Sponsors (§ 423.2320) 

 In our final rule entitled, “Medicare Program; Changes to the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 

and Other Changes” (77 FR 22071, 22086; April 12, 2012), CMS described the payment 

process for Part D sponsors under the Coverage Gap Discount Program. Under 
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§ 423.2320(a), CMS provides monthly interim Coverage Gap Discount Program 

payments as necessary for Part D sponsors to advance coverage gap discounts to 

beneficiaries. Part D sponsors report the gap discount amounts to CMS, and through a 

contractor, CMS invoices the manufacturers on a quarterly basis for the applicable 

discount amounts. The manufacturers repay each Part D sponsor directly for the invoiced 

amounts under the Medicare Coverage Gap Discount Program Agreement (Agreement) 

described at § 423.2315. Under § 423.2320(b), CMS reconciles the interim payments 

with amounts invoiced to manufacturers. 

 In the event that a manufacturer fails to the provide the applicable discounts in 

accordance with the Agreement, we must impose civil money penalties (CMPs) equal to 

the sum of the applicable discount the manufacturer would have paid under the 

Agreement and 25 percent of that amount. The CMP that is equal to the sum of the 

applicable discount the manufacturer would have paid under the agreement is used to pay 

the applicable discount that the manufacturer had failed to provide. 

 In our final rule describing the payment process for Part D sponsors under the 

Coverage Gap Discount Program, we did not contemplate a payment process in the event 

that a manufacturer becomes bankrupt and does not pay the Part D sponsors for quarterly 

invoiced amounts under the Agreement. Even though we will impose a CMP on a 

bankrupt manufacturer in an effort to collect the unpaid invoiced amounts, the 

bankruptcy settlements will likely result in the CMP being modified or reduced. In order 

to ensure that the Part D sponsors have the funds available to advance the gap discounts 

at the point-of-sale, as required under section 1860D–14A(c)(1)(A)(ii) of the Act, we 
 353 

now propose to amend § 423.2320 such that we will assume financial liability for the 

applicable discount by covering the costs of the quarterly invoices that go unpaid by a 

bankrupt manufacturer at the time of the Coverage Gap Discount Reconciliation 

described at § 423.2320(b). We would then file a proof of claim with the bankruptcy 

court to recover those costs from the bankrupt manufacturer. 

 The proposed policy that CMS assume financial liability for the applicable 

discounts in the event of a manufacturer bankruptcy is consistent with CMS' payment 

processes for Part D sponsors under the Medicare Coverage Gap Discount Program. 

Under § 423.2320 (a), CMS provides interim payments to ensure that Part D sponsors 

have the funds available to advance the coverage gap discount to beneficiaries at point of 

sale. Under § 423.2320 (b), CMS reconciles the interim payments with the invoiced 

manufacturer discount amounts in order make the PDP sponsor whole for the gap 

discount amount provided to the beneficiaries at point of sale. (For more information on 

these provisions, see October 11, 2011 final rule (76 FR 63017, 63027).) In order to 

remain consistent with the intent of the Coverage Gap Discount Reconciliation to make 

the Part D sponsor whole for the gap discounts amounts advanced at point of sale, CMS 

must provide payments to the Part D sponsor to cover the cost of the applicable discount 

in the event that the manufacturer cannot pay the quarterly invoices due to a bankruptcy. 

We propose to cover the costs of unpaid quarterly invoices only in the event that a 

manufacturer becomes bankrupt. We would not cover the cost of unpaid quarterly 

invoices for any other reasons because, in the event that a manufacturer fails to pay the 

quarterly invoices, we will impose CMPs that will cover the cost of the unpaid invoices. 
 354 

In the event that a manufacturer becomes bankrupt, we are concerned that the court will 

either modify or reduce the amount of the CMP, making the CMP process ineffective for 

covering the cost of the invoices and leaving the Part D sponsor in the position of having 

to cover the costs of the gap discount. 

 We propose to implement this policy by adjusting the Coverage Gap Discount 

Reconciliation to account for quarterly invoices that go unpaid as a result of a 

manufacturer becoming bankrupt. This adjustment will only occur for manufacturer 

discount amounts as they are reported on PDEs submitted by the submission deadline for 

the Part D reconciliation. 

 Based on the preceding, we propose to add a new paragraph (c) to § 423.2320 to 

describe a process for accounting for quarterly invoiced amounts that go unpaid by a 

bankrupt manufacturer. 

6. Risk Adjustment Data Requirements (§ 422.310) 

 We propose to strengthen existing regulations related to the accuracy of risk 

adjustment data by amending § 422.310 on risk adjustment data validation. First, we 

propose to renumber existing paragraph § 422.310(e) as paragraph (e)(2) and add new 

paragraph (e)(1), which would require that any medical record reviews conducted by an 

MA organization must be designed to determine the accuracy of diagnoses submitted 

under § 422.308(c)(1) and § 422.310(g)(2). (Paragraph § 422.308(c)(1) addresses 

adjustments to payments for health status, and paragraph § 422.310(g)(2) addresses 

deadlines for risk adjustment data submission, including the final risk adjustment data 

submission deadline prior to CMS' calculation of the final risk factors for a payment 
 355 

year.) Under our proposal, medical record reviews conducted by an MA organization 

cannot be designed only to identify diagnoses that would trigger additional payments by 

CMS to the MA organization; and medical record review methodologies must be 

designed to identify errors in diagnoses submitted to CMS as risk adjustment data, 

regardless of whether the data errors would result in positive or negative payment 

adjustments. This proposed amendment furthers our goals of improving payment 

accuracy and reducing payment errors. 

 We also propose to amend § 422.310(g) regarding deadlines for submission of 

risk adjustment data. Our current procedures generally permit submission of risk 

adjustment data after the final risk adjustment submission deadline only to correct 

overpayments. We propose to revise the regulation to explicitly permit late submissions 

only to correct overpayments but not to submit diagnoses for additional payment. 

 Finally, we propose to align this regulation with proposed § 422.326 by making 

two additional changes in paragraph (g). First, we propose the deletion of the January 31 

deadline in subparagraph (2) and replacing it with the statement that CMS will announce 

the deadline by which final risk adjustment data must be submitted to CMS or its 

contractor. This means that the risk adjustment data submission deadline would also 

function as the Part C applicable reconciliation date for purposes of proposed § 422.326 

on overpayment rules, as discussed in section II.B.1.b. of this proposed rule. Second, we 

propose to add subparagraph (3) to § 422.310(g). Proposed paragraph (3) cites § 422.326 

as the source of rules for submission of corrected risk adjustment data after the final risk 

adjustment data submission deadline, that is, after applicable reconciliation as defined at 
 356 

§ 422.326(a). 

7. RADV Appeals 

a. Background 

 We published Risk Adjustment Data Validation (RADV) appeals regulations in 

the April 15, 2010 Federal Register. These rules were proposed and finalized under 

CMS’s authority to establish Medicare Advantage (MA) program standards by regulation 

at section 1856(b)(1) of the Act and are found at § 422.311 et seq. 

 As explained in the preamble of that final rule, Subpart G of the MA regulations 

at part 422 describes how payment is made to MA organizations. These payment 

principles are based on sections 1853, 1854, and 1858 of the Act. Subpart G also sets 

forth the requirements for making payments to MA organizations offering local and 

regional MA plans, including calculation of MA capitation rates. Section 1853(a)(3) of 

the Act requires that we risk adjust our payments to MA organizations. Risk adjustment 

strengthens the Medicare program by ensuring that accurate payments are made to MA 

organizations based on the health status plus demographic characteristics of their enrolled 

beneficiaries and ensures that MA organizations are paid appropriately for their plan 

enrollees (that is, less for healthier enrollees expected to incur lower health care costs and 

more for less healthy enrollees expected to incur higher health care costs). Accurate 

payments to MA organizations also help ensure that providers are paid appropriately for 

the services they provide to MA beneficiaries. In general, the current risk adjustment 

methodology relies on enrollee diagnoses, as specified by the International Classification 

of Disease, currently the Ninth Revision Clinical Modification guidelines (ICD-9-CM) to 
 357 

prospectively adjust capitation payments for a given enrollee based on the health status of 

the enrollee. Diagnosis codes determine the risk scores, which in turn determine the risk 

adjusted reimbursement. As a result, physicians and providers must focus attention on 

complete and accurate diagnosis reporting according to the official ICD-9-CM coding 

guidelines (that is, coding diagnoses accurately and to the highest level of specificity). 

 MA enrollee Hierarchical Condition Categories (HCCs) are assigned based on 

risk adjustment diagnoses from FFS claims and from risk adjustment data submitted to us 

by MA organizations via the Risk Adjustment Payment System (RAPS). The CMSHCCs contribute to an enrollee's risk score, which is used to adjust a base payment rate. 

Essentially, the higher the risk score for an enrollee, the higher the expected health care 

cost for the enrollee. The HCC data that MA organizations submit to CMS via the RAPS 

system is self-reported by the MA organization and does not go through a validation 

review before being incorporated into a given beneficiary's risk-profile. Since there is an 

incentive for MA organizations to potentially over-report diagnoses so that they can 

increase their payment, the Agency audits plan-submitted diagnosis data a few years later 

to ensure they are supported by medical record documentation. 

 Verifiable medical record documentation is the key to accurate payment and 

successful data validation. We annually select contracts for RADV audits. RADV audits 

are intended to confirm the presence of risk adjustment conditions (that is, diagnoses that 

map to HCCs) as reported by MA organizations for their enrollees and confirmed via 

medical record documentation. RADV audits occur after the final risk adjustment data 

submission deadline for the MA contract year. We validate the HCC data submitted by 
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MA organizations by reviewing hospital inpatient, hospital outpatient, and 

physician/practitioner provider medical records. The focus of this medical record review 

activity is on diagnoses related to the enrollee's HCC profile. Risk adjustment 

discrepancies are identified when the enrollee's HCCs used for payment (based upon MA 

organization-submitted data) differ from the HCCs assigned based on the medical record, 

under the RADV audit process. Risk adjustment discrepancies can be aggregated to 

determine an overall level payment error. In turn, payment error for a sample of contract 

enrollees can be extrapolated to calculate a contract-level payment error estimate. 

 Since finalizing these rules in 2010, we have conducted additional RADV audits 

and believe that some of the appeals provisions finalized in the 2010 RADV Appeals 

final rule should now be modified to prevent confusion, and to strengthen the RADV 

appeals process. We therefore, propose revisions to the RADV appeals regulations 

finalized in the April 15, 2010 Federal Register. These proposed revisions clarify 

program requirements and simplify the RADV appeals process. These proposed RADV 

provisions will apply to any RADV determinations issued on or after the effective date of 

this regulation. 

b. RADV Definitions 

We propose to amend the RADV definitions at § 422.2 as follows: 

● Removing the following definitions: 

 ++ "Initial Validation Contractor (IVC)" means the first level of medical record 

review under the RADV audit process. 

++ "RADV payment error calculation appeal process" means an administrative 
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process that enables MA organizations that have undergone RADV audit to appeal the 

CMS calculation of an MA organization's RADV payment error. 

++ "The one best medical record for the purposes of Medicare Advantage Risk 

Adjustment Validation (RADV)" means the clinical documentation for a single encounter 

for care (that is, a physician office visit, an inpatient hospital stay, or an outpatient 

hospital visit) that occurred for one patient during the data collection period. The single 

encounter for care must be based on a face-to-face encounter with a provider deemed 

acceptable for risk adjustment and documentation of this encounter must be reflected in 

the medical record. 

● Adding the following definition: 

++ "RADV appeal process" means an administrative process that enables MA 

organizations that have undergone RADV audit to appeal the Secretary’s medical record 

review determinations and the Secretary’s calculation of an MA organization's RADV 

payment error. 

● Revising the following definitions: 

++ Risk adjustment data validation (RADV) audit means a payment audit of a 

Medicare Advantage (MA) organization administered by CMS or the Secretary 

that ensures the integrity and accuracy of risk adjustment payment data. 

++ "Attestation process" means a CMS-developed RADV process that enables 

MA organizations undergoing RADV audit to submit CMS-generated attestations for 

eligible medical records with missing or illegible signatures or credentials. The purpose 

of the CMS-generated attestations is to cure signature and credential issues for eligible 
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medical records. CMS-generated attestations do not provide an opportunity for a 

provider or supplier to replace a medical record or for a provider or supplier to attest that 

a beneficiary has the medical condition. 

c. Publication of RADV Methodology 

 In the October 22, 2009 Notice of Proposed Rule Making (NPRM), and as 

reinforced in the April 15, 2010 Final Regulation, CMS indicated that we would, 

“publish its RADV methodology in some type of public document – most likely, a 

Medicare Manual, so that the public can review and provide comment as it deems 

necessary”. We also indicated that we would provide an annual notice of RADV audit 

methodology. Our last RADV-related notice of methodology was published in February, 

2012. We will continue to publish a notice of the methodology employed, but will do so 

only if there is a change in the RADV methodology that would require publication. We 

note that these notices of RADV audit methodology updated information provided on 

RADV audit methodology provided in the October 22, 2009 proposed rule and April 15, 

2010 final rule. 

 In addition, we provided in the October 22, 2009 proposed rule preamble that we 

would provide an expanded explanation of methodology and payment error calculation 

factors as a part of each audit report of findings that we send to MA organizations that 

undergo RADV audit. Such explanation and factors have been and will continue to be 

part of the RADV audit report(s) that CMS provides health plans that have undergone 

RADV audits. 

d. Proposal to Update RADV Appeals Terminology (§ 422.311)
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 Current RADV regulations utilize the following terms for the CMS-issued RADV 

audit report: audit report post medical record review; RADV audit report; IVC-level 

RADV audit report; and RADV audit report of finding. This use of multiple terms to 

refer to what is the same audit report (the RADV audit report that CMS issues following 

conclusion of the medical record review portion of the audit) is potentially confusing. 

Therefore, we propose amending the RADV regulations throughout to adopt one 

common term to refer to RADV audit reports: “RADV Audit Report”. By standardizing 

terminology throughout the RADV regulations, the proposed amendment provides clarity 

which may lead to increased efficiency. We welcome comment on this proposal. 

 As mentioned earlier in the description of RADV-related definitions that have 

changed, we have revised certain RADV-related definitions to accommodate changes to 

both the RADV audit process and the RADV appeals process. One definition that we 

have removed from the RADV regulations is Initial Validation Contractor, or IVC. The 

RADV medical record review process no longer utilizes “initial” and “secondary” 

validation contractors to conduct medical record review under RADV. Instead we now 

utilize medical record reviewers to code medical records undergoing RADV review. 

These reviewers may be employed by the same or different medical record review 

contractors. Therefore, the term “IVC” is no longer relevant to the RADV audit process. 

 We therefore propose to remove this term from the RADV regulations at the following 

citations: § 422.311(c)(2)(i)(B) through (D); § 422.311(c)(2)(ii)(B), 

§ 422.311(c)(2)(iii)(A), § 422.111(c)(2)(v), (vi), § 422.311(c)(3)(ii)(A), and § 

422.311(c)(3)(iii)(A) and (B). We invite comment on this proposal. 
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e. Proposal to Simplify the RADV Appeals Process

 Currently, there are two types of RADV-related appeals processes described in 

Federal regulations at § 422.311 et seq.: medical record review-determination appeals 

and RADV payment error calculation appeals. RADV medical record reviewdetermination appeal requirements and procedures are discussed at § 422.311(b)(3) and 

§ 422.311(c) (2). Medical record review determination appeal is a two-stage 

administrative appeal process: the first step is a hearing by a hearing officer, followed by 

a CMS Administrator –level review. This appeal procedure provides MA organizations 

with an opportunity to appeal RADV medical record review determinations that are made 

by coders reviewing the medical record documentation submitted by MA organizations 

undergoing RADV audit. The second type of RADV appeal, payment error calculation 

appeal, is discussed at § 422.311(c)(3). Payment error calculation appeal is a threepronged appeal process: reconsideration, followed by a hearing officer review, followed 

by CMS Administrator–level review. This appeal process was specifically designed to 

afford MA organizations the opportunity to appeal CMS’s contract-level RADV payment 

error calculation. 

 We propose that the administrative appeals language described at § 422.311(b)(3) 

and § 422.311(c)(2) for RADV medical record review determination appeals and 

§ 422.311(c)(3) for RADV payment error calculation appeals be replaced with new 

regulatory language proposed § 422.311(c)(1) et seq., that combines the two existing 

RADV appeal policies and procedures into one set of requirements and one process. We 

propose to combine the two RADV appeals processes into one combined RADV appeals 
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process that is comprised of three administrative steps: reconsideration, hearing officer 

review, and CMS Administrator-level review. A three-step administrative appeals 

process comprising reconsideration, hearing officer review, and Administrator-levels of 

review is a common administrative appeals model used elsewhere within the Medicare 

managed care program, such as in appealing contract award determinations and 

intermediate sanctions. The combined RADV appeal process that we are proposing at 

new § 422.311(c)(1) et seq., also has the benefit of simplifying what is today a complex 

two-track appeal process into one process. While both CMS and the MA industry will 

benefit from simplifying this process, MA organizations also obtain an additional level of 

review under the combined approach since MA organizations will be afforded a 

reconsideration appeal step for medical record review determinations that is today—not 

part of the existing RADV appeal process. Shortening the existing two-track appeal 

process should also reduce the resources and level of effort needed from both MA 

organizations and CMS in participating in a RADV appeal proceeding. Under this 

proposal, MA organizations can simply request to appeal their RADV audit findings one 

time and specify whether they want to appeal either their medical record review 

determination(s), payment error calculation, or both. The specific details regarding this 

proposed process follow. We propose these changes based upon our experience with 

RADV appeals and because we hope to reduce the burden associated with undertaking 

RADV appeals on both MA organizations and CMS. The details of this proposed policy 

and procedure follows. 

(1) Issues Eligible for RADV Appeal 
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 Current regulations at § 422.311(c)(2) et seq., and § 422.311(c)(3) et seq., specify 

RADV-related medical record review and payment error calculation documents and 

issues eligible for the medical record review determination and payment error calculation 

appeal processes. We propose to amend the policies and procedures around issues 

eligible for RADV appeals at § 422.311(c)(2) and § 422.311(c)(3) by combining 

proposed policies and procedures for the existing two-pronged appeal approach into one 

set of policies and procedures for RADV appeals at the new § part 422.311(c)(2)(iv). At 

§ 422.311(c)(2)(i), we propose that as a general rule, MA organizations may appeal 

RADV medical record review determinations and RADV payment error calculation, 

though in order to be eligible to pursue these appeals, we specify at proposed 

§ 422.311(c)(2)(i)(A) and (B) that MA organizations must adhere to established RADV 

audit procedures and requirements and adhere to RADV appeals procedures and 

requirements. At § 422.311(c)(2)(ii) we propose that failure to follow RADV audit 

procedures and requirements and RADV appeals procedures and requirements will 

render the MA organization’s request for RADV appeal invalid. Furthermore, at 

proposed § 422.311(c)(2)(iii) we stipulate that the MA organization’s written request for 

medical record review determination appeal must specify the audited HCC(s) that have 

been identified pursuant to RADV audit as being in error, and further specify that MA 

organizations must provide a justification in support of the audited HCC(s) that the MA 

organization elects to appeal. At § 422.311(c)(2)(i) (iv) we propose that for each audited 

HCC, MA organizations may appeal one medical record that has undergone RADV 

medical record review and that if an attestation was submitted to cure a signature or 
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credential issue, that attestation may likewise be included in the HCC appeal. For 

example, if an MA organization submitted a medical record that did not contain a 

signature and/or credential—and the MA organization submitted an attestation to cure the 

error that CMS subsequently failed to accept—the MA organization could choose to 

appeal CMS’s determination to not accept the submitted attestation. We reiterate that the 

purpose of CMS-generated attestations is to cure signature and credential errors 

associated with an eligible submitted medical record and not to provide an opportunity 

for a provider or supplier to attest that a beneficiary has a certain medical condition. 

Evidence for the existence of the medical condition is found in a medical record. 

 We are proposing to modify our language at § 422.311(c)(2)(i)(v) to clarify 

existing RADV appeals provisions which stipulate that MA organizations must adhere to 

the “one best medical record” policy. Under changes to the RADV audit methodology 

announced by CMS in February 2012, we now allow MA organizations to submit more 

than one medical record (that is, more than the “one best medical record”) during the 

RADV audit process to validate an audited CMS-HCC. However, for purposes of 

appealing a CMS medical record review determination, we will not permit organizations 

to appeal multiple medical records but will instead—require that MA organizations 

identify a record from amongst those records submitted, and to submit that record for 

appeal. For each audited HCC, MA organizations may appeal only one medical record 

that has undergone RADV review. This policy was published in the February 2012 

White Paper and is not included in this proposed rule. 

 At § 422.311(c)(2)(vi) we propose that a written request for RADV payment error 
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calculation appeal must clearly specify the MA organization’s own RADV payment error 

calculation and must also specify where the payment error calculation was erroneous. 

(2) Issues Not Eligible for RADV Appeals 

 At § 422.311(c)(3) we propose documents and issues that are ineligible for 

RADV appeals. Consistent with the overall approach of combining into one RADV 

appeals process what was heretofore two separate RADV appeals processes - by way of 

this new proposed section, we propose to amend existing regulations at § 422.311(c)(3). 

At new § 422.311(c)(3), we propose that MA organizations’ request for appeal may not 

include HCCs, medical records or other documents beyond the audited HCC, selected 

medical record and any accompanying attestation that the MA organization chooses to 

appeal. We specify at § 422.311(c)(3)(ii) that the MA organizations may not appeal 

CMS’s medical record review determination methodology or CMS’s payment error 

calculation methodology. This is a clarification to existing RADV regulations at 

§ 422.311(c)(3)(D) which specifies that MA organizations may not appeal CMS’s 

payment error calculation methodology. At § 422.311(c)(3)(iii) we specify that MA 

organizations may not appeal RADV medical record review-related errors when 

appealing RADV error-calculation issues since medical record review determination 

issues must be resolved before we can calculate RADV payment errors. And at 

§ 422.311(c)(3)(iv) we specify that RADV errors that result from an MA organization’s 

failure to submit a medical record are not eligible for appeal. 

(3) Manner and Timing of a Request for RADV Appeal 

 We propose to replace existing RADV regulations at § 422.311(c)(2)(iii) et seq., 
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and § 422.311(c)(3)(iii) et seq., regarding the manner and timing of a request for RADV 

appeals. Again, at § 422.311(c)(5), we propose to combine the formerly two separate 

sets of requirements and procedures into one RADV appeals process addressing the 

request for RADV appeal. At § 422.311(c)(5)(i) we propose that at the time the 

Secretary issues her RADV audit report, the Secretary notifies audited MA organizations 

that they may appeal RADV HCC errors that are eligible for medical record review 

determination appeal and may appeal the Secretary’s RADV payment error calculation. 

At § 422.311(c)(5)(ii) we specify that MA organizations have 30 days from the date of 

CMS’s issuance of the RADV audit report to file a written request with CMS for RADV 

appeal. This request for RADV appeal must specify whether the MA organization 

requests medical record review determination appeal, whether the MA organization 

requests RADV payment error calculation appeal, or whether the MA organization 

requests both medical record review determination appeal and RADV payment error 

calculation appeal-- and in each instance-- the issues with which the MA organization 

disagrees, and the reasons for the disagreements. See proposed regulations at 

§422.311(c)(6) et seq. 

 At new § 422.311(c)(5)(ii) we specify that while MA organizations may now 

elect to appeal either medical record review determination, payment error calculation, or 

both—they must notify CMS which issues they will appeal at the same time. This new 

provision replaces existing RADV appeals requirements regarding notification at 

§ 422.311(c)(2)(iii) and § 422.311(c)(3)(iii)(C). 

 For MA organizations that elect both medical record review determination appeal 
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and RADV payment error calculation appeal, we specify at § 422.311(c)(5)(iii)(A) and 

(B) that the Secretary will adjudicate the request for RADV payment error calculation 

following conclusion of reconsideration of the MA organization’s request for medical 

record review determination appeal. This is necessary because RADV payment error 

calculations are based upon the outcomes of medical record review determinations. For 

example, for an MA organization that appeals both medical record review determinations 

and payment error calculations, the reconsideration official would first adjudicate and 

rule on the medical record review determinations and then proceed to recalculate the 

RADV payment error. 

(4) Reconsideration Stage 

 Under current RADV appeals procedures, only the RADV payment error 

calculation appeal process contains a reconsideration step. We propose to amend 

existing regulations at § 422.311(c)(3)(iii)(C) and § 422.311(c)(3)(v), (vi), and (vii) by 

proposing a new reconsideration stage for RADV appeals at § 422.311(c)(6) et seq. 

Reconsideration is the first stage of the new RADV appeals process and will apply to 

both medical record review determinations and error calculation issues being appealed. 

Therefore, MA organizations that elect to appeal RADV audit findings de facto begin the 

appeal process with the reconsideration step. At proposed § 422.311(c)(6)(i) we specify 

that a MA organization’s written request for medical record review determination 

reconsideration must specify the audited HCC identified as being in error that the MA 

organization wishes to appeal; and to provide a justification in support of the audited 

HCC chosen for appeal. At proposed § 422.311(c)(6)(ii) we specify that the MA 
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organizations’ written request for payment error calculation reconsideration must include 

the MA organization’s own RADV payment error calculation that clearly indicates where 

the RADV payment error calculation was erroneous. The request for payment error 

calculation reconsideration may also include additional documentary evidence pertaining 

to the calculation of the error that the MA organization wishes the reconsideration 

official to consider. 

 At proposed § 422.311(c)(6)(iii) we describe the conduct of the reconsideration 

process that is being proposed. We specify that for medical record review determination 

reconsideration, a medical record review professional who was not involved in the initial 

medical record review determination of the disputed HCC reviews the medical record 

and accompanying dispute justification; and reconsiders the initial audited HCC medical 

record review determination. For payment error calculation reconsideration, CMS 

ensures that a third party not involved in the initial RADV payment error calculation 

reviews the RADV payment error calculation, reviews the MA organization’s own 

RADV payment error calculation, and recalculates the payment error in accordance with 

CMS’s RADV payment error calculation procedures. 

 At proposed § 422.311(c)(6)(iv), we specify that the reconsideration official 

issues a written reconsideration decision to the MA organization, and that the 

reconsideration official’s decision is final unless the MA organization disagrees with the 

reconsideration official’s decision. If the MA organization disagrees with the 

reconsideration official’s decision, it may request a hearing. 

(5) Hearing Stage 
 370 

 Existing regulations at § 422.311(c)(2)(iv) through (ix) and § 422.311(C)(4) et 

seq., specify the procedures under which CMS conducts hearings under the RADV 

appeals process for medical record review and payment error calculation. We propose to 

replace these provisions with new hearing requirements and procedures at 

§ 422.311(c)(7)(iv). 

 At § 422.311(c)(7)(i), we propose that at the time the RADV appeals 

reconsideration official issues his/her reconsideration determination to the MA 

organization, the reconsideration official notifies the MA organization of any RADV 

audited HCC errors and or payment error calculations that are eligible for RADV 

hearing. At § 422.311(c)(7)(ii), we specify that a MA organization that requests a 

hearing officer review must do so in writing in accordance with procedures established 

by CMS. At § 422.311(c)(7)(iii), we specify that a written request for a hearing must be 

filed with the Hearing Officer within 30 days of the date the MA organization receives 

the reconsideration officer’s written reconsideration decision. If the MA organization 

appeals the medical record review reconsideration determination, the written request for 

RADV hearing must include a copy of the written decision of the reconsideration official; 

must specify the audited HCCs that the reconsideration official confirmed as being in 

error; and must specify a justification as to why the MA organization disputes the 

reconsideration official’s determination. If the MA organization appeals the RADV 

payment error calculation, the written request for RADV hearing must include a copy of 

the written decision of the reconsideration official and must include the MA 

organization’s own RADV payment error calculation that clearly specifies where the 
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CMS’s payment error calculation was erroneous. 

 At § 422.311(c)(7)(iv), we propose that a CMS hearing officer conduct the 

RADV hearing. At § 422.311(c)(7)(v), we specify terms and conditions under which a 

hearing officer may be disqualified. 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. A party to the hearing who objects to the assigned hearing 

officer must notify that officer in writing at the earliest opportunity. The hearing officer 

must consider the objections, and may, at his or her discretion, either proceed with the 

hearing or withdraw. If the hearing officer withdraws, another hearing officer will 

conduct the hearing. 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. 

 At § 422.311(c)(7)(vi) we propose that the hearing officer reviews the medical 

record and any accompanying attestation that the MA organization selected for review, 

the reconsideration official’s payment error calculation (if appealed), the reconsideration 

official’s written determination, and the written justification submitted by the MA 

organization and CMS in response to the reconsideration official’s determination. 

 At § 422.311(c)(7)(vii) we propose RADV appeal hearing procedures. We 

propose that the hearing officer has full power to make rules and establish procedures, 

consistent with the law, regulations, and rulings. These powers include the authority to 

dismiss the appeal with prejudice and take any other action which the hearing officer 
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considers appropriate, including for failure to comply with RADV audit and appeals rules 

and procedures. We propose that the hearing be altogether on the record unless the 

hearing officer, at his or her full discretion, approves a parties request for a live or 

telephonic hearing regarding some or all of the medical records in dispute, or if the 

hearing office schedules a live or telephonic hearing on its own motion. The hearing 

officer’s review will be solely limited to the record. The record is comprised of the 

RADV reviewed medical record and any accompanying attestation that the MA 

organization selected for review, the reconsideration official’s payment error calculation 

(if appealed), the reconsideration official’s written determination, the written justification 

submitted by the MA organization in response to the reconsideration official’s 

determination, and written briefs from the MA organization explaining why they believe 

the reconsideration official’s determination was incorrect. In addition, the record will be 

comprised of a brief from CMS that responds to the MA organization’s brief. 

 In terms of specifying the conduct of the hearing, we propose at 

§ 422.311(c)(7)(vii)(B) that the hearing officer neither receives testimony nor accepts any 

new evidence that is not part of the record. At § 422.311(c)(7)(vii) we propose that the 

hearing officer be given the authority to decide whether to uphold or overturn the 

reconsideration official’s decision, and pursuant to this decision – to send a written 

determination to CMS and the MA organization, explaining the basis for the decision. 

 At § 422.311(c)(7)(ix), we propose that in accordance with the hearing officer’s 

decision, a third party not involved in the initial RADV payment error calculation 

recalculate the MA organization’s RADV payment error and issue a new RADV audit 
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report to the appellant MA organization and CMS. For MA organizations appealing the 

RADV payment error calculation only, we propose that a third party not involved in the 

initial RADV payment error calculation recalculate the MA organization’s RADV 

payment error and issue a new RADV audit report to the appellant MA organization and 

CMS. At§ 422.311(c)(7)(x) we propose that the hearing officer’s decision be final unless 

the decision is reversed or modified by the CMS Administrator. 

(6) CMS Administrator Review Stage 

 Existing regulations at § 422.311(c)(2)(x) et seq., and § 422.311(C)(4)(vi) et seq., 

specify the CMS Administrator-level review procedures that CMS adheres to under the 

current RADV appeals process for medical record review determinations and payment 

error calculation. We propose to replace these regulations with new RADV appealrelated CMS Administrator review requirements and procedures at § 422.311(c)(8). 

 At § 422.311(c)(8)(i) and (ii), we propose that a request for CMS Administrator 

review must be made in writing within 30 days of receipt of the hearing officer’s 

decision; and must be filed with the CMS Administrator by CMS or an MA organization. 

 At § 422.311(c)(8)(iii), we propose that after receiving a request for review, the CMS 

Administrator has the discretion to elect to review the hearing officer’s decision or to 

decline to review the hearing officer’s decision. At § 422.311(c)(8)(iv) we propose that 

if the CMS Administrator elects to review the hearing decision--the Administrator 

acknowledges the decision to review the hearing decision in writing and notifies CMS 

and the MA organization of their right to submit comments within 15 days of the date of 

the notification. At § 422.311(c)(8)(iv)(B), we propose that the CMS Administrator be 
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limited to the review of the record and that the record be comprised of the hearing 

record, and written arguments from the MA organization and/or CMS explaining why 

either or both parties believe the hearing officer’s determination was correct or incorrect. 

 Regarding Administrator-level review procedures at § 422.311(c)(8)(vi), we 

propose that the Administrator reviews the record and determines whether the hearing 

officer’s determination should be upheld, reversed, or modified. At § 422.311(c)(8)(v), 

we propose that the Administrator render his or her final decision in writing to the parties 

within 60 days of acknowledging his or her decision to review the hearing officer’s 

decision. At § 422.311(c)(8)(vi), we propose that the decision of the hearing officer 

become final if the Administrator declines to review the hearing officer’s decision or 

does not make a decision within 60 days. 

 Combining these existing RADV medical record review determination and 

payment error calculation appeals policies and processes improves the overall appeals 

process by strengthening the depth and integrity of these procedures. We also believe 

that doing so improves overall RADV appeals procedures by providing clarity that leads 

to greater efficiencies in adjudicating RADV appeals. We welcome comments on these 

proposals. 

f. Proposal to Expand Scope of RADV Audits

 Federal regulations at § 422.311(a) specify that RADV audits are conducted by 

CMS. We propose to amend this regulation at § 422.311(a) by specifying that the 

Secretary of the Department of Health and Human Services, along with CMS, may 

conduct RADV audits beginning with the effective date of this regulation. We also 
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propose to amend RADV definitions at § 422.2 to specify that The Secretary of the 

Department of Health and Human Services, along with CMS, may conduct RADV audits. 

 We welcome comment on this proposal. 

g. Proposal to Clarify the RADV Medical Record Review Determination Appeal Burden 

of Proof Standard

 Our regulations at § 422.311(c)(3)(iv) specify that for RADV payment error 

calculation appeals, MA organizations bear the burden to prove that CMS failed to follow 

its stated RADV payment error calculation methodology. However, RADV regulations 

do not specify a burden of proof standard for the RADV medical record review 

determination appeal process. The absence of a clearly-defined burden of proof standard 

for RADV medical record review determination appeals creates an appeal environment 

where MA organizations, CMS and RADV appellate officials are free to interpret and 

apply different burden of proof standards when arguing or reviewing appeals cases. We 

propose to amend the rule with new § 422.311(c)(4) which specifies that the burden of 

proof for all RADV determinations—be they payment error calculation or RADV 

medical record review determinations - is on MA organizations to prove, based on a 

preponderance of the evidence, that CMS’s determination was erroneous. 

 This approach would stand in contrast to a burden of proof standard in which the 

MA organization were to prove that a valid diagnoses exists on the record, and that 

therefore, the audited HCC has been validated. This proposed amendment to the rule 

provides the medical record review determination process a clear burden of proof 

standard which more aligns with the existing RADV payment error calculation appeals 
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burden of proof standard. Doing so also improves the overall RADV appeals procedures 

by providing clarity that leads to greater efficiencies in adjudicating RADV appeals. We 

invite comment on this proposal. 

h. Proposal to Change RADV Audit Compliance Date 

 Currently, the compliance date for RADV audits is the due date when MA 

organizations selected for RADV audit must submit medical records to CMS or its 

contractors. We are proposing to change the compliance date for meeting RADV audit 

requirements for the validation of risk adjustment data to the due date when MA 

organizations selected for RADV audit must submit medical records to the Secretary—

and not only CMS. See proposed regulation language at § 422.311(b)(2). 
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B. Improving Payment Accuracy

8. Recovery Audit Contractor (RAC) Determination Appeals (Proposed Part 422 Subpart 

Z and Part 423 Subpart Z) 

a. Background

Section 306 of the Medicare Prescription Drug, Improvement and Modernization 

Act of 2003 (MMA) required the Secretary to conduct a demonstration to determine 

whether recovery auditors could be used effectively to identify improper payments paid 

under Medicare Part A and Part B claims. We conducted the demonstration from March 

2005 to March 2008 in six states. The Recovery Audit demonstration established 

recovery auditors as a successful tool in the identification and prevention of improper 

Medicare payments. 

In December 2006, the Tax Relief and Health Care Act of 2006 (TRHCA) 

(Pub. L. 109-432) was enacted. Section 302(a) of the TRHCA created a permanent 

Medicare Recovery Audit Contractor (RAC) program and added a new paragraph (h) to 

section 1893 of the Social Security Act (the Act) that required us to establish a national 

recovery audit program for Medicare Part A and Part B. The national Medicare Fee-ForService (FFS) Recovery Audit program was established on January 1, 2010. 

 Section 6411(b) of the Affordable Care Act amended section 1893(h)(1) of the 

Act by requiring the establishment of recovery audit programs for Medicare Parts C and 

D, in addition to the RAC program already in place for Medicare A and B. 

 On December 27, 2010, we published a notice in the Federal Register

(75 FR 81278) requesting comments on how to best implement the RAC program for 
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Parts C and D. Analysis of the comments received assisted us with implementation of 

the Part C and D RACs. 

 In January 2011, we entered into a recovery audit contract for Part D. The Part D 

RAC began recouping identified overpayments in 2012. On December 7, 2012, we 

published a Request for Quotation (RFQ) via the General Services Administration's 

(GSA) eBuy seeking quotations on the implementation of a Medicare Part C RAC. We 

anticipate the award of a Part C RAC contract in FY 2014. 

Given that we began recouping overpayments determined by the Part D RAC in 

2012, and we anticipate recouping overpayments in Part C after awarding a Part C RAC 

contract in FY 2014, it is appropriate to provide a codified administrative appeals process 

to allow for plans to challenge the overpayment findings generated by the RACs just as 

we provide for challenges to overpayment determinations elsewhere in the Medicare 

program. In crafting our proposed appeals process for Parts C and D RAC 

determinations, we reviewed existing appeals processes in other areas, including Parts A 

and B RAC determinations, Part C RADV Audits, Part D payments, etc. 

b. Proposed RAC Appeals Process 

After reviewing the agency’s existing appeal processes, we determined that the 

general mechanisms set forth in § 422.311 and § 423.350 offered the most appropriate 

models for the Part C and D RAC appeals process. 

 The Part D RAC currently reviews PDE data to identify overpayments and 

underpayments that are paid back to the plans. When overpayments are identified, Part D 

plans are notified and funds are recovered. If plans disagree with the calculated 
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overpayment amounts or whether the overpayments are proper, they may appeal the Part 

D RAC’s determination directly to the CMS Center for Program Integrity. 

 A multilevel independent appeals process is an important component of the Part C 

and Part D RAC program as it allows plans to appeal determinations they contend are 

made in error. The administrative appeals mechanisms in this proposed rule would apply 

to all Part C and Part D RAC determinations. As CMS implements the Part C RAC, we 

would determine if additional changes to the proposed appeals process are necessary. 

 Based on the foregoing, we propose to add a new subpart Z in Parts 422 and 423, 

respectively that would include the proposed provisions discussed in this section. In 

accordance with CMS direction and criteria, the Part C or Part D RAC would conduct an 

issue specific audit of CMS’ payment(s) to plans. An independent validation of all Part 

C and Part D RAC-identified improper payments would be conducted. If both the Part C 

or Part D RAC and the independent validation determine that an improper payment was 

made, the Part C or Part D RAC would send a notice of improper payment to the plan. If 

the Part C or Part D RAC determines an overpayment was made to the plan, it would 

send a demand letter requesting repayment. The demand letter would: (1) explain the 

reason for the overpayment determination; (2) explain our recoupment process; and (3) 

contain instructions on how the plan may appeal the Part C or Part D RAC’s finding. 

There would be no minimum monetary threshold for an appeal at any level. 

 The following three level process sets forth our proposed administrative appeals 

process for overpayment determinations by the Part C and Part D RACs. Please note that 

the appeals process set forth applies to both § 422.2600 and § 423.2600. Because the 
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sections largely mirror one another, discussions in this preamble would apply to both 

programs, unless otherwise noted. 

(1) Reconsiderations (§ 422.2605 and § 423.2605) 

 At § 422.2605 and § 423.2605, we propose that if the plan believes the part C or 

Part D RAC did not apply CMS’ stated payment methodology correctly, a plan may 

appeal the determination to an independent reviewer. CMS’ payment methodology itself, 

however, is not subject to appeal. That is, while miscalculations and factual or data 

errors may be appealed, the plan may not appeal the substantive basis for the 

overpayment determination. This is consistent with the approach to Part D reconciliation 

appeals at § 423.350(a)(1), which states that the Part D plan may appeal “if CMS did not 

apply its stated payment methodology correctly.” The Part D reconciliation appeals 

process does not permit the underlying payment methodology to be appealed. 

 Examples of appealable issues would include, but are not be limited to: (1) a Part 

C or Part D RAC determination that a plan provider/pharmacy was excluded from 

Medicare when the service was furnished; (2) a Part C or Part D RAC determination that 

a payment was a duplicate payment; or (3) whether the Part C or Part D RAC 

miscalculated an overpayment. 

 In paragraph (a), we propose that the plan’s request for reconsideration must be 

filed with the independent reviewer within 60 calendar days from the date of the demand 

letter. In paragraph (b)(1), we propose that the request for reconsideration must be in 

writing and must provide evidence or reasons or both to substantiate the request. In 

paragraph (b)(2), we propose that the plan must include with its request all supporting 
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documentation, evidence, and substantiation it wants the independent reviewer to 

consider. This material must be submitted in the format requested by CMS. 

Documentation, evidence, or substantiation submitted after the filing of the 

reconsideration request would not be considered. 

 In paragraph (c), we propose that CMS may file a rebuttal to the plan’s 

reconsideration request. The rebuttal must be submitted to the independent reviewer 

within 30 calendar days of the independent reviewer’s notification to CMS that it has 

received the plan’s reconsideration request. CMS would notify and send its rebuttal to 

the plan at the same time it is submitted to the independent reviewer. In paragraph (d), 

we propose that the independent reviewer would conduct the reconsideration. 

Specifically, the independent reviewer would review the notification of improper 

payment, the evidence, and findings upon which it was based, and any evidence that the 

plan or CMS submitted in accordance with regulations. In paragraph (e), we propose that 

the independent reviewer would inform CMS and the plan of its decision in writing. In 

paragraph (f), we propose that a reconsideration decision would be final and binding 

unless the plan requests a hearing in accordance with § 422.2605 and § 423.2605. 

Finally, in paragraph (g), we propose that a plan that is dissatisfied with the independent 

reviewer’s reconsideration decision would be entitled to a review by a hearing official as 

provided in § 422.2610 and § 423.2610. 

(2) Hearing Official Determinations (§ 422.2610 and § 423.2610) 

In proposed § 422.2610 and § 423.2610, we outline the process for requesting 

review of the record by a CMS hearing official. In paragraph (a), we propose that a 
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request for review must be filed with CMS within 15 days from the date of the 

independent reviewer’s issuance of a determination. The request must be in writing and 

must provide a basis for the request. In paragraph (b), we propose that the plan must 

submit with its request all supporting documentation, evidence, and substantiation that it 

wants to be considered. Documentation, evidence, or substantiation submitted after the 

filing of the request would not be considered. 

In paragraph (c), we propose that a CMS-designated hearing official would 

conduct the review. A hearing would not be conducted, either live or via telephone, 

unless the hearing official, in his or her sole discretion, chooses such a mechanism. In all 

cases, the hearing official’s review would be limited to information that: (1) the Part C 

or Part D RAC used in making its determinations; (2) the independent reviewer used in 

making its determinations; (3) the plan submits with its hearing request; and (4) CMS 

submits per paragraph (d). Neither the plan nor CMS would be allowed to submit new 

evidence. 

In paragraph (d), we propose that CMS may file a rebuttal to the plan’s hearing 

request. The rebuttal must be submitted within 30 calendar days of the plan’s submission 

of its hearing request. CMS would send its rebuttal to the plan at the same time it is 

submitted to the hearing official. In paragraph (e), we propose that the CMS hearing 

official would decide the case within 60 days and send a written decision to the plan and 

CMS, explaining the basis for the decision. In paragraph (f), we propose that the hearing 

official’s decision would be final and binding, unless the decision was reversed or 

modified by the CMS Administrator in accordance with § 422.2615 and § 423.2615. 
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(3) Administrator Review (§ 422.2615 and § 423.2615) 

In proposed § 422.2615 and § 423.2615, we discuss the Administrator review 

process. In paragraph (a), we propose that if a plan is dissatisfied with the hearing 

official’s decision, the plan may request that the CMS Administrator review the decision. 

 The request must be filed with the CMS Administrator within 15 calendar days of the 

date of the hearing official’s decision. The request must provide evidence or reasons or 

both to substantiate the request. In paragraph (b), we propose that the plan must submit 

with its request all supporting documentation, evidence, and substantiation that it wants 

to be considered. Neither the plan nor CMS would be allowed to submit new evidence. 

Documentation, evidence or substantiation submitted after the filing of the request would 

not be considered. 

 In paragraph (c), we propose that after receiving a request for review, the 

Administrator would have the discretion to review the hearing official’s decision in 

accordance with paragraph (e) or to decline to review said decision. 

 In paragraph (d), we propose that the Administrator would notify the plan of 

whether he or she intends to review the hearing official’s decision. If the Administrator 

declines to review the hearing official’s decision, the hearing official’s decision is final 

and binding. If the Administrator agrees to review the hearing official’s decision, CMS 

may file a rebuttal statement within 30 days of the Administrator’s notice to the plan that 

the request for review has been accepted. CMS would send its rebuttal statement to the 

plan at the same time it is submitted to the Administrator. In paragraph (e), we propose 

that if the Administrator agrees to review the hearing official’s decision, the 
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Administrator would determine, based upon this decision, the hearing official record, and 

any arguments submitted by the plan or CMS in accordance with this section, whether 

the determination should be upheld, reversed, or modified. The Administrator would 

furnish a written decision to the plan and to CMS. The Administrator’s decision would 

be final and binding. 
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C. Strengthening Beneficiary Protections

1. Providing Good Quality Health Care (§422.504(a)(3) and §423.505(b)(27)) 

Section 1857(e)(1) of the Act, together with section 1860D-12(b)(3) of the Act, 

which incorporates its terms for Part D, authorizes CMS to include terms and conditions 

in our contracts with MA organizations and PDP sponsors that are consistent with Part C 

and Part D requirements, respectively, and that the Secretary finds are “necessary and 

appropriate.” Furthermore, the requirements set forth in section 1860D-4(b), (c), and (d) 

of the Act include specifications for a Part D sponsor to administer a benefit that not only 

accurately and efficiently process claims but also meets beneficiary healthcare needs, and 

to take affirmative action to improve outcomes and achieve patient satisfaction. Under 

this authority, we propose to add a requirement to CMS contracts with MA organizations 

and Part D sponsors that explicitly requires that Part C and Part D plans demonstrate that 

they are providing good quality health care by achieving good or improving scores on 

CMS performance standards for outcomes, intermediate outcomes, process, patient 

experience, and patient access to care. We believe that adding this requirement would 

help ensure our beneficiaries receive the right care at the right time. 

While we believe that we have conveyed this expectation in other ways, such as 

through our performance and quality measurement and rating methodologies, we have 

never explicitly articulated this requirement in regulation. In short, we are proposing 

here that it is not enough to simply administer a benefit plan, but that Part C and Part D 

sponsors should constantly seek out ways to actively promote and advance the health of 

its enrollees. 
 386 

In order to create a requirement that helps ensure that Medicare beneficiaries are 

receiving consistently good quality care, and to have the ability to enforce such a 

requirement, we sought existing guidance to shape the meaning of “good quality health 

care.” The Affordable Care Act required HHS to develop the National Strategy for 

Quality Improvement in Health Care (the National Quality Strategy), which, like our 

Three-Part Aim , combines the three broad objectives of better health for the population, 

better care for individuals, and affordable care. In addition, our Star Ratings program 

was developed to include quality and performance measures to increase the level of 

accountability for MA organizations and PDP sponsors to administer a good quality 

benefit to Medicare beneficiaries. By linking a concept as subjective in nature as good 

quality health care to objective metrics and measures in the Star Ratings program, we 

believe plans and sponsors can reasonably employ tangible strategies that improve the 

quality of services and benefits provided to Medicare beneficiaries. 

 To give concrete and verifiable meaning to this requirement, we propose to 

specify that good quality health care refers to MA organizations and Part D sponsor 

performance in the five categories identified in CMS's Star Ratings program – patient 

outcomes, intermediate outcomes, patient experience, patient access to care, and process. 

 Achievement of this type of performance is based on organizational capability and 

implementation by the MA organizations and Part D sponsor. Articulating and codifying 

this requirement underscores for the public and our plans and sponsors the critical 

importance we place on aligning the administration of Part C and Part D benefits with the 

achievement of good quality health care as illustrated by, but not limited to, these specific 
 387 

performance standards. Leveraging what plans have already put into practice with regard 

to these five categories means that plans should not encounter any additional burden in 

complying with this proposed regulation. Instead, the proposed change gives plans an 

opportunity to demonstrate the value they offer their enrollees, while providing a means 

for us to enforce or take corrective action when a Part C or Part D plan fails to provide 

good quality health care. 

 There are several reasons we propose including in regulation a contract 

requirement that plans administer a benefit promoting good quality health care. We 

reward MA organizations with quality bonus payments when they achieve high scores 

within the Star Ratings. At the same time, we believe that it is appropriate that we react 

correspondingly if an MA organization does not provide good quality care. In addition, 

our existing requirements that MA organizations have a quality improvement (QI) 

program (§422.152) and Part D sponsors have a Medication Therapy Management 

Program (§423.153(d)) further reinforce our belief that MA organizations and Part D 

sponsors are already striving to administer a good quality benefit. Moreover, we 

examined our authority at §422.502(b) and §423.503(b), which allows us to ensure that 

plan performance is routinely evaluated. Based on the methodology we use to calculate 

plan performance for both MA organizations and Part D sponsors, we are able to 

determine which plans are outliers – that is, those organizations whose performance is 

consistently poor. With regard to the particular proposed contractual requirement to 

administer a good quality benefit, we can evaluate a plan’s scores in Performance Metrics 

category within the plan performance review. Plans are held accountable for achieving 
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good scores on the review, and this evaluation allows us to appropriately deny an 

organization’s application to operate if it is determined that they are an outlier. 

 Therefore, we propose adding paragraph (b)(27) to §423.505, Requirements for 

contracts, to state, "A PDP sponsor is required to administer a PDP benefit that provides 

good quality health care demonstrated by scores of 3 or higher on CMS performance 

standards for patient outcomes , intermediate outcomes, process, patient experience, and 

patient access to care." 

 Similarly, we propose adding paragraph (a)(3)(iv) to §422.504, Contract 

Provisions, to state that MA organizations agree to provide benefits, "in a manner that 

provides good quality health care demonstrated by scores of 3 or higher on CMS 

performance standards for patient outcomes , intermediate outcomes, process, patient 

experience, and patient access to care." 

2. MA-PD Coordination Requirements for Drugs Covered Under Parts A, B, and D 

(§422.112) 

Under §422.112(b) of the MA program regulations, coordinated care plans must 

ensure continuity of care and integration of services through arrangements with 

contracted providers. We believe that an important aspect of this coordination is 

ensuring that all needed services, including drug therapies, are provided in a timely 

manner. We have become aware of situations in which enrollees’ access to needed 

Medicare-covered drugs has been delayed or denied due to the MA organization’s failure 

to effectively coordinate Part B and Part D benefits for certain drugs, both at the 

point-of-sale (POS) and during the coverage determination process. 
 389 

As defined in §423.100, “Part D” drugs do not include drugs for which payment 

as so prescribed and dispensed or administered to an enrollee is available for that enrollee 

under Part A or Part B. In other circumstances, these drugs are covered under the Part D 

benefit, but coverage generally cannot be determined based solely on the drug itself. 

These drugs include certain infusion agents, oral anti-cancer therapies, oral anti-emetics, 

immunosuppressants, and injectables. 

We do not believe MA-PD plans are adopting or administering uniform policies 

that allow them to expeditiously determine whether a drug is covered under Part A/Part B 

or Part D at the POS. The resulting POS rejection of coverage under the Part D benefit 

does not uniformly include messaging that a Part B prior authorization determination is 

required, nor consistently result in a corresponding authorization under Part B. This can 

result in lengthy drug treatment delays while the enrollee or his or her provider attempts 

to determine why the drug was not covered and then pursues a coverage determination 

from the MA-PD plan. For example, an MA-PD enrollee may present a prescription for a 

covered chemotherapy drug at his or her pharmacy only to be told that the claim has been 

rejected under the Medicare Part D benefit, resulting in the enrollee leaving the pharmacy 

counter without his/her drug. The enrollee may not know that the drug is covered under 

Part B. In some cases, the enrollee must take steps on his or her own to find out why 

coverage for a prescription was rejected at the POS and then contact the plan to obtain 

the Part B-covered medication. Unless the MA-PD plan has a robust process in place to 

make a timely and appropriate payment determination at the POS, there may be 

unnecessary delays, during which the enrollee is denied access to the needed medication. 
 390 

We have issued guidance in section 20.2.2. Chapter 6 of the Medicare 

Prescription Drug Benefit Manual related to how Part D plan sponsors should make 

determinations whether a drugs is covered under Part B or Part D. We have also outlined 

in Appendix C of Chapter 6 considerations for Part D plan sponsors – and by extension, 

MA organizations that offer MA-PD plans – to take into account when making 

determinations as to whether a drug is covered under Part B or Part D. We expect plans 

to work with network pharmacies and providers to determine coverage and payment for 

these drugs with the goal of limiting disruptions to beneficiaries and pharmacies and 

ensuring access to medically necessary prescription drugs. For example, we have stated 

in subregulatory guidance that, when adjudicating claims for these drugs, Part D plan 

sponsors are permitted to rely on information submitted on the prescription (for example, 

to determine whether the prescription is related to a Medicare covered organ transplant) 

and may require their network pharmacies to obtain documentation to determine whether 

payment should be made under Part B or Part D. 

During recent MA-PD plan audits, we also have seen that some plans are not 

adequately coordinating the respective Part D and Part B drug benefits when an enrollee 

or his or her provider requests a drug coverage determination from the plan. For 

example, in response to a POS claim rejection for an immunosuppressant drug that 

cannot be resolved at the POS, an enrollee’s provider may submit a coverage 

determination request to the MA organization offering an MA-PD, which is generally 

processed under the Part D benefit. In some cases, MA-PD plans deny coverage and 

issue a denial notice under the Part D benefit on the basis that the drug is, or may be, 
 391 

covered by Part B, but the plan either fails to make a determination regarding Part B 

coverage or does not authorize payment under the Part B benefit. 

Occurrences like these cause inappropriate and avoidable delays, or, even worse, 

result in situations in which the enrollee fails to receive needed medication altogether. In 

the case of chemotherapy or immunosuppressive drugs, such delays could have rapid and 

serious medical consequences for the beneficiary. 

Part D drug benefits and drug benefits under Parts A and B should be coordinated 

by MA organizations offering MA-PDs so that enrollees receive needed medications on a 

timely basis. We are proposing to add a new paragraph (b)(7) to §422.112 to require 

MA-PDs to establish adequate messaging and processing requirements with network 

pharmacies (that is, Part D contracted providers) to ensure that appropriate payment is 

assigned at the POS, and to ensure that, when coverage is denied under Part D due to 

available coverage under Part A or Part B, such Part A or Part B coverage is authorized 

or provided to the enrollee as expeditiously as the enrollee’s health condition requires. 

Our proposed regulation would require that MA PDs have systems in place to accurately 

and timely adjudicate claims at the POS. 

In addition, we would like to ensure that MA-PD plans are coordinating their drug 

benefits appropriately during the coverage determination process. If an MA organization 

offering Part D denies Part D coverage due to the availability of Part A or Part B 

coverage, we expect the MA organization to ensure the decision results in authorization 

or provision of the drug under Part A or Part B pursuant to the requirements in parts 422 

and 423, subpart M under our proposed regulation. We do not expect MA-PD enrollees 
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to have to request an initial coverage determination more than once. 

To avoid unnecessary delays and inappropriate denials of critical medications, we 

have considered requiring MA-PD plans to authorize coverage of all Part A, Part B and D 

medications at the POS so that the enrollee can receive covered medication without 

delay. The determination as to whether the drug is covered under Part A, Part B or Part 

D and the amount of the appropriate cost sharing would occur later if necessary. 

However, we recognize that such a requirement may interfere with medically appropriate 

pre-authorization requirements, and may trigger retrospective enrollee liability depending 

on the difference in enrollee cost sharing for coverage under Part A, Part B and Part D 

and retrospective TROOP adjustments and Part D reconciliation. 

We solicit comments on our proposal, as well as other possible approaches to 

minimizing delays in beneficiary access to needed medications caused by inadequate 

coordination of the Part A, Part B and Part D drug benefits at the POS and during the 

coverage determination process. In particular, we would appreciate organizations sharing 

their expertise regarding best practices for this benefit coordination at the POS and plan 

processes that enhance those coverage determinations. We also are soliciting comments 

on challenges MA organizations offering Part D currently encounter in their efforts to 

integrate these benefits. 

3. Good Cause Processes (§417.460, §422.74 and §423.44) 

Section 1851(g)(3)(B)(i) of the Act provides that MA organizations may 

terminate the enrollment of individuals who fail to pay basic and supplemental premiums 

after a grace period established by the plan. Section 1860D-1(b)(1)(B) of the Act 
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generally directs us to use rules related to enrollment, disenrollment, and termination for 

Part D plan sponsors that are similar to those established for MA organizations under 

section 1851 of the Act. In addition, section 1860D–13(a)(7) of the Act mandates that 

the premiums paid by individuals with higher incomes be increased by the applicable 

Part D Income Related Monthly Adjustment Amount (Part D IRMAA), for the months in 

which they are enrolled in Part D coverage. 

Consistent with these sections of the Act, subpart B in both the Part C and Part D 

 regulations sets forth our requirements with respect to involuntary disenrollment 

procedures at §422.74 and §423.44, respectively. An MA or Part D plan that chooses to 

disenroll beneficiaries for failure to pay premiums must be able to demonstrate to us that 

it made a reasonable effort to collect the unpaid amounts by notifying the beneficiary of 

the delinquency, providing the beneficiary a period of no less than 2 months in which to 

resolve the delinquency, and advising the beneficiary of the termination of coverage if 

the amounts owed are not paid by the end of the grace period. 

In addition, current regulations at §417.460(c) specify that a Health Maintenance 

Organization (HMO) or competitive medical plan (cost plan) may disenroll a member 

who fails to pay premiums or other charges imposed by the plan for deductible and 

coinsurance amounts. While there is not a grace period parallel to MA and Part D, the 

other procedural requirements for cost plans to disenroll a member on this basis are 

similar to those for MA and Part D plans. The cost plan must demonstrate that it made 

reasonable efforts to collect the unpaid amount and send the enrollee written notice of the 

pending disenrollment at least 20 days before the disenrollment effective date. 
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In the April 2011 final rule (76 FR 21432) we amended both the Parts C and D 

regulations at §422.74(d)(1)(v), §423.44(d)(1), and §423.44(e)(3) regarding involuntary 

disenrollment for non-payment of premiums or Part D-IRMAA to allow for reinstatement 

of the beneficiary’s enrollment into the plan for good cause. In the April 2012 final rule 

(77 FR 22071), we extended the policy of reinstatement for good cause to include 

beneficiaries enrolled in cost plans in §417.460(c)(3); thus aligning the cost plan 

reinstatement provision with the MA and PDP plan provisions. 

These good cause provisions authorize CMS to reinstate a disenrolled individual’s 

enrollment without an interruption in coverage in certain circumstances where the 

non-payment was due to circumstances that the individual could not reasonably foresee 

and could not control, such as unexpected hospitalization. Since the inception of these 

provisions, we have received feedback from plans on ways to improve the good cause 

process and make it more efficient for both the plans and us. Over the past year, we have 

already used this feedback to improve the operational aspects of the policy by updating 

Chapter 2 of the Medicare Managed Care Manual and Chapter 3 of the Medicare 

Prescription Drug Benefit Manual to clarify notice language and the process and timing 

of receiving payments during the extended grace period, as outlined in §417.460(c)(3), 

§422.74(d)(1)(v), and §423.44(d)(1)(vi). In addition, we updated the Complaints 

Tracking Module (CTM) Standard Operating Procedures (SOP) to permit plans to 

transfer requests for reinstatement for good cause to CMS. We are now proposing to 

make additional revisions to §417.460, §422.74, and §423.44 to make changes to the 

good cause review process. 
 395 

The ability for individuals to be reinstated during the extended grace period for 

good cause is outlined in §417.460, §422.74 and §423.44. Since its inception, the 

process of accepting, reviewing, and processing beneficiary requests for reinstatement for 

good cause has been carried out exclusively by CMS. In multiple cases, individual MA 

organizations and Part D plans have indicated that they wanted to be the point of contact 

for their current and past members. In addition, several plans have raised concerns 

regarding complaints by their members who are seeking reinstatement and who have to 

contact CMS instead of the plan to make this request. 

In light of this feedback, the experience we have gained since the initial 

implementation of the good cause process, and in the interest of making the process more 

efficient, we solicited public input on improving the process in the draft 2014 Call Letter 

issued on February 15, 2013. In the Call Letter, we indicated that we were considering 

making changes to the good cause process. Specifically, we stated that we were 

exploring expanding the plans’ role in the process to include accepting the initial requests 

for reinstatement by former plan members and gathering information prior to submitting 

the requests to us. We requested comments from MA organizations and Part D plan 

sponsors on our proposal to expand the plans’ role and any other ways we might improve 

the process to receive and review good cause requests for reinstatement. 

The vast majority of the comments we received from stakeholders in response to 

the Call Letter were in favor of expanding the plans’ role, given the fact that plans can 

readily access a former enrollee’s premium billing and payment history and, as such, are 

in a position to identify and efficiently resolve other disenrollment disputes that are 
 396 

erroneously being received as good cause requests. A number of plans indicated a 

preference to independently implement the good cause process through enhanced 

subregulatory guidance. A few commenters indicated that CMS should retain 

responsibility over all aspects of the good cause process to ensure objectivity. 

In response to this feedback we are proposing to amend §417.460(c)(3), 

§422.74(d)(1)(v), and §423.44(d)(1)(vi) to permit an entity acting on behalf of CMS to 

effectuate reinstatements when good cause criteria are met. This regulatory change 

would allow us to designate another entity, including the plans or an independent 

contractor, to complete portions or all of the good cause process. It is our intent to 

expand the role of plans to include accepting incoming requests for reinstatement directly 

from former enrollees and making the good cause determinations using the existing 

regulatory standard. This proposed change would enable plans to be more responsive to 

their current and former members, and lessen the burden the plans have in coordinating 

with us regarding the good cause and reinstatement process. It further aims to lessen the 

number of complaints generated due to miscategorization of the reinstatement requests as 

an allegation of plan error, which the plans must then resolve and refer back to us for a 

good cause determination. 

 Ensuring objectivity in the review of these cases and equity among beneficiaries 

regarding the determination of good cause for cases is critically important. Thus, we 

would establish operational policy and processes in subregulatory guidance to set 

parameters for the application of the good cause standard, including the submission to 

CMS of certain cases for review to ensure that plans remain impartial and equitable in 
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their assessment and treatment of former members who have been disenrolled for 

nonpayment of premiums. These changes would be accompanied by the development of 

an oversight protocol for any activities currently carried out by us for which we name the 

plans or an independent contractor our designee to carry out. 

In addition to our proposal here to permit a CMS designee to determine 

reinstatements for good cause, we are taking this opportunity to propose a technical 

change to the language in § 417.460 to clarify that good cause protections for enrollees in 

cost plans apply to instances where there was a failure to pay either plan premiums or 

cost sharing. In extending the good cause provision to cost plans in the April 2012 final 

rule, we correctly referenced failure to pay premiums as a basis for disenrollment from a 

cost plan, but in two instances we neglected to include a reference to “other charges” as a 

basis for disenrollment. We propose to make a technical change to §417.460(c)(3) and 

(c)(4) to clarify that the good cause provisions are applicable to individuals who have 

been disenrolled for non-payment of other charges (for example, deductible or 

coinsurance amounts), in addition to non-payment of premiums. 

4. Definition of Organization Determination (§ 422.566) 

Based on our updated guidance, program experience, and information collected 

during audits of MA organizations, we are proposing to revise the current regulatory 

definition of “organization determination” set forth at § 422.566(b) to create a single, 

uniform definition. As described later in this proposed rule, the definition of 

organization determination referenced in our manual guidance (Chapter 13 of the 

Medicare Managed Care Manual, section 30), required plan marketing documents (such 
 398 

as the EOC), and Part C data requirements (Medicare Part C Plan Reporting 

Requirements, Technical Specifications Document – Measure 6) is more inclusive than 

the definition currently reflected in this regulation. 

Section 1852(g) of the Act requires MA organizations to have a procedure for 

making determinations regarding whether an enrollee is entitled to receive a health 

service and the amount (if any) that the individual is required to pay for such service. 

Our regulations at 42 CFR part 422, subpart M codify the procedures MA organizations 

must follow when processing organization determinations. Section 422.566(b) defines 

which actions are considered organization determinations, but does not currently include 

all types of coverage decisions made by a provider under contract with an MA 

organization. 

Our current manual guidance, required model EOC documents, and Part C plan 

reporting requirements clarify that organization determinations include fully favorable, 

partially favorable, and unfavorable decisions made by an MA organization concerning 

payment or provision of an item or a service. Additionally, requirements elsewhere in 

Part 422 provide certain beneficiary protections in the MA program, including a 

requirement that MA organizations provide or make payment for all services covered by 

Medicare Parts A and B (see § 422.101(a)), and contract requirements that limit 

beneficiary financial liability for fees that the MA organization is legally obligated to pay 

for services provided by contract and non-contract providers (see § 422.504(g)). Our 

proposed changes would clarify what actions are included and therefore ensure that 

enrollees receive required Medicare notices (for example, notice of termination in certain 
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healthcare settings) and due process rights. 

We are proposing to make minor modifications to regulatory language at 

§422.566(b)(1) through (b)(3) to improve the uniformity of our guidance on what actions 

are considered organization determinations. We are restating these provisions for 

consistency within this section and to further underscore an “organization determination” 

includes any coverage decision – fully favorable, partially favorable, and unfavorable – 

made by an MA organization concerning payment or provision of an item or a service. 

At §422.566(b)(1) and (b)(2), we refer to an organization determination as “any 

determination” by an MA organization (that is, fully favorable, partially favorable, and 

unfavorable). At 422.566(b)(3), we are proposing to replace the reference to the MA 

organization’s “refusal to provide or pay” with reference to “any determination not to 

provide or pay for” items or services made by the MA organization to improve 

consistency of the regulatory language. 

Chapter 13, section 30 of the Medicare Managed Care Manual states that 

approval for an item or service by the plan or its delegated entity (that is, provision of an 

item or service by a contract provider, such as inpatient admission to a contract hospital) 

is an organization determination. We are also proposing to add new language to the 

regulation text at § 422.566(b)(6) that clarifies that a provider under contract with an MA 

organization that furnishes an item or service to an enrollee has made a favorable 

organization determination on behalf of the MA organization. We believe this 

clarification to the regulatory definition is necessary to clearly distinguish when a 

contract provider is making an organization determination on behalf of the MA 
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organization from instances where a contract provider is not making an organization 

determination on behalf of the MA organization. We have repeatedly stated that a 

contract provider’s refusal to furnish an item or service is a treatment decision, not an 

adverse organization determination made on behalf of the MA organization. In a case 

where a contract provider refuses to furnish an item or service, the enrollee has the right 

to request an organization determination from the MA organization. In addition, the 

provider may request the organization determination on the enrollee’s behalf. 

The proposed revision to the regulation text at § 422.566(b)(6) would also clarify 

that a service or item provided by a noncontract provider due to a referral from a contract 

provider constitutes a favorable organization determination, and therefore ensures that 

enrollees would be protected by limitations on their financial liability. (For more 

information, see §422.504(g) of the regulations and Chapter 4, section 170 of the 

Medicare Managed Care Manual). We stated in the January 28, 2005 final rule 

(70 FR 4618) that if a network physician performs a service or directs an MA beneficiary 

to another provider to receive a plan covered service (regardless of whether the provider 

is following the plan’s internal procedures, such as obtaining the appropriate plan 

pre-authorization), the enrollee cannot be held liable for more than applicable plan cost 

sharing for those services. When a contract provider refers an enrollee out of the 

network, the enrollee has a reasonable expectation that the items or services provided by 

the non-contract provider will be covered by the plan. Enrollees cannot be held to a 

higher standard than plan contracting providers to adhere to plan rules. 

Proposed new paragraph §422.566(b)(6) would also clarify that a favorable 
 401 

organization determination has been made if: (1) the MA organization decides to provide 

or pay for an item or service, including a decision to continue providing or paying for an 

item or service; or (2) a contract provider or facility, acting on behalf of the MA 

organization, furnishes (or continues to furnish) an item or service. 

Together, our proposed revisions to §422.566(b) are intended to codify our 

current guidance, creating a single, uniform definition of organization determination. 

5. MA Organization Extension of Adjudication Timeframes for Organization 

Determinations and Reconsiderations (§422.568, §422.572, §422.590, §422.618, and 

§422.619) 

Section 1852(g)(2) of the Act requires MA organizations to provide for 

reconsideration, or review, of organization determinations within a timeframe specified 

by the Secretary, but generally no later than 60 days from the date of receipt of the 

request for reconsideration. Section 1852(g)(3)(B) of the Act requires MA organizations 

to maintain procedures for expediting organization determinations and reconsiderations 

when a physician’s request indicates that applying the standard timeframe could seriously 

jeopardize the life or health of the enrollee or the enrollee’s ability to regain maximum 

function or when, in the case of an enrollee’s request, the MA organization makes such a 

determination on its own. In expedited cases, the MA organization generally must issue 

its decision no later than within 72 hours of receipt of the request. Section 

1852(g)(3)(B)(iii) of the Act permits the Secretary to extend this 72-hour decision 

making timeframe in certain cases. 

Our regulations at 42 CFR part 422, subpart M codify the procedures MA 
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organizations must follow in issuing standard and expedited organization determinations 

and reconsiderations. Specifically, the current regulations at §422.568(b), §422.572(b), 

and §422.590(a)(1) and (d)(1) set forth the standard and expedited timeframes within 

which plans are required to process such decisions and describe the circumstances under 

which plans are permitted to extend decision making timeframes by up to 14 calendar 

days. 

Based on information ascertained during recent MA program audits, we have 

found that some MA organizations are routinely and inappropriately invoking extensions 

of the adjudication timeframes for organization determinations and reconsiderations. We 

have identified circumstances in which MA organizations are routinely invoking the 14 

day extension: (1) in cases where the plan lacks adequate internal controls to ensure 

coverage requests are reviewed and adjudicated within the required regulatory timeframe; 

and (2) in cases where the plan is awaiting receipt of supporting clinical documentation 

from one of its contract providers. We believe the current language that permits 

extension of the adjudication timeframes set forth in §422.568(b), §422.572(b), 

§422.590(a)(1) and §422.590(d)(2) is being interpreted more broadly than our intent in 

adopting these rules. Therefore, we propose to revise these regulatory provisions to more 

clearly define our intended standard for when it is appropriate for an MA organization to 

extend an adjudication timeframe. 

Routinely invoking an extension of the applicable adjudication timeframe is 

counter to the intent of the statutory and regulatory requirements for timely 

determinations that emphasize the health needs of the beneficiary in determining the 
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appropriate adjudication timeframe. Extensions should be permitted only in limited 

circumstances, and only if the extension is in the enrollee’s interest. MA organizations 

are required by regulation to render all coverage decisions as expeditiously as the 

enrollee’s health condition requires. When plans choose to subject an item or service to a 

prior authorization requirement, we expect them to have the resources to process those 

requests in a timely manner. 

We believe MA organizations have interpreted existing regulations to mean that 

there is a broader set of circumstances in which it would be appropriate to invoke an 

extension than we intended, such as the need for medical evidence from a contract 

provider. We are proposing to amend the regulation text to clarify our original intent that 

an extension should not be routinely invoked for any category of coverage request, but in 

particular not for purposes of obtaining additional medical evidence from contract 

providers. Thus, we propose to revise the extension language in §422.568(b), 

§422.572(b), and §422.590(a)(1), and to add new §422.590(e), which would incorporate 

and clarify existing text at §422.590(a)(1) and (d)(2) in order to more clearly identify 

when it is appropriate for an MA organization to invoke an extension of the adjudication 

timeframe. We also propose revisions to §422.590(d) and redesignation of existing 

subparagraphs §422.590(e) through (g) as part these changes. 

First, we propose to retain the current provisions in these various regulations that 

permit an extension at the request of the enrollee. Additionally, we propose to modify 

the current regulatory provisions that permit an extension “if the organization justifies a 

need for additional information and how the delay is in the interest of the enrollee (for 
 404 

example, the receipt of additional medical evidence from noncontract providers may 

change an MA organization's decision to deny).” Our proposed revised language would 

result in two more specific provisions permitting an extension, which we believe clarifies 

the intent of our existing requirements. 

Additionally, we propose language to clarify at §422.568(b)(1)(ii), 

§422.572(b)(1)(ii), and §422.590(e)(1)(ii) that an extension may be justified and in the 

enrollee’s interest due to the need to obtain additional medical information that may 

result in changing the MA organization’s denial of coverage of an item or service only 

from a non-contract provider. We believe the arrangement between an MA organization 

and its contract providers is such that clinical documentation should generally be readily 

available and that there are mechanisms for an MA organizations to ensure that contract 

providers produce necessary documentation in a timely manner (for example, via their 

contract). We believe that any delay in decision-making caused by an extension to obtain 

additional medical evidence from a contract provider would be in the plan’s interest but 

not generally in the interest of the enrollee. Therefore, we are proposing to specify at 

§422.568(b)(1)(ii), §422.572(b)(1)(ii), and §422.590(e)(1)(ii) that one circumstance in 

which it may be appropriate for an MA organization to invoke an extension is when the 

extension is in the enrollee’s interest due to the need for additional medical evidence 

from a non-contract provider only. 

When the MA organization needs additional information that may change a 

decision to deny coverage, it is our expectation that the MA organization promptly solicit 

necessary clinical documentation in all cases and that extension of the timeframe not be 
 405 

routinely invoked. It is also our expectation that the full 14 days not be routinely taken, 

even if an extension is warranted, and that all coverage requests be reviewed, and 

decisions issued, as expeditiously as the enrollee’s health condition requires within that 

period, as required by regulation. 

In addition, we propose to include a provision (new language to be codified at 

§422.568(b)(1)(iii), §422.572(b)(1)(iii), and §422.590(e)(1)(iii)) to clarify that an 

extension of the adjudication timeframe may be permitted when the extension is justified 

due to extraordinary, exigent or other non-routine circumstances, and it is in the 

enrollee’s interest. We recognize that there may be limited, non-routine circumstances in 

which the adjudication timeframe may need to be extended even if the enrollee does not 

request the extension and no additional documentation must be obtained from a 

non-contract provider. We emphasize that the extension must be both: (1) due to 

extraordinary, exigent or other non-routine circumstances; and (2) in the enrollee’s 

interest. For example, a natural or man-made disaster may impede a contract provider’s 

ability to provide the MA organization with timely clinical information, and invoking an 

extension may be in the enrollee’s interest if that information is necessary to approve 

coverage. It is our expectation that these exceptions would be rare. MA organizations 

that overuse or misuse the authority to invoke an extension may be subject to corrective 

action. 

In all cases where an extension is invoked, the MA organization is responsible for 

documenting the justification for the extension in the case file, complying with the 

requirement to notify the enrollee in writing of the reasons for the delay, and informing 
 406 

the enrollee of the right to file an expedited grievance if he or she disagrees with the MA 

organization’s decision to grant an extension. 

In an effort to improve clarity in our guidance related to extensions and to remove 

duplicative language, we have made corresponding, technical edits to subpart M. 

Specifically, we are proposing in §422.590 to remove paragraph (d)(2) and add a new 

paragraph (e). To correspond with this proposed change, we propose to update related 

cross-references and language accordingly. Specifically, at §422.618(a)(1), we propose 

to replace the reference to §422.590(a)(1) with a reference to §422.590(e). In 

§422.619(a), we propose to replace the reference to §422.590(d)(2) with a reference to 

§422.590(e). Also, we propose to make corresponding changes within §422.568(b), 

§422.572(b), and §422.590(d) to ensure consistency in the structure and language of 

these provisions. 
 407 

D. Strengthening Our Ability to Distinguish Stronger Applicants for Part C and D 

Program Participation and to Remove Consistently Poor Performers

1. Two-Year Prohibition When Organizations Terminate Their Contracts (§422.502, 

§422.503, §422.506, §422.508, and §422.512) 

 Section 1857(c)(4)(A) of the Act prohibits organizations from re-entering the MA 

program in the event that a previous contract with the organization was terminated at the 

request of the organization within the preceding 2-year period, except in circumstances 

that warrant special consideration. Furthermore, section 1857(e) of the Act permits us to 

add contract provisions that are not inconsistent with Part C of the Act and that we find 

necessary and appropriate for the administration of Medicare Part C. We propose to 

amend the text and application of regulations implementing these provisions of the Act. 

In the April 15, 2010 final rule (75 FR 19678), we characterized our current policy on the 

2-year ban applicable to voluntary non-renewals and mutual terminations as applying the 

ban based on plan type and service area. We provided the following example to illustrate 

application of the rule: an MA organization’s non-renewal of a Private Fee-for-Service 

MA plan would not prohibit the MA organization from immediately applying for an MA 

HMO contract for the same service area. Similarly, our current policy, absent this 

proposal, would not apply the 2-year ban on an MA organization that non-renewed a 

contract in one region from applying immediately for the same type of MA product in a 

different region. 

 This current policy unnecessarily narrows the scope of the 2-year prohibition and 

precludes us from preventing poor performing MA organizations from reentering the MA 
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program. We have reconsidered the wisdom of this policy and believe that the MA 

program would be better served if we applied the 2-year ban flowing from non-renewals 

and mutual terminations to new contracts or service area expansions regardless of the 

product type or service area of the non-renewed or terminated contract. We note that we 

are retaining our ability to exercise discretion in applying the 2-year ban when there are 

special circumstances that warrant special consideration, as provided in the current 

regulations text at §422.503(b)(6)(ii), §422.506(a)(4), and §422.512(e). 

 First, we propose to address how a non-renewal or mutual termination of an MA 

contract would be treated. Specifically, we propose to amend the regulation text at 

§422.506(a)(4) and §422.512(e) to explicitly apply the 2-year prohibition to applications 

for service area expansions in addition to applications for new contracts. These changes 

to §422.506 and §422.512 would make the text of these regulations consistent with the 

text at §422.503(b)(7) and §422.508(c) with regard to the 2-year prohibition imposed as a 

condition of a mutual termination of an MA contract. We read the current text at 

§422.503(b)(7) to permit us to deny a contract to a MA organization that has participated 

in a mutual contract termination, regardless of contract type, product type, or service 

area, within the past 2 years. We also note that the current text of §422.503(b)(6) is not 

explicit on this point but may be read to permit contract denials for new contracts and 

service area expansions, consistent with our proposal; we intend to apply this 

interpretation to the existing text at § 422.503(b)(6). We also propose to add the 

following sentence to paragraphs (c) and (d) of §422.508 to make it clear that a mutual 

termination of a MA contract would result in a ban of all contract types and service area 
 409 

expansions: “This prohibition may apply regardless of the product type, contract type or 

service area of the previous contract.” These proposed amendments are in harmony with 

our policy, as articulated in the preamble to the April 15, 2010 final rule (75 FR 19703) 

to apply the 2-year ban consistently in the context of voluntary non-renewals and mutual 

terminations. 

2. Withdrawal of Stand-Alone Prescription Drug Plan Bid Prior to Contract Execution 

(§423.503) 

 Occasionally, organizations new to Part D that have qualified for a Medicare PDP 

sponsor contract withdraw their bids after we have announced the low-income subsidy 

(LIS) benchmark but prior to executing the contract for the coming plan year. These 

withdrawals interfere with our administration of the Part D program, in particular the 

auto assignment of LIS beneficiaries. To address this problem, we are proposing to adopt 

regulatory provisions that would impose a 2-year application ban on organizations not yet 

under contract with us as PDP sponsors that withdraw their applications and bids after we 

have issued our approvals. We are making this proposal under our authority at section 

1860D-12(b)(3)(D) of the Act to adopt additional contract terms, including the conditions 

under which we would enter into contracts, not inconsistent with the Part D statute. 

In February of each year, we solicit applications from organizations seeking to 

qualify to enter into a contract to offer stand-alone PDPs in the upcoming plan year. 

These organizations, along with current PDP sponsors who wish to continue participating 

in the Part D program, submit bids in June for our review and approval. We review these 

applications and bids with the expectation that, upon approval, the organizations would 
 410 

enter into PDP sponsor contracts with us in September to provide the Part D benefit for 

the plan year starting the following January. 

As part of the annual bid review, we calculate the LIS benchmark for each PDP 

Region based on the bids for basic PDPs submitted annually by current PDP sponsors 

that will operate in that region in the coming year. Sponsors whose monthly premiums 

fall at or below the benchmark in a region receive auto-enrollments from us of LISeligible beneficiaries in those regions. We normally announce the LIS benchmark in late 

July or early August. 

In recent years, some organizations have withdrawn their applications and bids 

following the announcement of the LIS benchmark. Because these organizations 

withdrew prior to executing a contract, and we cannot compel them to sign the contract, 

they are not subject to our compliance or oversight authority, and nothing in our current 

regulations prevents these applicants from withdrawing their applications late enough in 

the process to cause significant disruption. In contrast, when an existing PDP sponsor 

withdraws its bid, we treat such an action as an election by the PDP sponsor to nonrenew its contract in that PDP Region, which renders the sponsor ineligible to submit 

another application for 2 years, under our regulations at §423.507(a)(3). We propose to 

make a regulatory change to ensure equal treatment between new applicants and existing 

PDP plan sponsors, which would allow us to maintain an accurate depiction of the 

contracting landscape. Specifically, we propose to amend §423.503 by adding paragraph 

(d) which would impose a 2-year Part D application ban on organizations approved by 

CMS as qualified to enter into stand-alone PDP sponsor contracts but which elect, after 
 411 

our announcement of the LIS benchmark, not to enter into such contract and withdraw 

their PDP bids. This proposed regulatory change, in effect, would subject a withdrawing 

applicant to the same penalty we may apply to an organization already under contract that 

elects to terminate or non-renew its PDP contract. 

It is critical that we have an accurate portrayal of the number and type of plan 

benefit packages that would be available to beneficiaries in every PDP Region, especially 

during the end of the summer when much of the bid review, both the formulary and 

actuarial components, has been completed. During this period, we need to confirm that 

there are the required minimum number of plans available in each PDP region. We also 

need accurate plan information at the end of the summer so that we can meet the 

production deadlines associated with the annual election period, including publication of 

the Medicare & You handbook as well as updating the Medicare Plan Finder website and 

our payment and enrollment systems. An applicant that withdraws its application late in 

the process alters the contracting landscape, potentially disrupting preparations we have 

already made, including those related to the auto assignment of LIS beneficiaries, for the 

upcoming plan year. 

 We acknowledge that PDP plan applicants may need to withdraw their pending 

contracts for a variety of legitimate business reasons. For this reason, we afford 

applicants several months to withdraw their applications, without penalty, following the 

application due date in February and the bid submission deadline of the first Monday in 

June. However, in adopting the proposed regulatory authority, we would place a 

reasonable limit on prospective PDP sponsors’ option to withdraw bids and applications 
 412 

without penalty. By imposing consequences on applicants that withdraw their bids 

following the announcement of the LIS benchmark, we also would discourage any 

“gaming” of the bid review and auto assignment processes (for example, by participating 

in the bid review process until it learns that it will not qualify for auto assignments) that 

can occur when applicants opt out of participation in the PDP at the last minute. 

3. Essential Operations Test Requirement for Part D (§ 423.503(a) and (c), 

§423.504(b)(10), §423.505(b)(28), and §423.509) 

We propose to create, through regulation, a new step in the application and 

contracting process with newly contracted entities operating as stand-alone PDP sponsors 

or MA organizations offering Part D plans (MA-PDs). This step will be an “essential 

operations” test which we would administer to “newly contracted entities.” We use the 

term “newly contracted entity” in this preamble to describe an organization that has 

entered or applied to enter into a Part D contract with us for the first time for the 

upcoming plan year, and neither it, nor another subsidiary of the organization’s parent 

organization, is offering Part D benefits during the current benefit year. This would 

include organizations that are offering EGWPs for the first time. 

Currently, with the exception of the LIS readiness audits, we have no test for 

assessing the effectiveness of the arrangements organizations represent to us in their 

applications and bids prior to the actual start of delivery of benefits on January 1. An 

essential operations test would allow us to test whether an organization’s arrangements 

appear likely to allow the organization to effectively administer its contract. We are 

proposing to require organizations to pass an essential operations test either-- (1) as a 
 413 

qualification to contract, with failure to pass the test nullifying our approval of the 

application; or (2) after contract execution as a contract requirement but prior to the start 

of the benefit year, with a failure to pass the test triggering an immediate contract 

termination under § 423.509. 

Pursuant to section 1860D-12(b)(3)(D) of the Act, which incorporates by 

reference section 1857(e)(1) of the Act, we have the authority to add contract provisions 

that are necessary and appropriate to carry out the Part D program; section 1860D-11(b) 

provides authority for the collection of additional information as part of the bid as we 

may require to carry out the Part D program. Based on this authority we propose adding 

§ 423.504(b)(10) and § 423.505(b)(28) to include passing the essential operations test as 

a condition to enter into and a term of the Part D contract. Additionally, pursuant to our 

authority at section 1860D--12(b)(3)(B) and (b)(3)(F) of the Act (which incorporate by 

reference section 1857(c)(2) and (h) of the Act, respectively, to apply to the Part D 

program), the current regulations at §423.509(a) and (b)(2)(i), authorize immediate 

termination of contracts with Medicare Part D plan sponsors in certain circumstances. 

 We believe that immediate termination would be authorized under the standard of 

section 1857(h)(2) of the Act because the inability of a plan sponsor to ensure future 

members’ access their drug benefit, as evidenced by failure to pass the essential 

operations test, would constitute an imminent and serious risk to beneficiary health and 

safety. We propose adding § 423.509(a)(4)(xii) and (b)(2)(i)(D) to subpart K to reflect 

this new cause for immediate termination. (Of note, we are reorganizing § 423.509(a) to 

group the statutory basis for termination together followed by examples of violations that 
 414 

would meet the statutory basis. This new regulation is an example of a violation.) 

Additionally, we propose to explicitly include the essential operations test as a means to 

evaluate Part D applicants in § 423.503(a)(1) and to add § 423.503(c)(4) to subpart K to 

establish failure of an essential operations test as grounds for nullifying a CMS approval 

of application notice. 

The heart of the Part D benefit is the sponsor’s ability to process claims for 

prescription drugs in real-time because, unlike health benefits, where claims payment 

normally follows the delivery of services, pharmacies require confirmation of claims 

payment at the point-of-sale either from an insurer or the covered individual. Success in 

Part D claims processing depends largely on the sponsor’s ability to perform enrollment, 

benefit administration, and claims adjudication operations seamlessly at the point-of-sale. 

 That is, the sponsor must be able to do all of the following essential operations in real 

time and at the point-of-sale to a satisfactory level: identify a beneficiary as a member of 

one of its Part D plans; determine whether the drug requested is, in fact, appropriately 

covered under Part D (for example, that the drug is not covered: (a) under Part B, (b) as 

part of end-stage renal disease (ESRD) treatment, or (c) as a hospice benefit); determine 

the phase of the benefit the beneficiary is currently in; and provide the pharmacy with 

instructions so that the beneficiary can be charged appropriate copays/coinsurance and 

deductibles. 

We are proposing the essential operations test and associated regulatory changes 

because of our experience with certain newly contracted entities in the Part D program 

that experienced significant operational difficulties at the start of the benefit year as a 
 415 

result of their inexperience administering Part D benefits. To prevent the recurrence of 

this problem and ensure that new sponsors are prepared to and actually can deliver Part D 

benefits at an acceptable level, starting with the 2015 contract year application cycle, we 

propose that we may require newly contracted entities to pass an essential operations test 

conducted by us beginning in the fall of 2014. 

Often these newly contracted entities have little or no prior experience in 

administering health and drug benefit plans. Unfortunately, by the time deficiencies in 

the sponsor’s operations and ability to provide the Part D benefit become apparent 

(typically when we receive complaints about significant numbers of inappropriately 

rejected claims at the pharmacy), the sponsor has already executed an agreement with us, 

which has prevented us from moving quickly to remove the sponsor from the program 

and prevent further beneficiary harm. In these instances, we have found it necessary to 

provide inordinate amounts of resource-intensive technical assistance to sponsors that 

were not prepared to effectively administer Part D benefits when they signed their 

contract. The essential operations test would help to prevent the recurrence of problems 

of this nature. 

The essential operations test for newly contracted entities would entail testing of 

sponsors’ command of Part D benefit administration rules and systems related to these 

areas. Initially, the testing would consist of scenario testing with sponsors’ key staff to 

show us that they have a firm grasp of the Part D policies and essential operations. The 

test would be able to verify whether an applicant’s administrative and management 

arrangements, as attested to in its application, are sufficient for the applicant to carry out 
 416 

functions listed in §423.504(b)(4)(ii) such as furnishing prescription drug services and 

implementing utilization management programs. 

Provided we have the resources, in the future, the test would likely become 

significantly more sophisticated and involve live testing of sponsors’ systems with test 

data. The more involved test would also likely include testing the processes related to 

enrollment such as MARx communication and processing; LIS processing and 

determinations; coverage determinations, appeals, and grievances (CDAG) processing; 

and real-time coordination of benefits data exchange and processing. For instance, the 

sponsor would need to demonstrate the ability to pay test claims correctly in real-time 

consistent with its CMS-approved benefit packages (including formulary) and the Part D 

transition fill policy. 

The timing of the essential operations test must fit within the timeline of the 

annual Part D contracting process, which is driven largely by the bid deadline and plan 

election period dictated by statute. In preparation for an upcoming benefit year 

beginning on January 1, we must solicit and review applications from organizations 

seeking a MA-PD or PDP sponsor contract in February of the preceding year. We issue 

application determinations (that is, approval or denial) in May. All existing Part D 

sponsors and new applicants must submit their plan benefit package (PBP) bids 

(including formularies) in June. Then, we complete the bid review approval and 

negotiation processes at the end of August. Once we have approved the submitted bids, 

sponsors can then execute their contracts with us. Historically, we have executed all 

contracts by mid-September so we can finalize preparations for the marketing season, 
 417 

which begins on October 1, and the annual election period (AEP), which begins on 

October 15. These preparations include publishing the Medicare & You handbook in 

September, which lists approved plans; releasing the Medicare Plan Finder website using 

plan-specific data; reviewing and approving sponsors’ marketing materials; and granting 

sponsors access to our enrollment systems. 

In contrast to an audit, the application process currently only requires that 

sponsors demonstrate to us that they have the necessary legal arrangements in place (for 

example, a risk-bearing license, executed contracts with first-tier and downstream 

entities, pharmacy network descriptions, etc.). Likewise, bid and formulary approvals 

indicate that the plans to be offered by the new sponsor are acceptable to us, not that the 

sponsor will necessarily be successful in implementing those plans. 

Under our current schedule, the essential operations test we propose to require as 

part of the application and contracting process would occur after contracts are signed in 

September but before the start of the benefit year on January 1. We would most likely 

complete the tests by November 15. In the future, we aim to conduct the essential 

operations tests prior to signing contracts with applicants which is why we are also 

proposing to add passing the test as a qualification to contract. Ultimately, in the event of 

an organization failing the test, we would apply the appropriate proposed regulatory 

provision based on the timing of the test administration. 

a. Failing Essential Operations Test as Cause for Immediate Termination 

Once a sponsor signs its contract, it is obligated to perform all of the required 

functions to support the benefits described in the contract even though the sponsor does 
 418 

not start offering benefits until January 1. Given the volume of preparations and tight 

resource constraints between our approving bids in late August and the start of the AEP 

in October, the first opportunity we currently have to devote resources to the essential 

operations test is most likely in late September to November. We are currently not likely 

to be in the position to conduct essential operations tests prior to contracting because it 

would be challenging to conduct the test prior to approving the benefit structure against 

which we would test a sponsor’s ability to process claims accurately. If we find that a 

sponsor does not have the requisite systems and processes in place to offer Part D 

benefits in real-time, we would consider this cause for immediate termination of the 

sponsor’s Part D contract in order to protect beneficiaries from harm at the start of the 

contract year. 

 Pursuant to section 1857(h)(2) of the Act (incorporated by reference into PDP by 

section 1860D-12(b)(3)(F) of the Act), we have the authority to immediately terminate a 

contract with a sponsor (without notice and opportunity for a hearing) when a delay in 

termination would pose an imminent and serious risk to the health of beneficiaries 

enrolled in the sponsor’s plans. Also, under §423.509(b)(2)(i) and §423.652(b)(2), unlike 

standard CMS terminations, the effective date of an immediate termination is not stayed 

when the sponsor requests a hearing under §423.650(a)(2). Because enrollment and 

accurate benefit administration through real-time claims processing are so fundamental to 

the delivery of the Part D benefit, if a sponsor fails to demonstrate to us that it can 

perform these essential operations, we would view this as a substantial failure to meet the 

Part D contract requirements on the following grounds: (1) evidence that the sponsor 
 419 

was carrying out the contract in a manner that was inconsistent with the effective and 

efficient administration of the plan; and (2) evidence that the sponsor did not 

substantially meet the applicable conditions set out in the Part D regulations which would 

ultimately justify, depending upon timing of the test, our termination of a contract 

consistent with § 423.509(a)(1) through (3) based on the sponsor’s failure to meet our 

proposed contract terms at § 423.504(b)(10) and § 423.505(b)(28). We believe that a 

newly contracted entity’s failure to demonstrate certain critical capabilities and failing 

the essential operations test represents a substantial failure to carry out its Part D contract 

and is evidence that the sponsor is not prepared to carry out the contract in a manner that 

is consistent with the efficient and effective administration of the Part D program. Such a 

failure poses an unacceptable risk to the new sponsor’s future members’ access to Part D 

drugs, which would constitute an imminent and serious risk to beneficiary health and 

safety, justifying our immediate termination of the sponsor’s contract. For MA 

organizations that must offer Part D benefits pursuant to § 423.104(f)(3)(i), failing the 

test would support the termination of the organization’s Part D addendum as well as its 

MA contract under § 422.510(a)(3) because the inability to offer Part D benefits means 

that the organization no longer meets the applicable conditions associated with offering 

Part C benefits. 

Given our experience with sponsors’ abilities to resolve systemic systems 

problems in a timely manner, we believe that sponsors that fail the test would most likely 

not have sufficient time before the start of the benefit year to remedy the breadth and 

magnitude of the failures we would have identified during the test. Even if the sponsor 
 420 

attested that it had corrected problems we identified, we would not have time to conduct 

a second test to validate the sponsor’s corrections prior to the start of the new benefit 

year. Simply put, we believe the risk of harm to enrollees’ health and safety is too great 

to move forward with a sponsor that has such significant and critical problems so close to 

the start of the plan year. Thus, an immediate termination of the contract before the start 

of the year would be the only way to protect beneficiaries and ensure successful 

operation of the Part D program by absolving the sponsor and us of the responsibilities in 

the contract. 

b. Failing Essential Operations Test as Failure of a Qualification to Contract and 

Grounds for Nullification of Approval 

 If an organization fails an essential operations test we conducted prior to contract 

signature, no termination would be necessary as we would simply nullify our previous 

conditional approval of the organization’s Part D contract qualification application. 

Section 423.503(a) describes the mechanisms we use to evaluate an applicant and 

determine whether the applicant is qualified to contract. These mechanisms currently 

include application review and on-site visits. The general term “on-site visit” is used to 

describe interactions with applicants that include our visiting the applicant’s facility and 

vice versa, either in person or virtually. We are proposing to explicitly include the 

essential operations test as a qualification to contract at § 423.503(a)(1) to authorize our 

use of the test and any information learned in the course of the essential operations test in 

making the contract determination. Our experience over the past few years with newly 

contracted entities that have passed the paper-based application, but failed to have fully-
 421 

functional administrative and management arrangements in place to effectively offer 

benefits in January, has demonstrated to us that implementing an essential operations test 

is key to the successful administration of the Part D program for all beneficiaries. 

 We would view failure of the essential operations test as a determination that the 

applicant would not be qualified to contract with us. As a result, we would nullify our 

approval on that basis. Successful applicants receive a conditional approval at the end of 

May of their Part D application pursuant to § 423.503(c)(1). The letter informs 

applicants that the conditional approval is based on the information contained in their 

application, and if we subsequently determined that any of the information was 

inaccurate or that qualification requirements are not met, we would withdraw the 

approval of the application. Through that notice, we preserve the right to nullify our 

approval. If that occurs, we would not provide appeal rights described in subpart N to 

applicants that have their approval nullified based on failing the essential operations test. 

 

 We are proposing to not afford applicants appeal rights because CMS would not 

be able to conduct the appeals process provided for in Part 423, Subpart N, within the 

timeframe imposed by § 423.650(c), which requires CMS to have all contract application 

appeals decided by September 1 for contracts to be effective on January 1 of the 

following year. We could not conduct a test in late August, find that the applicant failed 

the test, and move through a fair appeal process for both parties in less than 2 weeks. 

Therefore, we would not afford appeal rights to applicants that fail the test prior to 

contracting under our proposal. 
 422 

4. Termination of the Contracts of Medicare Advantage Organizations Offering PDP for 

Failure for 3 Consecutive Years to Achieve 3 Stars on Both Part C and Part D Summary 

Star Ratings in the Same Contract Year (§ 422.510) 

In the final rule adopted April 12, 2012 (77 FR 22168), we set forth at 

§ 422.510(a)(14) and § 423.509(a)(13) that a Medicare contracting organization’s 

consistent failure to achieve at least a 3-star summary star rating for 3 consecutive years 

provides a sufficient basis for us to make a decision to terminate our contract with a MA 

organization or stand-alone PDP sponsor. This termination standard was based on the 

criteria we used then to mark low-rated contracting organizations with a “low performing 

icon (LPI)” on the Medicare Plan Finder website. Recently, we revised our LPI 

assignment criteria for MA organizations that offer PDP benefits (MA-PDs) to more 

accurately reflect their contract performance. We propose here to revise the contract 

termination regulation related to consistent low star ratings to reflect the new LPI 

assignment methodology announced in the contract year 2014 Call Letter. Specifically, 

we are proposing to modify our existing authority at § 422.510(a) 3 by clarifying that 

MA-PD organizations that do not achieve at least 3 stars in both their Part C and D 

ratings in the same year for 3 consecutive years may be subject to termination. 

 In the April 12, 2012 final rule (77 FR 22072), we finalized the contractual 

requirement at § 422.504(a)(18) and § 423.505(b)(25) that MA organizations and PDP 

plan sponsors attain each year summary ratings of at least 3 stars (the “average” 

performance rating). We explained that, because the star rating calculations are based on 

 

3 Elsewhere in this proposed rule, we proposed to reorganize and renumber § 422.510(a). The discussed provision is 
 423 

an organization’s performance across a wide array of operational measures, the summary 

star ratings are an accurate indicator of the extent to which the organization has in place 

effective administrative and management arrangements necessary to administer Part C 

and Part D benefit plans, as required under §422.504(a)(17) and §423.505(b)(24). 

 We further established, as part of the same rulemaking, our authority at 

§ 422.510(a)(14) and § 423.509(a)(13) to terminate the contracts of organizations 

offering MA and stand-alone PDPs when those organizations fail to achieve at least 3 

stars on either their Part C or Part D summary rating for at least 3 consecutive years. At 

the time, we stated that since the measures that make up the star ratings provide evidence 

of the sufficiency of a contracting organization’s administrative and management 

capability, it was reasonable for us to conclude that an organization receiving a summary 

rating below 3 stars for 3 consecutive years had substantially failed to meet that 

requirement, providing us justification for terminating the contract of that organization. 

We also explained that 3 consecutive years was sufficient time for sponsors to analyze 

the underlying causes of their low ratings and take corrective action that would result in 

at least a 3-star summary rating. The rulemaking also called for an MA-PD 

organization’s Part C summary rating to be tracked separately from its Part D summary 

rating. That is, we could terminate an MA-PD organization contract if it failed for 3 

straight years to achieve at least a 3-star Part C summary rating, regardless of its Part D 

summary ratings. Similarly, we could terminate the same organization if it failed to 

achieve at least a 3-star Part D summary rating for 3 straight years, regardless of its Part 

 

current codified at § 422.510(a)(14) but we are proposing to redesignate it as § 422.510(a)(4)(xi). 
 424 

C performance. Since in most instances an MA organization must also offer Part D 

benefits, consistently low Part D summary ratings justify a termination of the entire MAPD contract since the organization could no longer meet its obligation to offer Part D 

benefits. We stated that we would allow a 3-year transition period before we would 

begin using the star rating-based termination authority to issue termination notices to any 

sponsors whose performance met the criteria in late 2014 with an effective date of 

January 1, 2015. 

 At the time we adopted this regulation, we identified certain organizations on the 

Medicare Plan Finder (MPF) website as consistently low performing organizations with 

the display of the LPI next to the organization’s other plan information. In the contract 

year 2014 Call Letter released in April 2013, we announced a change in the methodology 

for assigning the LPI mark to plan sponsors. On page 105 of the notice, we noted that 

some stakeholders had raised concerns that MA-PD contractors could switch back and 

forth from poor performance on Part C to poor performance on Part D from year to year 

without ever being identified as a poor performer and marked with the LPI. We noted 

that such a situation was potentially misleading to beneficiaries, and we decided to 

address the matter by revising, effective in 2014, the criteria for the assignment of the 

LPI indicator to those organizations that fail for 3 consecutive years to achieve both Part 

C and Part D summary ratings of at least 3 stars in the same year for 3 consecutive years. 

 We concluded this announcement by observing that MA-PD organizations are 

responsible for providing adequate care and services across both Part C and Part D and 
 425 

that the LPI methodology change encourages consistent improvement in the quality of 

care by MA-PD organizations across all of the Part C and Part D measures. 

 We believe that the justification for the change in the LPI methodology also 

requires a change in the way we would apply the standard for MA-PD contract 

termination based on star rating performance. The performance of an MA-PD 

organization must be assessed across the totality of its obligations under its Medicare 

contract. Organizations should not be permitted to target their compliance efforts from 

year to year on alternating sets of contract requirements, just barely meeting our 

minimum requirements in order to stay one step ahead of our enforcement authorities. 

Beneficiaries rightly expect quality in the delivery of all of their Medicare benefits, 

covering both health care and prescription drugs. MA-PD organizations that alternate 

their low star ratings from year-to-year between Part C and Part D are in fact subjecting 

their members to substandard performance every year. This is an unacceptable outcome 

that does not promote the best interests of Medicare beneficiaries. 

 If an MA-PD organization is not able to achieve at least an “average” star rating 

across all of its Part C and Part D operations in at least 1 year out of 3, it would become 

clear that the organization had both substantially failed to meet the administrative and 

management requirements of a Medicare contractor and could not take effective 

corrective action over the same 3-year period. 

 The artificiality of the division between Part C and Part D star rating performance 

becomes apparent when one notes the extent to which the measures for each part assess 

the MA-PD organization’s performance of similar functions or responsibilities. 
 426 

According to the most recent methodology we used to calculate star ratings, “The 

Medicare Health & Drug Plan Quality and Performance Ratings – 2013 Part C & Part D 

Technical Notes,” (http://www.cms.gov/Medicare/Prescription-DrugCoverage/PrescriptionDrugCovGenIn/PerformanceData.html) the Part C measures are 

divided into 5 domains and the Part D measures into 4. Three of the Part C domains are 

virtually identical to those of Part D, with variations where necessary to reflect 

differences in terminology and features between health and drug plans. For example, 

Domain 1 for Part D, “Drug Plan Customer Service,” consists of measures that largely 

correspond to those of Part C’s Domain 5, “Health Plan Customer Service.” Both 

contain measures that reflect call center performance (including foreign language 

availability) and processing of appeals. The Part D Domain 2, “Member Complaints, 

Problems Getting Services, and Improvement in the Drug Plan’s Performance,” measures 

an organization’s performance in largely the same categories as Part C’s Domain 4, 

“Member Complaints, Problems Getting Services, and Improvement in the Health Plan’s 

Performance.” Both domains consist of measures that reflect beneficiaries’ complaints 

about the plan, their access to benefits, their decision to leave the plan, and the plan’s 

quality improvement. Domain 3 of both the Part C and Part D measures are entitled 

“Member Experience with the Health/Drug Plan” and reflect plan members’ experience 

with their plans such as assessment of their ability to access covered services (needed 

prescription drugs in the case of Part D, physician appointments, and coordination of care 

in the case of Part C). Domain 4 for Part D, “Patient Safety and Accuracy of Drug 

Pricing,” corresponds to Part C’s Domain 1, “Staying Healthy: Screenings, Tests and 
 427 

Vaccines,” and Domain 2, “Managing Chronic (Long Term) Conditions,” in that they all 

capture an MA-PD organization’s attention to the clinical impact of the Medicare 

services they provide to their members. The Part D measures in Domain 4 reflect the 

extent to which plan members maintain adherence to their medication regimens and 

receive prescriptions for high risk medications. The Part C Domains 1 and 2 address 

clinical performance as it is carried out by a health plan, including the extent to which it 

has conducted screenings of its members for breast cancer, colorectal cancer, and high 

cholesterol and manages long term conditions such as diabetes, high blood pressure, and 

rheumatoid arthritis. 

 The similarity in the Part C and Part D measures means that the operations 

associated with these 2 programs are not so different as to justify separate Part C and Part 

D analyses of MA-PD organization’s delivery of Medicare benefits to the same set of 

beneficiaries in the same service area. MA-PD organizations do not contract with us to 

provide separate Part C and Part D benefits. Rather, it is more correct to say that their 

contract obligates them to provide effective customer service, access to care, and promote 

clinical outcomes across the entire range of Medicare benefits. Therefore, the better way 

to assess an MA-PD organization’s administrative and management compliance is not to 

see whether it can meet Part C or Part D requirements, but whether it can meet the 

customer service, access to care, and clinical performance requirements in the delivery of 

all types of Medicare benefits. The only way to accurately measure the performance of 

such functions is to examine the organization’s ratings in the Part C and Part D measures 

in the related domains. For example, an MA-PD organization cannot be said to be 
 428 

providing satisfactory customer service to its members if it achieves a 3-star rating in 

only its Part C operations. 

 Therefore, we propose to revise §422.510(a)4

 to clarify that MA-only contracts 

are subject to CMS termination when they fail for 3 consecutive years to achieve a Part C 

star rating of at least 3 stars. Additionally, we propose to add a subparagraph to § 

422.510(a) to establish as a basis for termination of MA-PD contracts the failure for 3 

consecutive years of the contract to achieve at least 3 stars in both its Part C and D 

ratings in the same year. When we first adopted the star rating-based contract 

termination authority in April 2012, we stated that we would afford organizations a 3-

year transition period before we would use that authority to make contract termination 

decisions. This period was necessary to allow organizations to make adjustments to their 

operations to reflect the dramatic increase in the consequences associated with low star 

rating performance created by our new termination authority. Accordingly, the 

regulation states that we may use only those star ratings issued after September 1, 2012, 

to make a decision to terminate a contract based on consistently low star ratings. Thus, 

organizations that fail to achieve at least a 3-star rating upon the release in September 

2014 of the 2015 ratings would be the first group of Medicare contractors eligible for 

termination under our new authority. We are not proposing to extend this grace period as 

part of this proposed adjustment to the current policy, because there is no reason why 

failures under the current regulations (which contain the “loophole” we are closing here) 

 

4

 Elsewhere in this proposed rule, we would reorganize and renumber §422.510(a) and §423.509(a) to better 

reflect the bases for contract termination in connection with our statutory authority to terminate. Using the 

current numbering, this proposal would be codified as § 422.510(a)(14) but under our proposal here, it 

would be codified as § 422.510(a)(4)(xi). 
 429 

should not count towards the 3-year mark along with failures under the revised standard 

once in place. 
 430 

III. Provisions of the Proposed Regulation 

E. Implementing Other Technical Changes

1. Requirements for Urgently Needed Services (§ 422.113) 

 Our regulations at § 422.113(b) require MA organizations to cover urgently 

needed services furnished outside a plan’s service area or contracted network of 

providers when the enrollee is in need of such services but is outside of the service area 

or is in the service area but the plan network is temporarily unavailable due to 

extraordinary and unusual circumstances. Further requirements built in to the definition 

of “urgently needed services” specify additional criteria for out-of-network coverage of 

these services: (1) the need for services was a result of unforeseen illness, injury or 

condition; and (2) it is not reasonable, given the circumstances, for the enrollees to obtain 

the services through the organization offering the MA plan. 

 In the preamble to our June 29, 2000 final rule implementing the current 

requirements (65 FR 40199), we clarified the intended meaning of “extraordinary and 

unusual circumstances” as “an earthquake or strike.” However, it is our experience in 

administering the MA program that there are other much less severe circumstances in 

which the plan network may be unavailable or inaccessible to an enrollee who is in the 

authorized service area and needs immediate care due to an unforeseen illness, injury or 

condition. Examples of such circumstances include the need for urgent care outside of 

the network’s business hours, (for example, during the weekend or at night). 

Many MA plans have responded to the need for urgently needed services by 

contracting with clinics that have hours of operation well beyond those of traditional 
 431 

physicians’ offices to furnish services to their enrollees when the plan network is not 

available. 

To better align the regulations with current practices regarding access to urgently 

needed care services, we are proposing to revise the regulation by removing the phrase 

“under extraordinary and unusual circumstances” at § 422.113(b)(1)(iii). The proposed 

regulatory language would read as follows: 

(iii) Urgently needed services means covered services that are not emergency 

services as defined in this section, provided when an enrollee is temporarily 

absent from the MA plan's service (or, if applicable, continuation) area (or 

provided when the enrollee is in the service or continuation area but the 

organization's provider network is temporarily unavailable or inaccessible) when 

the services are medically necessary and immediately required— 

2. Skilled Nursing Facility Stays (§ 422.101 and § 422.102) 

Under section 1814(a)(2)(B) of the Act, Medicare Part A generally only covers 

skilled nursing facility services (SNF) following a qualifying 3-day hospital stay. 

However, under section 1812(f) of the Act, we may authorize Part A coverage of SNF 

care without a prior hospital stay if two conditions are met. First, the coverage of these 

services must not result in any increase in Medicare program payments, and second, the 

coverage must not alter the acute care nature of the benefit. For reasons discussed later 

in this proposed rule, in an August 22, 2003 final rule (68 FR 50847), we exercised this 

authority under section 1812(f) of the Act with respect to SNF services covered under 

MA plans. 

The reason that we took this step is that, in the absence of this exercise of this 
 432 

authority, MA organizations could only cover SNF services without a 3-day prior 

hospital stay as a supplemental benefit. In such a case, if an MA enrollee is in a SNF 

pursuant to such coverage in the middle of a 100-day covered stay, and disenrolls from 

the MA plan, or the MA plan is terminated or non-renewed during such a stay, the 

beneficiary would lose SNF coverage, as it would not be covered under Medicare Part A 

because it would not have met the condition for coverage of a 3-day prior hospital stay. 

By exercising the authority under section 1812(f) of the Act to make the stay a Part A 

covered benefit, the stay would remain covered even if the individual is no longer 

enrolled in the MA plan. 

Our determination that SNF services provided by MA organizations without a 3-

day prior hospital stay met the two tests in section 1812(f) of the Act was based on the 

fact that MA organizations are paid a monthly per-Medicare enrollee payment to provide 

all contracted services. Thus, Medicare costs would not be affected by permitting SNF 

services to be covered by Medicare without the prior 3-day hospital stay for so long as 

the beneficiary was enrolled in the MA plan because the plan is paid a fixed amount 

without regard to services received. We determined that this would provide incentives 

for the MA organizations to provide care more cost effectively. Some evidence at the 

time indicated that MA organizations, particularly coordinated care plans, could shorten 

hospital stays and shift patients to post-acute or subacute settings, such as SNFs, more 

quickly than under the original Medicare program. If SNF care is the appropriate level of 

care, MA organizations are then able to use SNF care rather than more expensive hospital 

care for similar patients requiring posthospital care. For some patients and diagnoses, the 

MA organization is able to bypass the hospital stay and admit the beneficiary directly to a 
 433 

SNF. 

Because the previously discussed rulemaking exercised authority under section 

1812(f) of the Act to authorize Part A coverage in the absence of an otherwise-required 

3-day prior hospital stay, the regulations addressing “basic benefits” (which include 

benefits under Part A) at § 422.101 were revised to include provision for this Part A 

coverage at § 422.101(c). 

Notwithstanding the fact that, when the option under § 422.101(c) is elected by an 

MA organization, the services are covered under Part A, at least some MA organizations 

did not include the costs of such stays in the Part A portion of their adjusted community 

rate (ACR) submissions, and in later years, in their bids. Rather, they continued to treat 

these Part A-covered services as “supplemental benefits.” We understand why MA 

organizations did this, as the services (other than in the case described previously when 

an MA enrollee receiving such services is no longer enrolled in an MA plan covering 

them) would not be covered under Part A if the enrollee were not enrolled in the MA 

plan. However, because of the section 1812(f) of the Act waiver, these services 

technically were services “covered under Part A,” included under § 422.101(a), not 

supplemental benefits under § 422.102. 

We had determined in promulgating the August 2003 final rule that the services in 

this situation had to be treated as covered under Part A in order to protect coverage for a 

beneficiary who changes from MA coverage to original Medicare coverage mid-stay. 

However, in light of the fact that MA organizations have, over a period of years, been 

treating these benefits as supplemental benefits, we have determined that we can protect a 

beneficiary in the situation described without requiring an MA organization to include a 
 434 

SNF stay without a 3-day prior hospitalization as a Part A benefit under its MA plan by 

modifying our exercise of section 1812(f) of the Act authority to waive the 3-day prior 

hospitalization requirement only in cases in which an MA enrollee receiving SNF 

services without a 3-day prior hospital stay changes from coverage under the MA plan to 

Medicare coverage under Original Medicare (or another MA plan that does not cover 

such stays as a supplemental benefit). This addresses the concern we were addressing in 

our August 2003 final rule without requiring MA organizations to change their treatment 

of this MA plan benefit. 

In order to effectuate this proposed change in the scope of our section 1812(f) 

waiver, we are proposing to move the provision describing an MA organizations’ 

authority to furnish covered SNF stays without the qualifying inpatient hospital stay 

required under original Medicare to a new § 422.102(f) in the section of the regulations 

governing supplemental benefits. 

We also propose to make a conforming revision in the cross-reference to this 

provision that currently appears at § 409.30(b)(2)(ii), to - (1) reflect this provision’s 

relocation from § 422.101 to § 422.102; and (2) reflect the fact that the Part A coverage 

provided for thereunder is not for the entire “duration of the SNF stay”, but only for the 

period after the individual is no longer enrolled in the MA plan offering the coverage of 

the SNF stay as a supplemental benefit. 

3. Agent and Broker Training and Testing Requirements (§ 422.2274 and § 423.2274) 

 Pursuant to our authority under sections 1851(h)(2), 1860D-1(b)(1)(B)(vi), 

1851(j)(2)(E), and 1860D-4 (l)(2) of the Act, we previously codified agent and broker 

training and testing requirements at § 422.2274 (b) and (c) and § 423.2274 (b) and (c) to 
 435 

require all agents and brokers selling Medicare products be trained and tested annually 

through a CMS endorsed or approved training program, or as specified by us, on 

Medicare rules and regulations specific to the plan products they intend to sell. 

Since the training and testing requirements were implemented, we have embarked 

on various activities to improve and ensure the efficacy of training and testing. 

Specifically, we launched an online training and testing pilot in 2009 to increase 

understanding of the standardized Medicare program requirements. Although the pilot 

was successful, our ability to accommodate all agents and brokers nationally is limited 

and maintaining the training and testing module requirements creates a significant 

financial burden. Additionally, endorsing other entities limits our oversight of training 

and testing information, and assurance of consistency among program requirements. 

Moreover, through our monitoring efforts, we have found that MA organizations and Part 

D sponsors are complying with the annual guidance released by us. Specifically, we 

found that plans provided adequate detail on the level of information that must be 

covered in agent and broker training and testing materials. As a result, we propose to 

revise § 422.2274 (b) and (c) and § 423.2274 (b) and (c) to accomplish several things (i) 

remove CMS endorsed or approved training and testing as an option; (ii) require that 

agents and brokers be trained annually on Medicare rules and regulations; and details 

specific to the plan products they intend to sell: and (iii) require agents and brokers to be 

tested annually to ensure appropriate knowledge and understanding of the training topics. 

 We believe this proposed change continues to ensure that all agents and brokers selling 

Medicare products have a comprehensive understanding of Medicare program rules. We 

previously proposed (see the provisions for "Reducing the Burden of the Compliance 
 436 

Program Training Requirements (§ 422.503(b)(4)(vi)(C) and § 423.504(b)(4)(vi)(C)") to 

require a standardized compliance training program. Under those provisions, MA 

organizations and Part D sponsors will not be permitted to develop and implement plan 

specific training materials or supplemental materials. The proposed change in this 

section is exclusive to the requirements for conducting marketing activities under the MA 

and Part D program. 

4. Deemed Approval of Marketing Materials (§ 422.2266 and § 423.2266) 

 Sections 1851(h) and 1860D-1(b)(1)(B)(vi) of the Act establish the requirements 

regarding the review and approval of marketing materials created by MA organizations 

and Part D sponsors. Sections § 422.2266 and § 423.2266 provide the regulatory 

requirements for materials that are deemed approved. If we have not disapproved the 

distribution of marketing materials and forms submitted by an MA organization or Part D 

sponsor with respect to the plan in the area, we are deemed not to have disapproved in all 

other areas covered by the MA organization or Part D sponsor except with regard to any 

portion of the material or form that is specific to the particular area. Sections § 422.2262 

and § 423.2262 also provide the requirements for the review and distribution of 

marketing materials. The provisions stated in § 422.2266 and § 423.2266 are also part of 

the review and distribution process of marketing materials, and therefore should be 

moved to align with the requirements in § 422.2262 and § 423.2262. Therefore, we 

propose moving the substance of the current requirements in § 422.2266 and § 423.2266 

to § 422.2262 (a)(2) and § 423.2262(a)(2), respectively. We propose reserving 

§ 422.2266 and § 423.2266. 
 437 

 In addition, we also believe that the current regulatory requirements in § 422.2266 

and § 423.2266 do not clearly state when and to what extent marketing materials are 

considered deemed approved. Therefore, we propose to simplify the language presently 

contained in § 422.2266 and § 423.2266 by stating, “if CMS does not approve or 

disapprove marketing materials within the specified review timeframe, the materials will 

be deemed approved. Deemed approved means that an MA organization or Part D 

sponsor may use the material.” We believe this change clarifies the present regulatory 

requirement for deemed marketing materials. 

5. Cross-Reference Change in the Part C Disclosure Requirements (§ 422.111) 

Prior to the publication of subpart V, Medicare Marketing Requirements, 

marketing-related rules were found in subpart B, Eligibility, Election, and Enrollment. 

These rules (codified in § 422.80) included review of marketing materials and election 

forms. With the publication of our September 18, 2008 final rule (73 FR 54208), the 

marketing-related requirements were moved into the new subpart V and § 422.80 was 

removed. Since that time, we have discovered an incorrect cross-reference to § 422.80 at 

§ 422.111(d)(1) for procedures MA organizations must follow when submitting its rules 

changes to us for review. The correct reference should be subpart V, Medicare 

Advantage Marketing Requirements. We are proposing in these regulations to correct 

the reference contained in § 422.111(d)(1). 

6. Managing Disclosure and Recusal in P&T Conflicts of Interest: Formulary 

Development and Revision by a Pharmacy and Therapeutics Committee under Part D 

(423.120(b)(1)) 

Section 1860D-4(b)(3)(A)(ii) of the Act requires Part D sponsors who use 
 438 

formularies to include on their P&T committees at least one practicing physician and at 

least one practicing pharmacist, each of whom is independent and free of conflict with 

respect to the sponsor and the plan and who has expertise in the care of elderly or 

disabled persons. In our August 3, 2004 proposed rule (69 FR 46659), we proposed to 

interpret “independent and free of conflict” to mean that such P&T committee members 

could have no stake, financial or otherwise, in formulary determinations. In our January 

28, 2005 final rule (70 FR 4256), we adopted this interpretation, and clarified that we 

would consider a P&T committee member not to be free of conflict of interest if he or she 

had any direct or indirect financial interest in any entity – including Part D plans and 

pharmaceutical manufacturers – that would benefit from decisions regarding plan 

formularies. 

In a recent report ("Gaps in Oversight of Conflicts Of Interest in Medicare 

Prescription Drug Decisions," OEI-05-10-00450), the HHS OIG recommended 

improvements in our requirements for Part D plan P&T committees. Specifically, the 

OIG report recommended that we establish minimum standards to ensure that these 

committees have clearly articulated and objective processes to determine whether 

disclosed financial interests are conflicts and to manage recusals due to conflicts of 

interests. The OIG report also suggested that we tell sponsors that they need to designate 

an objective party, such as a compliance officer, to flag and enforce the necessary 

recusals. In other words, the identification and evaluation of whether a disclosed 

financial interest represents a conflict of interest should be made by a knowledgeable and 

accountable representative of the sponsor’s organization, such as the compliance officer, 

and not solely by the P&T committee members themselves. We concurred that P&T 
 439 

committees should have clearly articulated and objective processes to determine whether 

disclosed financial interests are conflicts, and to manage recusals arising from any such 

conflicts. Therefore, to address these recommendations, we propose to revise our 

formulary requirements pertaining to development and revision by a P&T committee at 

§ 423.120(b)(1) to make it clear that the sponsor must establish such processes. 

Moreover, we propose that these processes must be clearly articulated and documented, 

and enforced by an objective party. 

In our response to the OIG report, we noted that statutory and regulatory 

provisions (section 1860D-4(b)(3) of the Act and 42 C.F.R. § 423.120(b)) indicate that it 

is the plan sponsor’s responsibility to meet the formulary requirements, which include 

development of these processes. We also noted that we believe the agency's current Part 

D formulary review provides appropriate protections to beneficiaries from any adverse 

effects resulting from potential conflicts of interest. The agency thoroughly reviews Part 

D formularies to prevent discrimination against Medicare beneficiaries based on age, 

disease, or setting in which they receive care. The review process ensures inclusion of a 

broad distribution of therapeutic categories and classes by using reasonable benchmarks 

to ensure drug lists are robust. Further, we ensure that cost-sharing levels and utilization 

management strategies are appropriate and non-discriminatory. We identify potential 

outliers at each review step for further investigation and require reasonable clinical 

justification when outliers appear to create beneficiary access problems. We devote 

extensive resources to plan formulary oversight—and reserve the right to reject any 

formulary—to ensure compliance with industry best practices for formulary development 

and to ensure beneficiaries' access to clinically appropriate therapies. 
 440 

Therefore, if a P&T committee, while operating under a potential conflict of 

interest were to create a formulary representative of such conflicts, the formulary would 

likely be discriminatory. Because a discriminatory formulary would not be approved, the 

only potential impact we can envision would be that the bid could be more expensive 

and, therefore, less competitive. However, in this case, beneficiaries could easily 

evaluate these higher premiums in the marketplace and choose a more efficient plan to 

meet their needs. As a result, we would expect that, given our level of formulary review, 

a conflict of interest in the P&T committee would disadvantage the sponsor rather than 

the beneficiary or the Medicare program. 

We have also been asked to consider whether the practicing physician and the 

practicing pharmacist on the P&T committee who must be free of conflict of interest 

from Part D plans and pharmaceutical manufacturers should also be free of conflict of 

interest from Pharmacy Benefit Managers (PBMs). As discussed previously, we believe 

that our current formulary review process confers appropriate protections to beneficiaries 

from any potential adverse effects of conflicts of interest. Additionally, we have devoted 

extensive resources to the oversight of plan formularies and audit of P&T committee 

proceedings to ensure that they comply with industry best practices for development and 

management, and ensure beneficiaries’ access to clinically appropriate therapies. 

P&T committees must first base their 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, consistent with the program goal of maintaining 

a competitive market. Therefore, given that sponsors must balance both quality and costs 
 441 

in developing formularies, and that PBMs are the entities that negotiate for price 

concessions on behalf of sponsors, we believe that it is appropriate that PBMs have an 

interest in formulary decisions. However, we solicit comment on the pros and cons of 

defining PBMs as entities that could benefit from formulary decisions from which one 

practicing and one practicing pharmacy on the P&T committee must be free of conflict of 

interest. 

As discussed previously, we believe the potential effects of conflicts of interest 

would theoretically result in either discriminatory or inefficiently priced plans. However, 

our formulary review process prevents discrimination, and higher priced plans will be 

subject to competition on premiums in the marketplace. Nonetheless there may be risks 

to formularies that we have not anticipated. In addition, we believe that sponsors should 

be accountable for objectively managing potential conflicts of interest as directed by the 

statute. Therefore, we propose revising our regulations at § 423.120(b)(1) to renumber 

the existing provisions and add a new paragraph (b)(1)(iv) to require that the sponsor’s 

P&T committee clearly articulates and documents processes to determine that the 

requirements under paragraphs (b)(1)(i), through (iii) have been met, including the 

determination by an objective party of whether disclosed financial interests are conflicts 

of interest and the management of any recusals due to such conflicts. 

7. Definition of a Part D Drug (§ 423.100) 

Section 1860D-2(e) of the Act defines a covered Part D drug as a drug that may 

be dispensed only upon a prescription and that is described in subparagraph (A)(i), 

(A)(ii), or (A)(iii) of section 1927(k)(2) of the Act; or a biological product described in 

clauses (i) through (iii) of subparagraph (B) of such section, or insulin described in 
 442 

subparagraph (C) of such section and medical supplies associated with the injection of 

insulin (as defined in regulations of the Secretary), and such term includes a vaccine 

licensed under section 351 of the Public Health Service Act (and, for vaccinations 

administered on or after January 1, 2008), its administration, and any use of a covered 

Part D drug for a medically accepted indication (as defined in paragraph (4)). We 

codified this definition in § 423.100. 

a. Combination Products 

The FDA approves and regulates many products that include drug-drug and drugdevice combinations. However, for the purposes of the Part D program, only 

combination products approved and regulated by the FDA as drugs, vaccines, or 

biologics (or any approved combinations of these) are potentially eligible for Part D 

coverage, in line with the Part D drug definition. We have previously addressed the 

status of combination products through guidance, including initially a published Q&A 

response and later in Section 10.3 of Chapter 6 of the Medicare Prescription Drug Benefit 

Manual (Part D Manual). This guidance has specified that combination products that 

contain at least one Part D drug component are Part D drugs when used for a medically 

accepted indication, unless such product, as a whole, belongs in one of the categories of 

drugs excluded from coverage under the Part D program. We now propose to address 

this issue in regulation to codify and clarify our policy. 

We propose to add paragraph (vii) under the definition of a Part D drug to further 

clarify that only those combination products approved and regulated in its combination 

form by the FDA as a drug, vaccine, insulin, or biologic, as described in paragraph (i), 

(ii), (iii), or (v) of the Part D drug definition, may be eligible for Part D coverage. Our 
 443 

proposal would make it clear that the definition of a Part D drug excludes products where 

a combination of items are bundled or packaged together for convenience (such as one 

box packaging together multiple products, each in separate bottles), where the bundle has 

not been evaluated and approved by the FDA. This proposal would not affect products 

where multiple active ingredients (including at least one Part D eligible prescription-only 

ingredient) are incorporated into a single pill or single injection, as such products would 

have had to go through FDA approval in this combined form, meeting the Part D 

requirement. Combination products that are FDA approved would then be treated like 

other Part D drugs, eligible for coverage only when being used for a medically accepted 

indication and not otherwise excluded from Part D coverage (for example, because it is 

covered as prescribed and dispensed or administered under Medicare Part B). 

This proposed policy is intended to clarify that a combination product containing 

at least one constituent ingredient that would, if dispensed separately, meet the definition 

of a Part D drug is eligible for Part D coverage only if it has received FDA approval in its 

combined form. Combination products not FDA approved as drugs under the Federal 

Food, Drug, and Cosmetics Act would not satisfy section 1927(k)(2)(A)(i) of the Act, 

defining covered outpatient drugs as those approved for safety and effectiveness as a 

prescription drug. Combination vaccines not licensed as a vaccine under section 351 of 

the Public Health Service Act similarly would not satisfy the definition of a Part D drug 

as defined in section 1927(k)(6). 

Our proposal would not require that all constituent ingredients of a combination 

product be FDA-approved prescription drugs. An example would be an FDA-approved 

prescription drug that combines a Part D drug with a non-Part D covered vitamin. 
 444 

Conversely, a product combining a Part D drug with a medical food, dietary supplement, 

or another Part D drug, where the combined product has not received FDA approval as a 

prescription drug, vaccine, or biologic would not be eligible for Part D coverage. 

b. Barbiturates and Benzodiazepines 

We also propose to amend the definition of a Part D drug to address certain 

exclusions by revising paragraph (2)(ii). When the Part D benefit started in 2006, all 

uses of barbiturates and benzodiazepines were excluded from coverage by statute. In 

2008, section 175 of the MIPPA amended section 1860D-2(e)(2)(A) of the Act to include 

coverage for barbiturates when used in the treatment of epilepsy, cancer, or a chronic 

mental health disorder and for benzodiazepines when used for any medically accepted 

indication, effective January 1, 2013. In 2010, section 2502 of the Affordable Care Act 

amended section 1927(d) of the Act, to remove barbiturates and benzodiazepines from 

the list of drugs subject to exclusion from coverage, effective for services provided on or 

after January 1, 2014. Thus, this subsequent statutory change effectively includes 

barbiturates as a Part D drug for all medically accepted indications. The proposed 

revision to § 423.100 would conform our definition of Part D drug to the new statutory 

requirement. 

c. Medical Foods 

We propose to add paragraph (2)(iii) to the list of exclusions from the definition 

of Part D drug to specify that medical foods, as defined in 21 U.S.C. 360ee, are not Part 

D drugs. Medical foods are not described in subparagraphs A(i), A(ii) or A(iii) of section 

1927(k)(2) of the Act , and therefore do not meet the statutory definition of a covered 

Part D drug, nor do they fall under other categories eligible for Part D coverage listed in 
 445 

the Part D drug definition, such as biologics, vaccines, and insulin. 

Moreover, as described previously in the section on combination products, a 

product with relevant components including some or all ingredients meeting the 

definition of a Part D drug would not be eligible for Part D coverage unless the combined 

product has also been approved by the FDA as a drug, vaccine, or biologic. 

The proposed clarifications involving coverage for approved combination 

products and non-coverage of medical foods would not affect current policies 

surrounding Part D coverage of parenteral nutrition. (See the Part D manual guidance, 

Chapter 30.7 regarding the payment for parenteral and enteral nutrition items and 

services.) Extemporaneously compounded prescription drug products (addressed 

separately in Chapter 6 of the Part D manual and in § 423.120) also would not be affected 

by the proposed changes. Part D coverage for extemporaneously compounded 

prescriptions is available for the ingredients that independently meet the definition of a 

Part D drug when the product needed is one requested by the provider to meet a specific 

medical need, where there is no commercially available alternative. The convenience 

packaging of unapproved combination products for broad distribution does not meet the 

criteria set out specifically for extemporaneously compounded prescriptions. 

8. Thirty-six Month Coordination of Benefits (COB) Limit (§ 423.466(b)) 

In our April 15, 2010 final rule (75 FR 19819), we exercised our authority under 

sections 1860D-23 and 1860D-24 of the Act to impose a timeframe on the coordination 

of benefits between PDP sponsors and other payers including State Pharmaceutical 

Assistance Programs (SPAPs), other providers of prescription drug coverage, or other 
 446 

payers. In the preamble of the final rule, we explained our approach to determining the 

3-year timeframe, including the benefits derived from its establishment. 

We stated, “PDP sponsors must coordinate benefits with SPAPs, other entities 

providing prescription drug coverage, beneficiaries, and others paying on the 

beneficiaries’ behalf for a period not to exceed 3 years from the date on which the 

prescription for a covered PDP drug was filled.” The phrase “a period not to exceed 3 

years” has caused confusion among some sponsors, who interpreted this to mean that the 

coordination of benefits period could be shorter than 3 years, and have consequently 

imposed tighter timeframes for coordination of benefits. 

 To clarify the requirement and avoid further confusion, we are proposing to 

remove from the regulation the phrase “not to exceed,” and adding the word “of.” This 

would clarify that sponsors must employ a coordination of benefits period of 3 years, and 

would remove any uncertainty about whether they may impose a shorter coordination of 

benefits period. 

 We also propose to revise the heading of § 423.466 to reference claims 

adjustments, which are addressed in § 423.466(a). 

9. Application and Calculation of Daily Cost-Sharing Rates (§ 423.153) 

We are proposing technical changes to the daily cost-sharing rate rule to clarify 

the application and calculation of daily cost-sharing rates and cost-sharing under the rule. 

 We reminded Part D sponsors in the contract year 2014 Final Call Letter that, beginning 

January 1, 2014, in accordance with § 423.153(b)(4)(i), they must establish and apply a 

daily cost-sharing rate whenever a prescription is dispensed by a network pharmacy for 

less than a 30 days’ supply, unless the drug is excepted in the regulation. These 
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provisions were finalized in a rule entitled “Medicare Program; Changes to the Medicare 

Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 

and Other Changes” (77 FR 22072) (“April 12, 2012 final rule”). We provided 

information in the contract year 2014 Final Call Letter about changes to the PBP to 

accommodate a mandatory Daily Copayment field for any tier where the plan enters a 

Copayment Field to assist sponsors that have been confused about how to calculate daily 

cost-sharing rates. We also noted in the contract year 2014 Final Call Letter that the 

daily cost-sharing rate rule does not address how pharmacy dispensing fees are to be 

negotiated, calculated, or paid. We did so because we had heard that some sponsors are 

prorating dispensing fees as part of implementing the LTC short-cycle dispensing 

requirement of § 423.154 effective beginning January 1, 2013 and may be incorrectly 

referencing the upcoming daily cost-sharing rate rule as the reason. We made clear that 

there is no necessary connection between daily cost-sharing rates charged to beneficiaries 

and how dispensing fees are paid to pharmacies. Nothing in the daily cost-sharing rate 

rule at § 423.153(b)(4) requires the proration of dispensing fees, and we proposed a 

prohibition on the proration of dispensing fees in the LTC setting in another section of 

this proposed rule, because we believe it encourages inefficient dispensing in LTC 

facilities. In light of continuing confusion among some Part D sponsors about the daily 

cost-sharing rate rule, we believe technical changes to the rule are warranted. 

Currently, under § 423.100, in cases when a copayment is applicable, “daily costsharing rate” is defined as the “monthly copayment under the enrollee's Part D plan, 

divided by 30 or 31 and rounded to the nearest lower dollar amount, if any, or to another 

amount, but in no event to an amount that would require the enrollee to pay more for a 
 448 

month's supply of the prescription than would otherwise be the case.” When we drafted 

this definition, we used the numbers “30” and “31,” as these are the numbers of days that 

are typically in a month’s supply in Medicare Part D prescription drug benefit plans. 

However, we clarified in the Call Letter that the maximum amount that can be entered for 

the Daily Copayment field in the PBP will be based on the 1-month copayment amount 

divided by the actual number of days entered for the 1-month supply for that specific tier. 

 Therefore, we are proposing to replace these numbers with the phrase “the number of 

days in the approved month’s supply for the drug dispensed” to address how Part D 

sponsors that have other days’ supplies as their month’s supplies are to calculate daily 

cost-sharing rates. 

Also, under our existing definition of “daily cost sharing rate” in § 423.100, as 

noted above, and with respect to copayments, the daily copayment cannot be an amount 

that would require the enrollee to pay more for a month’s supply of the prescription than 

would otherwise be the case. For example: If a plan uses a 31-day supply as its 1-month 

supply and establishes a one-month copayment of $70 for Tier 3, then the Daily 

Copayment field entry for that tier could not be higher than $2.25 ($70/31 = $2.258). 

Thus, if a plan must round the daily cost-sharing rate to a dollar and cents figure, the 

highest amount the plan could round to would be the nearest lower dollar and cents 

amount, as shown in the example. If a plan rounded the daily cost-sharing rate up, then if 

an enrollee eventually received a month’s supply of a medication, the enrollee would pay 

more than “would otherwise be the case,” meaning more than the 1-month cost sharing 

specified in the approved benefit package. In the example, if a plan were to round the 

daily cost-sharing rate up to $2.26, an enrollee who eventually receives a month’s supply 
 449 

of the medication would pay $70.06, which is higher than the approved $70 copay for 

that tier. In other words, rounding up is not permitted under the current definition of 

“daily cost-sharing rate” and this has been another cause of confusion for some Part D 

sponsors. 

While our original intention was to prohibit significant increases in cost sharing, 

such as charging the full 30-day copay for both the trial supply and any subsequent refill 

of a medication, the current limitation on any increase in cost sharing over the 30-day 

supply amount has reportedly led to unnecessarily complicated programming, as well as 

proration of other amounts on the claim, such as the dispensing fees, as discussed 

previously. Therefore, we are proposing to replace the language “lower dollar amount, if 

any, or to another amount,” with “the nearest cent.” We believe this language would be 

the simplest way to convey the concept of rounding, while realizing this language would 

allow Part D sponsors to round daily cost-sharing rates up or down to the nearest 2 

decimal places. For instance, in the example provided previously, the daily cost-sharing 

rate would actually be rounded to $2.26, as this amount would be the nearest cent. For 

the reasons we describe in the following paragraph, we believe this slight change in 

policy is not significant and that the proposed revised regulation text would address 

current confusion about the daily cost-sharing rate rule. The revised definition of “daily 

cost-sharing rate”, if adopted, would read with respect to copayments: “as applicable, the 

established monthly copayment under the enrollee's Part D plan, divided by the number 

of days in the approved month’s supply for the drug dispensed and rounded to the nearest 

cent.” 
 450 

As noted previously, the daily cost-sharing rate rule applies whenever a 

prescription is dispensed by a network pharmacy for less than a 30 days’ supply, unless 

the drug is excepted in the regulation. However, as detailed in the preamble to the April 

12, 2012 final rule (77 FR 22072), it is primarily expected to incentivize Part D enrollees 

to talk with their prescribers about trial supplies, when they are prescribed an expensive 

chronic medication for the first time. By obtaining a less-than-30-days’ supply, 

beneficiaries reduce their cost sharing when the medication is discontinued in the first 

month due to poor tolerance or side effects, which also benefits the Part D program by 

reducing costs of unused medications. In addition, as noted in the April 12, 2012 final 

rule (77 FR 22072), we believe some enrollees will be encouraged to request that their 

pharmacists assist them with synchronizing the refill dates of multiple medications, 

because they could do so without having to pay a full month’s cost sharing for the 

shortened days’ supplies necessary to synchronize refill dates. Although permitted under 

the rule, we do not foresee enrollees choosing to continue to receive chronic medications 

incrementally on a sequential basis. We anticipate that enrollees who tolerate a chronic 

medication would obtain months’ supplies after the first incremental fill, and enrollees 

who are synchronizing medications are expected to do so through one incremental fill of 

all medications except one. Therefore, even though the proposed revised definition of 

“daily cost-sharing rate” could result in an enrollee who receives the remainder of 

month’s supply after receiving an incremental fill paying slightly more than he or she 

otherwise would have for a month’s supply, we believe such cases would be rare, if any, 

and the amounts involved are nominal anyway. We are more concerned that the 
 451 

regulation text with respect to rounding is clearer, and in this regard, we solicit comments 

on whether sponsors need any additional rounding guidance. 

We are also proposing other technical changes to the daily cost-sharing rate rule 

at § 423.153(b)(4)(i) to improve the regulation’s clarity. First, we are proposing to 

consolidate the language of § 423.153(b)(4)(i)(A) into § 423.153(b)(4)(i) and to 

consolidate § 423.153(b)(4)(i)(B)(1) and (2) into a new paragraph § 423.153(b)(4)(ii). 

Second, we are proposing that the language in § 423.153(b)(4)(i) that addresses the 

application of the daily cost-sharing rate in the case of a monthly copayment be revised 

for clarity, and moved to a new paragraph (b)(4)(iii)(A). This paragraph would state that 

in the case of a drug that would incur a copayment, the Part D sponsor must apply costsharing as calculated by multiplying the applicable daily cost-sharing rate by the days’ 

supply actually dispensed when the beneficiary receives less than a 30 days’ supply. 

Again, this is not a change in policy but is merely a technical change to the regulation 

text for better clarity. Third, we are proposing that § 423.153(b)(4)(iii)(B) would state 

that, in the case of a drug that would incur a coinsurance percentage, the Part D sponsor 

shall apply the coinsurance percentage for the drug to the days’ supply actually 

dispensed. We note that this means, with respect to dispensing fees, that the enrollee’s 

portion of additional dispensing fees for the incremental supply would be calculated by 

application of this percentage. We believe all the foregoing technical clarifications will 

assist sponsors in correctly setting, calculating, and applying daily cost-sharing rates in 

the retail and LTC settings beginning January 1, 2014 whenever a prescription is 

dispensed by a network pharmacy for less than a 30 days’ supply, unless the drug is 

excepted in the regulation. 
 452 

10. Technical Change to Align Regulatory Requirements for Delivery of the 

Standardized Pharmacy Notice (§ 423.562) 

The current regulations at § 423.562(a)(3) require Part D plan sponsors to make 

arrangements with their network pharmacies to distribute notices instructing enrollees 

how to contact their plans to obtain a coverage determination or request an exception. 

This is accomplished through delivery of a standardized notice, CMS-10147—“Medicare 

Prescription Drug Coverage and Your Rights” (“pharmacy notice”). Section 

423.562(a)(3) cross-references § 423.128(b)(7)(iii), added in our April 2011 final rule 

(76 FR 21432), which requires plans to have a system in place that transmits codes to 

network pharmacies so the pharmacy is notified to deliver the pharmacy notice at the 

point of sale (POS) in designated circumstances where the prescription cannot be filled as 

written. 

Pursuant to the 2011 regulatory change, we issued subsequent guidance (HPMS 

memoranda dated October 14, 2011 (“Revised Standardized Pharmacy Notice”) and 

December 27, 2012 (“Revised Guidance for Distribution of Standardized Pharmacy 

Notice”) which clarifies that distribution of the pharmacy notice is required upon receipt 

of certain transaction responses indicating that the claim is not covered by Part D, as well 

as revised manual guidance in Chapter 18, section 40.3.1 of the Medicare Prescription 

Drug Benefit Manual related to operationalization of this requirement specific to a 

variety of specialty pharmacy settings. 

In practice, we have never based distribution of or referral to the pharmacy notice 

on whether or not the enrollee disagrees with information provided by the pharmacist, but 

rather on whether the drug in question can be provided under Part D and whether the 
 453 

enrollee is able to obtain the covered drug at the pharmacy counter. Because the existing 

regulation text at § 423.562(a)(3) ties delivery of the pharmacy notice to the enrollee’s 

disagreement with information provided by the pharmacist, we are proposing to remove 

this reference. 

This proposed technical change would not alter the circumstances under which 

the pharmacy notice must be delivered to an enrollee and will align the regulation and the 

operational requirements for distribution of the pharmacy notice. In addition, this 

proposed change would be consistent with both the current OMB-approved instructions 

regarding the pharmacy notice and current CMS manual guidance. 

 We do not prohibit distribution of the pharmacy notice in any circumstance, so 

pharmacies may choose to also provide a copy of the notice in circumstances where the 

enrollee disagrees with the information provided (for example, if the enrollee believes 

they are being charged an incorrect cost-sharing amount), but the notice is not required 

under the standards established in § 423.128(b)(7)(iii). Provision of the pharmacy notice 

is not a prerequisite for an enrollee to request a coverage determination or access the 

appeals process. Similarly, a plan sponsor’s failure to comply with the requirements of 

§ 423.128(b)(7)(iii) or § 423.562(a)(3) does not in any way limit an enrollee’s right to 

request a coverage determination or appeal. 

11. Special Part D Access Rules During Disasters or Emergencies (§ 423.126) 

Section 1860D-4(b) of the Act requires us to ensure beneficiaries have access to 

covered Part D drugs. When a disaster strikes or is imminent, beneficiaries may find they 

have trouble accessing drugs through normal channels or must move to safer locations far 

away from their regular pharmacies. In order to ensure that beneficiaries do not run out 
 454 

of their medications during or as a result of a disaster or emergency, we issued guidance 

on December 18, 2009 identifying when, in the course of a disaster, Part D sponsors 

would be expected to relax “refill-too-soon” (RTS) edits. We now propose to codify a 

revised version of that policy. Proposed § 423.126(a)(1)(i) would require Part D 

sponsors to relax RTS edits in the event of any imminent or occurring disaster or 

emergency that would hinder an enrollee’s access to covered Part D drugs. By this we 

mean that there is an anticipated or actual disaster or emergency, as evidenced by a 

declaration of a disaster or emergency issued by an appropriate federal, state, or local 

official, and it is reasonable to conclude that such disaster or emergency or preparation 

therefore would make it difficult for beneficiaries to obtain refills of their medications 

because the disaster or emergency or anticipation thereof has affected, or will affect, their 

ability to have timely access to their usual pharmacies. For example, if federal, state or 

local authorities issue mandatory evacuation orders to populations or segments of the 

population in a geographic area, it would be reasonable to conclude that the evacuation 

would hinder an LTC resident’s ability to get a refill after he or she is evacuated from the 

facility. In such an instance, then, Part D sponsors with enrollees in the affected area 

would be required to relax RTS edits so that the LTC pharmacies could provide 

beneficiaries with refills to take with them to the location to which they are being 

evacuated. Our proposed requirement would apply to one refill for each drug the 

beneficiary is taking for refills sought within 30 days of the date the plan sponsor began 

relaxing RTS edits. We believe this timeframe would be sufficient to ensure that 

beneficiaries who are unable to obtain refills during the emergency or disaster will be 

able to do so as soon as they can safely access a network pharmacy. We solicit comment 
 455 

as to whether 30 days after the date of the triggering declaration provides an appropriate 

amount of time to ensure that beneficiaries do not run out of their medications. In 

particular, we would be interested in learning about any situations in which a beneficiary 

affected by an actual or impending disaster or emergency would be likely to go to a 

pharmacy more than 30 days after the triggering declaration such that the resumption of 

RTS edits after 30 days would be problematic. We also solicit comment as to how it 

would be feasible for Part D sponsors to identify pharmacies or beneficiaries located in 

affected areas for which they would be required to relax edits and, how long it might then 

take to program the necessary changes. 

Although we believe our proposal provides a general framework for when RTS 

edits must be relaxed, we solicit comment on whether we should impose more particular 

requirements in cases where a disaster or emergency could result in a voluntary or 

mandatory evacuation of an LTC facility. We are also concerned that if a disaster strikes 

the area in which an LTC facility is located but not the area in which its servicing LTC 

pharmacy is located, the appropriate edits may not be relaxed. Accordingly, we solicit 

comment as to whether it would be more feasible to establish beneficiary specific edits 

limited to residents of LTC facilities in affected areas given that evacuation decisionmaking is rarely a straightforward, linear process (for example, not just based on the 

declaration of a disaster or emergency), but rather, often involves a myriad of facilityspecific factors. In particular, we solicit comment on the practicality of requiring Part D 

sponsors to relax RTS edits for residents of a particular LTC facility after that facility 

decides on its own initiative to evacuate through use of National Council on Prescription 

Drug Programs (NCPDP) Submission Clarification Code (SCC) code 13, which conveys 
 456 

that there is an emergency. We solicit comment as to whether use of this code number, 

13, is specific enough to signal that sponsors need to loosen RTS edits and whether it 

would be practical for LTC facilities to request that their LTC pharmacies enter the SCC 

code 13. Lastly, we would be interested in any other ideas on how to structure workable 

edits or institute manual procedures to best target only enrollees who live in LTC 

facilities located in areas affected by a disaster. 

We would also be interested in hearing from any commenters who would 

recommend any other triggering events that would require Part D sponsors to relax RTS 

edits. In particular, we solicit comment as to whether it would be feasible to require 

sponsors to relax edits after the issuance by the National Weather Service (NWS) of a 

Hurricane or Tropical Storm watch or warning. The NWS typically issues watches 36 

hours in advance of adverse weather conditions possibly hitting an area, while the NWS 

issues watches 48 hours (2 days) in advance of those conditions possibly hitting an area. 

All watches/warnings are posted on the NWS website immediately after their issuance. 

We solicit comment as to whether watch/warnings would require RTS overrides in the 

whole state, or just areas under the watch or warning. We are also interested in 

comments regarding the time generally needed to move residents of LTC facilities with 

their medication supplies to safety. 

Lastly, we believe that sponsors are in the best position to determine how to relax 

the specific RTS edits when required under our proposal. However, we also wish to 

ensure that all sponsors relax RTS edits in a consistent manner in order that enrollees 

have the same critical access to drugs when disasters and emergencies are imminent or 

have occurred--regardless of the specific plan in which they are enrolled. Accordingly, 
 457 

we solicit comments on the types of situations that might arise and the extent to which 

sponsors should be allowed to exercise some discretion in complying with this proposed 

requirement. 

And, as has been the case under our current guidance, Part D sponsors may 

consider extending the implementation of the RTS edits but are not required to do so. 

However, if sponsors choose to reinstate the RTS edits, they need to work closely with 

enrollees who indicate that they are still displaced or otherwise impacted by the disaster 

or emergency. 

12. MA Organization Responsibilities in Disasters and Emergencies (§ 422.100) 

Section 1852(d) of the Act requires MA organizations to provide proper and 

continued access to services, including making medically necessary benefits available 

and accessible 24 hours a day and 7 days a week. When a disaster occurs or is imminent, 

beneficiaries may find they have trouble accessing services through normal channels or 

must move to safer locations that are outside of their service areas. To date, we have 

relied on issuing subregulatory guidance for MA organizations through the HPMS 

system and have included that guidance in Chapter 4 of the Medicare Managed Care 

Manual. During a disaster, we expect MA organizations to continue to follow applicable 

standing regulations, including ensuring continuing access to care in addition to 

complying with our subregulatory guidance. 

We are proposing to add paragraph (m) to § 422.100 to codify and further clarify 

an MA organization’s responsibilities when health plan services are affected by public 

health emergencies or disasters. This provision is intended to ensure that beneficiaries 

continue to have access to care in situations where normal business operations are 
 458 

disrupted due to public health emergencies, disasters and warnings of imminent disasters. 

 The proposed new paragraph (m) requires MA organizations to ensure access to covered 

services that are furnished at non-contracted facilities and to charge no more cost sharing 

for services obtained by enrolled beneficiaries out-of-network than they would pay innetwork. These requirements provide protections for enrolled beneficiaries, including 

those who move to safer locations that are outside of their service areas, who have 

trouble accessing services through normal channels due to the unusual circumstances 

created by the disaster or emergency. Additionally, the proposed new paragraph (m) 

provides MA organizations with guidance on the bases for determining the beginning and 

end of a disaster or emergency and requires that the organization post on its website and 

convey to enrollees and contracted providers at least annually, the disaster and 

emergency policies in order to facilitate enrollee access to needed services while normal 

care delivery is unavailable. In addition, this enables out-of-network providers to be 

informed of the terms of payment for furnishing services to affected enrollees. 

13. Termination of a Contract Under Parts C and D (§ 422.510 and § 423.509) 

a. Cross-Reference Change (§ 423.509(d)) 

Section 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describes the procedures 

for termination for both Part C and Part D plan sponsors respectively. These statutory 

provisions give an organization an opportunity for a hearing before its contract is 

terminated. 

We codified organizations’ appeal rights under subpart N of parts 422 and 423. 

Under the Part C § 422.510(d), a reference to the appeal rights “in accordance with 

subpart N” is made. However, in the corresponding section for Part D Plan sponsors at 
 459 

§ 423.509(d), the reference to the appeal rights reads “in accordance with § 423.642.” 

The Part C and Part D references should be the same. We are proposing to align the Part 

C and Part D appeal rights language under § 422.510(d) and § 423.509(d) by replacing 

the inconsistent language at § 423.509(d) to now read “in accordance with subpart N of 

this part.” This change is proposed only to ensure consistent wording is used in both 

regulatory sections and in no way changes the meaning or policy encompassed in this 

provision. 

b. Terminology Changes (§ 422.510 and § 423.509) 

Sections 1857(c) and 1860D-12(b)(3)(B) of the Act authorize contract 

terminations for Part C MA organizations and Part D plan sponsors respectively. In the 

current termination regulations at § 422.510 and § 423.509, there is inconsistent use of 

the terms “days” and “calendar days”. Calendar days are the appropriate term that should 

be used consistently throughout these sections. Therefore, we are proposing to replace 

the word “days” with “calendar days” in both § 422.510 and § 423.509. This change is 

proposed only to ensure consistent wording is used in § 422.510 and § 423.509 and in no 

way changes the meaning or policy encompassed in these provisions. 

c. Technical Change to Align Paragraph Headings (§ 422.510(b)(2)) 

Sections 1857(c)(2) and 1860D-12(b)(3)(B) of the Act provide us with the 

authority to terminate contracts, for Part C and Part D sponsors respectively. The Part C 

paragraph heading at § 422.510(b)(2) incorrectly reads “Expedited termination of 

contract by CMS.” The Part D corresponding paragraph heading at § 423.509(b)(2) 

correctly reads “Immediate termination of contract by CMS”. The Part C and Part D 

paragraph headings should be the same. Therefore, we are proposing to revise the 
 460 

paragraph of § 422.510(b)(2) to read “Immediate termination of contract by CMS”. This 

change is proposed only to ensure consistent wording is used in both regulatory sections 

and in no way changes the meaning or policy encompassed in this provision. 

d. Terminology Change (§ 423.509(b)(2)(C)(ii)) 

Sections 1857(c)(2) and 1860D-12(d)(3)(B) of the Act provide us with the 

authority to terminate contracts, for Part C and Part D sponsors respectively. In 

§ 423.509(b)(2)(C)(ii) the regulation incorrectly references “MA organization.” This 

section concerns Part D, so the correct reference is “Part D Plan Sponsor”. Therefore, we 

are proposing to change § 423.509(b)(2)(C)(ii) to appropriately reference Part D plan 

sponsor; not MA organization (Part C), as it currently states. This change is proposed 

only to ensure accurate wording is used in both regulatory sections and in no way 

changes the meaning or policy encompassed in this provision.

14. Technical Changes to Align Part C and Part D Contract Determination Appeal 

Provisions (§ 422.641 and § 422.644) 

Sections 1857(h) and 1860D-12(b)(3)(F) of the Act describe the procedures for 

termination for both Part C MA organizations and Part D Plan sponsors, respectively. 

These statutory provisions provide an organization with an opportunity for a hearing 

before its contract is terminated. Appeal procedures were established under sections 

1856(b)(2) and 1860D-12(b)(3) of the Act for both Part C and Part D sponsors, 

respectively. Sections 422.641 and 423.641, list the types of Part C and Part D contract 

determinations that may be appealed. 

(a) Technical Change (§ 422.641) 
 461 

Currently in § 422.641, the contract termination is discussed in paragraph (b) and 

contract non-renewal is discussed in (c). Conversely, in § 423.641 the contract 

terminations are discussed in (c) and contract non-renewal is discussed in (b). Therefore, 

we are proposing to align the Part C list order for (b) and (c) in the contract 

determinations section at § 422.641 with its Part D corresponding section at § 423.641. 

This change is proposed only to ensure consistency between the two parts and in no way 

changes the meaning or policy encompassed in this provision. 

(b) Technical Changes (§ 422.644(a) and (b))

Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describe the procedures 

for termination for both Part C and Part D sponsors, respectively. These statutory 

provisions provide an organization with an opportunity for a hearing before its contract is 

terminated. Appeal procedures were established under § 1856(b)(2) of the Act for both 

Part C and Part D sponsors. In § 423.642 we specify that the notice is based upon a 

contract determination made “under § 423.641.” Therefore, since Part C and Part D 

language should be consistent the same reference should be made in the Part C 

corresponding § 422.644. To remedy this error, we are proposing to insert “under 

§ 422.641” into § 422.644(a) for Part C contract determinations. This change is proposed 

only to ensure consistent wording is used in both regulatory sections and in no way 

changes the meaning or policy encompassed in this provision. 

 In addition, the Part D Plan sponsor language in § 423.642(b) states that “(b) The 

notice specifies the—(1) Reasons for the determination; and”. The Part C language in 

§ 422.644(b) states that “(b) The notice specifies—(1) The reasons for the determination; 

and”. Part C and Part D language should be consistent, therefore, the same reference 
 462 

should be made in the Part C corresponding section § 422.644. To remedy this error, we 

are proposing to align the Part C language at § 422.644(b) with that of the Part D 

language at § 423.642(b) for consistency between both the Part C and Part D termination 

regulations. Specifically, we propose to change § 422.644(b) by deleting the word “the” 

and revising it to read “(b) The notice specifies the—(1) Reasons for the determination; 

and”. This change is proposed only to ensure consistent wording is used in both 

regulatory sections and in no way changes the meaning or policy encompassed in this 

provision. 

15. Technical Changes to Align Parts C and D Appeal Provisions (§ 422.660 and 

§ 423.650) 

Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describe the procedures 

for termination for both Part C and Part D, respectively. These statutory provisions 

provide organizations with an opportunity for a hearing before its contract is terminated. 

Appeal procedures were established under § 1856(b)(2) of the Act for both Part C and 

Part D sponsors. We propose to make technical changes in our regulations at 

§ 422.660(a)(2), § 422.660(a)(3), and § 423.650(a)(2) to ensure consistency. 

Specifically, we are proposing to replace the term “under” with the phrase “in accordance 

with” in § 422.660(a)(2), § 422.660(a)(3), and § 423.650(a)(2). This change is proposed 

only to ensure consistent wording is used in § 422.660 and § 423.650 and in no way 

changes the meaning or policy encompassed in these provisions. 

In addition, we are proposing to make a technical change in our regulations at 

§ 423.650(a)(4) to ensure consistency with the authorizing language contained in sections 

1856(b)(2), 1857(h), and 1860D-12(d)(3)(F) of the Act which gives us the authority to 
 463 

terminate contracts for both Part C and Part D sponsors. Under the Part C 

§ 422.660(a)(4), a reference to imposing intermediate sanctions and civil money penalties 

“in accordance with § 422.752(a) through (b) of this part” is made. The corresponding 

section for Part D is at § 423.650(a)(4). However, the reference to imposing intermediate 

sanctions and civil money penalties reads “in accordance with § 423.752(a) and (b)”. 

The Part C and Part D references should be the same and both state “(a) through (b)”. 

Specifically, we are proposing to replace the word “and” with “through” in 

§ 423.650(a)(4). This change is proposed only to ensure consistent wording is used in 

both regulatory sections and in no way changes the meaning or policy encompassed in 

this provision. 

Sections 422.660(b)(4) and 423.650(b)(4) give a general reference to § 422.752 

and § 423.752, but do not refer the reader to the applicable paragraphs contained in those 

sections. Therefore, we are proposing to modify § 422.660(b)(4) and § 423.650(b)(4) to 

add the language “§ 422.752(a) through (b)” and “§ 423.752(a) through (b)”, 

respectively, to refer the reader to the applicable regulations for intermediate sanctions. 

This change is proposed only to accurately reflect applicable regulatory requirements and 

in no way changes the meaning or policy encompassed in this provision. 

16. Technical Changes Regarding Intermediate Sanctions and Civil Money Penalties 

Sections 1857(g) and 1860D-12(b)(3)(E) of the Act provides us with the authority 

to impose intermediate sanctions (sanctions) and CMPs on Part C and Part D sponsors, 

respectively. 

a. Technical Changes to Intermediate Sanctions Notice Receipt Provisions 

(§ 422.756(a)(2) and § 423.756(a)(2)) 
 464 

Under § 422.756(a)(2) and § 423.756(a)(2) the current language states that 

written requests for rebuttal by the MA organization or Part D plan sponsor must be 

received within “10 calendar days from the receipt of notice”. This language is 

inconsistent with other the language that appears in other sections within subpart O, the 

appeals section in subpart N and the termination sections in subpart K. In those sections 

we state that written requests must be received within “10 calendar days after receipt of 

the notice”. The language in all sections should be consistent. Therefore, we are 

proposing to modify the language at § 422.756(a)(2) and § 423.756(a)(2) to state “10 

calendar days after receipt of the notice”. This change is proposed only to ensure 

consistent wording is used in all sections and in no way changes the meaning or policy 

encompassed in this provision. 

In addition, we are proposing to correct the grammatical error that exists in 

current § 422.756(a)(2) and § 423.756(a)(2). The Part C and Part D language currently 

reads, “CMS considers receipt of notice as the day after notice is sent by fax, e-mail, or 

submitted for overnight mail”. To fix the grammatical errors we are proposing to revise 

the language in both § 422.756(a)(2) and § 423.756(a)(2) to read “CMS considers receipt 

of the notice as the day after the notice is sent by fax, e-mail, or submitted for overnight 

mail.” This change is proposed only to make a grammatical correction and in no way 

changes the meaning or policy encompassed in this provision. 

b. Cross-reference Changes (§ 422.756(b)(4) and § 423.756(b)(4)) 

Under § 422.756(b)(4) and § 423.756(b)(4), we furnish our procedures for 

imposing intermediate sanctions and civil money penalties on MA organizations and Part 

D sponsors, respectively. The current language at § 422.756(b)(4) states that MA 
 465 

organizations, if sanctioned, must follow the right to a hearing procedure as specified at 

§ 422.660 and § 422.684. The current language at § 423.756(b)(4) states that Part D 

sponsors, if sanctioned, must follow the right to a hearing procedure as specified at 

§ 423.650 and § 423.662. However, MA organizations and Part D sponsors must adhere 

to procedures promulgated within subpart N of the regulations, not just § 422.660 and 

§ 422.684; and § 423.650 and § 423.662, respectively. Therefore, we are proposing to 

modify the language at § 422.756(b)(4) and § 423.756(b)(4) to state that MA 

organizations and Part D sponsors “must follow the right to a hearing procedures as 

specified in subpart N”. This change is proposed only to accurately reflect applicable 

regulatory requirements and in no way changes the meaning or policy encompassed in 

this provision. 

c. Technical Changes (§ 422.756(d) and § 423.756(d)) 

In § 422.756(d) and § 423.756(d) we provide alternatives to sanctions, including 

non-renewal or termination of the organizations contract. However, the paragraph 

heading of both § 422.756(d) and § 423.756(d) only refers to terminations by CMS. 

Therefore, we are proposing to revise the paragraph heading to “Non-renewal or 

termination by CMS” in both sections to reflect the content specified within the 

provision. This change is proposed only to accurately reflect applicable regulatory 

requirements and in no way changes the meaning or policy encompassed in this 

provision. 

Within § 422.756(d) and § 423.756(d) we state that we may decline to authorize 

the renewal of an organization’s contract in accordance with § 422.506(b)(2) and (b)(3) 

for MA organizations and in accordance with § 423.507(b)(2) and (b)(3) for Part D 
 466 

sponsors. However, in both § 422.756(d) and § 423.756(d), all of paragraph (b) applies 

to the provisions. Therefore, we are proposing to change both provisions § 422.756(d) 

and § 423.756(d) to read “§ 422.506(b)” and “§ 423.507(b)”, respectively. This change 

would accurately reflect that all of paragraph (b) applies in both provisions. This change 

is proposed only to accurately reflect applicable regulatory requirements and in no way 

changes the meaning or policy encompassed in this provision.

Within § 422.756(d) and § 423.756(d), we refer to the sanctions described in 

paragraph (c) of each section but in each section, paragraph (c) refers to the effective date 

and duration of sanctions, rather than sanctions which are described in § 422.750 and 

§ 423.750, respectively. Therefore, we are proposing to change the current language at 

§ 422.756(d) to read “In addition to or as an alternative to the sanctions described in 

§ 422.750...” and change the language at § 423.756(d) to read “In addition to or as an 

alternative to the sanctions described in § 423.750.” This change would accurately 

reflect the applicable provision referenced in both § 422.756(d) and § 423.756(d). This 

change is proposed only to accurately reflect applicable regulatory requirements and in 

no way changes the meaning or policy encompassed in this provision. 

d. Technical Changes to Align the Civil Money Penalty Provision with the Authorizing 

Statute (§ 422.760(a)(3) and § 423.760(a)(3)) 

The provisions at § 422.760(a)(3) and § 423.760(a)(3) state, “the harm which 

resulted or could have resulted from conduct of an MA organization” and “the harm 

which resulted or could have resulted from conduct of a Part D plan sponsor”, 

respectively. However, this language is not consistent with the authorizing statutory 

provisions, nor is it consistent with other provisions in the corresponding sections. 
 467 

Therefore, we are proposing to align the language with paragraph (b) in both 

§ 422.760(a)(3) and § 423.760(a)(3). The language would be revised to state “The 

adverse effect to enrollees which resulted or could have resulted...” in both 

§ 422.760(a)(3) and § 423.760(a)(3). This change is proposed only to accurately reflect 

applicable statutory requirements and in no way changes the meaning or policy 

encompassed in this provision. 

e. Technical Changes to Align the Civil Money Penalty Hearing Notice Receipt 

Provisions (§ 422.1020(a)(2), § 423.1020(a)(2), § 422.1016(b)(1), and § 423.1016(b)(1)) 

Sections 1857(g)(4) and 1860D-12(b)(3)(E) of the Act provides us with the 

authority to impose civil money penalties on Part C and Part D sponsors, respectively. 

Under § 422.1020(a)(2) and § 423.1020(a)(2), we discuss our procedures for appealing 

CMPs. The current language in both sections state written requests for appeal by the MA 

organization or legal representative or authorized official must be filed within 60 

calendar days from the receipt of notice of initial determination, to request a hearing 

before the Administrative Law Judge to appeal any CMS decision. However, this 

language does not align with the appeal language in subpart N. Therefore, we are 

proposing to change the language at § 422.1020(a)(2) and § 423.1020(a)(2) to align it 

with the language within subpart N for appeals. Specifically, we are changing both 

§ 422.1020(a)(2) and § 423.1020(a)(2) to state “within 60 calendar days after receipt of 

the notice of initial determination”. This change is only to ensure consistent wording is 

used in all sections and in no way changes the meaning or policy encompassed in this 

provision. 
 468 

In addition, under § 422.1016 and § 423.1016, we furnish our procedures for 

filing briefs with the Administrative Law Judge or Departmental Appeals Board, and 

opportunity for rebuttal. The provisions at § 422.1016(b)(1) and § 423.1016(b)(1) state, 

“the other party will have 20 days from the date of mailing or personal service to submit 

any rebuttal statement or additional evidence”. However, this language is not consistent 

with provisions in other corresponding sections. Therefore, we are proposing to revise 

the language at § 422.1016(b)(1) and § 423.1016(b)(1) to state “The other party will have 

20 days from the date of mailing or in person filing”. This change is proposed only to 

ensure consistent wording is used in all sections and in no way changes the meaning or 

policy encompassed in this provision. 

17. Technical Change to the Restrictions on use of Information under Part D (§ 423.322) 

We are proposing a technical change to § 423.322 due to section 6402(b)(1) of the 

Affordable Care Act which amended section 1860D-15(f)(2) of the Act. For background, 

most of the payment provisions for the Part D program are found in section 1860D-15 of 

the Act. Subsections (d) and (f) of section 1860D-15 of the Act authorize the Secretary 

to collect any information needed to carry out this section. However those subsections, 

as originally enacted, also stated that “information disclosed or obtained under [section 

1860D-15 of the Act] may be used by officers, employees, and contractors of [HHS] only 

for the purpose of, and to the extent necessary, in carrying out [section 1860D-15 of the 

Act].” Thus, section 1860D-15 of the Act contains provisions that limit the use of 

information disclosed or obtained under its authority. 

Section 6402(b)(1) of the Affordable Care Act amended section 1860D-15(f)(2) 

of the Act to relax the limitation on the use of information that is disclosed or obtained 
 469 

under section 1860D-15 of the Act. Specifically, the Affordable Care Act removed the 

word “only” from subsection (f)(2)(A) and added a new subsection (ii) which states that 

information disclosed or obtained under section 1860D-15 of the Act may be used by 

officers, employees, and contractors of HHS for the purposes of, and to the extent 

necessary, in “conducting oversight, evaluation, and enforcement under this title.” 

Section 6402(b)(1) also added a new subsection (B) which states that information 

disclosed or obtained pursuant to section 1860D-15 of the Act may be used “by the 

Attorney General and the Comptroller General of the United States for the purposes of, 

and to the extent necessary in, carrying out health oversight activities.” Thus, the 

Affordable Care Act considerably broadened the purposes for which HHS, its 

contractors, and the Attorney General and Comptroller General may use the information 

disclosed or obtained pursuant to section 1860D-15 of the Act by removing the word 

“only” in subsection (A) and adding a new clause (ii) and a new subsection (B). 

However, we note, that the Affordable Care Act did not change the existing restriction on 

the use of information under subsection (d). 

 In light of the Affordable Care Act amendment to section 1860D-15(f) of the Act, 

we are proposing to make conforming changes to § 423.322. 
 470 

IV. Collection of Information Requirements 

 Under the Paperwork Reduction Act of 1995, we are required to provide 60-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 an information collection 

should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 

1995 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. 

 We are soliciting public comment on each of these issues for the following 

sections of this document that contain information collection requirements (ICRs). 

A. ICRs Related to Eligibility of Enrollment for Individuals Not Lawfully Present in the 

United States (§ 417.2, § 417.420, § 417.422, § 417.460, § 422.1, § 422.50, § 422.74, 

§ 423.1, § 423.30, and § 423.44)

We are proposing to amend § 417.2, § 417.420, § 417.422, § 417.460, § 422.1, 

§ 422.50, § 422.74, § 423.1, § 423.30, and § 423.44 to include the eligibility requirement 

of citizenship or lawful presence to enroll in MA, Part D, or cost plans. To implement 

these regulations, we would relay data regarding an individual’s lawful presence status to 
 471 

plans through the MARx system so that the plans will be aware of an individual’s 

eligibility when requesting enrollment and notify plans when current members lose 

lawful presence status. This data is already available to us; thus no new data will be 

collected, and there is no new information collection or burden on organizations. 

B. ICRs Related to Improper Prescribing Practices and Patterns (§ 424.535(a)(13) and 

(14))

 Our proposed additions of § 424.535(a)(13) and (14) would result in an increase 

in revocations and associated appeals. However, we are unable to estimate the number of 

revocations and appeals. We do not have data available that can be used to make such a 

projection, as each situation would have to be carefully reviewed and addressed on a case 

by case basis. Since we would invoke § 424.535(a)(8)(iii) only in the most egregious of 

circumstances, we believe that the number of revocations under this provision would be 

small. The concomitant increase in the ICR burden would therefore be minimal. 

C. ICRs Related to Applicants or their Contracted First Tier, Downstream, or Related 

Entities to Have Experience in the Part D Program Providing Key Part D Functions 

(§ 423.504(b)(8)(i) through (iii))

Proposed § 423.504(b)(8)(i) through(iii) would require that Part D organizations 

seeking a new Medicare contract must have arrangements in place such that either the 

applicant or a contracted entity that will be performing certain key Part D functions has at 

least 1 full benefit year of experience providing the function or providing the function for 

another Part D plan sponsor. The burden associated with this requirement is the time and 

effort put forth by Part D applicants to answer questions about such experience as part of 
 472 

the Part D application process. For entities that hold an existing Part D contract, or 

whose parent or another subsidiary of that parent has already held a Part D sponsor 

contract for at least a year, it is estimated that it will take each Part D applicant for a new 

contract 2 minutes to provide 1 or 2 new sentences in the organizational history section 

of the application, and 1 minute to respond to yes-no questions about experience with the 

3 functions for which experience is required, for a total of 3 minutes per applicant. For 

entities new to Part D, it is estimated that it will take each Part D applicant for a new 

contract 2 minutes to provide 1 or 2 new sentences in the organizational history section 

of the application, 1 minute to respond to yes-no questions about experience with the 3 

functions for which experience is required, and 1 additional minute to provide at least 1 

contract number of an existing or recent Part D sponsor under which the entity to provide 

the key function obtained its experience, for a total of 4 minutes. Based on the number of 

Part D applications we receive each year, we would anticipate no more than 60 Part D 

applications for a new contract, of which no more than 15 would be entities new to Part 

D. Thus, the burden for the 45 existing entities at 3 minutes each, plus the burden for the 

15 new entities at 4 minutes each, brings the total burden hours to approximately 3.25 

hours. If approved, the new application questions would be addressed under currently 

approved OMB control number (OCN) 0938-0936 

D. ICRs Related to Eligibility of Enrollment for Incarcerated Individuals (§ 417.460, 

§ 422.734, and § 423.44)

We are proposing to amend § 417.460(b)(2)(i), § 417.460(f)(1)(i), 

§ 422.74(d)(4)(i)(A), § 422.74(d)(4)(v), and § 423.44(d)(5) to clarify the eligibility 
 473 

requirement for residing in the plan’s service area related to incarceration for the 

purposes of enrolling into and remaining enrolled in MA, Part D, and Medicare cost 

plans. To implement these regulations, we would relay data to plans regarding an 

individual’s incarceration through the MARx system so that the plans would be aware of 

the individual’s eligibility when requesting enrollment and notify the plans of loss of 

eligibility for current members. This data is already available to us. Thus no new data 

would be collected, and there is no new information collection or burden on 

organizations. 

E. ICRs Related to Rewards and Incentives Program Regulations for Part C Enrollees 

(§ 422.134)

 This requirement does not impose any new information collection requirements. 

This is an existing recordkeeping requirement in which MA organizations must retain 

information pertaining to any rewards and incentives programs in accordance with our 

regulations at 42 CFR 422.118 . We believe the burden associated with this requirement 

is exempt from the PRA under 5 CFR 1320.3(b)(2) as we believe this is a usual and 

customary business practice. Furthermore, any requests to furnish the information in a 

form and manner we designate are unique, that is, non-standardized and specific to each 

individual MA organization. 

F. ICRs Related to Expanding Quality Improvement Program Regulations (§ 422.152)

 This requirement does not impose any new information collection requirements. 

PRA approval is current under OCN 0938-1023. 

G. ICRs Related to Revisions to Good Cause Processes (§ 417.460, § 422.74, and 
 474 

§ 423.44)

We are proposing to amend § 417.460, § 422.74, and § 423.44 to establish the 

ability for us to designate an entity other than CMS to implement the good cause process. 

 To implement these regulations, the plan will already have the enrollment data necessary 

to make the good cause determinations within the process. Thus no new data would be 

collected. However, there would be additional burden to the plan in terms of completing 

the operational process, such as responding to requests for reinstatement from former 

members, gathering the attestation from the individual regarding his or her reason for not 

paying the plan premiums within the grace period, making the determination as to 

whether the individual meets the good cause criteria and maintaining the case notes and 

documentation to support its determination should it need to be reviewed. As plans 

already provide customer service to their current and past members, we estimate that this 

burden would be approximately 30 minutes for each reinstatement request. According to 

the most recent wage data provided by the Bureau of Labor Statistics (BLS) for May 

2012, the mean hourly wage for the category of “Customer Service Representatives” – 

which we believe, considering the common point of entry for all issues at the plan, is the 

most appropriate category - is $15.92. With fringe benefits and overhead, the per hour 

rate is $24.03. It is calculated that the cost for 30 minutes would be $12.01. Not all 

plans disenroll for non-payment of premiums. However, for those who do implement 

this voluntary policy, it results in an average of 20,000 disenrollments each month. In 

response, we receive an average of 698 requests for reinstatement per month. The plan 

representative cost of $12.01 for each case is multiplied by 698 cases. Therefore, based 
 475 

on the proposed change, handling of these requests would result in a total monthly cost of 

$8,383 for all plans in the MA, Part D, and cost plan programs. 

H. ICRs Related to the Definition of Organization Determination (§ 422.566)

 The burden associated with this proposal is the time necessary for MA 

organizations to process organization determination requests, issue a decision and, where 

appropriate, effectuate any approved coverage decision. When an MA organization 

issues an adverse organization determination, it must give the enrollee written notice 

pursuant to the requirements in § 422.568(d) and (e) and § 422.572(e). This requirement 

is subject to the PRA, and the burden associated with it is currently approved under 

OCN 0938-0829. The information collection requirements are not expected to change 

because the proposed revisions to the definition of organization determination would not 

alter the frequency with which the current OMB-approved notice is required, nor the time 

required to issue the notice. The proposed change to § 422.566(b)(3) would codify 

certain adverse decisions which MA organizations already treat operationally as adverse 

organization determinations subject to the standardized denial notice. The proposed 

addition of § 422.566(b)(6) applies only to favorable organization determinations which 

do not require written notice. 

I. ICRs Related to Skilled Nursing Facility Stays (§ 422.101 and § 422.102)

 We propose to relocate the MA regulation language currently located at 

§ 422.101(c), “Requirements Related to Basic Benefits” to § 422.102(a)(5), 

“Supplemental Benefits.” We are proposing to move the provision because it describes 

MA organizations’ authority to furnish covered SNF stays without the qualifying 
 476 

inpatient hospital stay required under original Medicare. For the past 10 years, MA 

organizations have offered the waiver of the 3-day inpatient hospital stay as a 

supplemental benefit. Thus, placing the provision in the section related to supplemental 

benefits is appropriate. 

We also propose to make a conforming revision in the cross-reference to this 

provision that currently appears at § 409.30(b)(2)(ii), in order to reflect this provision’s 

relocation from § 422.101 to § 422.102. This is a simple relocation of current regulation. 

 There are no new PRA requirements. 

J. ICRs Related to Changes to Audit and Inspection Authority (§ 422.503(d)(2) and 

§ 423.504(d)(2)) 

We are proposing a change to § 422.503(d)(2) and § 423.504(d)(2) to include 

authority that will permit CMS to require MA organizations and Part D sponsors to hire 

an independent auditor to conduct full or partial program audits and/or perform validation 

exercises to confirm correction of deficiencies found during an audit. We currently 

conduct these audits and validation exercises, and collect data associated with these 

activities under OCN 0938-1000. We do not believe that requiring MA organizations 

and Part D sponsors to hire an independent auditor to conduct these audits or validation 

exercises will impose any additional burden on MA organizations and Part D sponsors. 

K. ICR Related to Recovery Audit Contractor Determinations (Part 422, Subpart Z and 

Part 423, Subpart Z)

 The information collection burden associated with our proposed requirements 

consists of the submission of requests for: (1) reconsiderations; (2) CMS hearing official 
 477 

determinations; and (3) CMS Administrator reviews. Based on existing Part D appeals 

data, we estimate that plans will file the following numbers of requests on an annual 

basis: 

TABLE 7-- ESTIMATED NUMBER OF PART C & D RAC APPEAL 

REQUESTS 

Type Of Request Number of Requests Per Year 

Reconsideration 104 

CMS Hearing Official 10 

Administrator Review 2 

TOTAL 116 

The reasons for the decrease in requests at higher appeal levels are that: (1) the 

plan may succeed in its appeal and thus have no need to appeal to the next level; and (2) 

the plan may simply wish to forgo further appeals. We stress that the figures in Table 7 

are mere projections, though, again, they are based on the number of Part D appeals that 

have been submitted to date. 

We estimate that it would take a plan 5 hours to prepare and file an appeal 

request. In terms of cost, it has been our experience that most appeals have been 

prepared by high-level officials of the plan. According to the most recent wage data 

provided by the Bureau of Labor Statistics (BLS) for May 2012, the mean hourly wage 

for the category of “General and Operations Managers” – which we believe, considering 

the variety of officials who have submitted appeals, is the most appropriate category - is 

$55.22. With fringe benefits and overhead, the per hour rate is $83.35. Multiplying this 

figure by 580 hours (or 116 submissions x 5 hours) results in a projected annual cost 

burden of $48,343, as outlined in Table 8. 
 478 

TABLE 8--ESTIMATED ANNUAL REPORTING/RECORDKEEPING BURDEN 

Regulation 

Section(s) 

OMB 

Control 

No. Respondents Responses 

Burden 

per 

Response 

(hours) 

Total 

Annual 

Burden 

(hours) 

Hourly 

Labor 

Cost of 

Reporting 

($) 

Total 

Labor 

Cost of 

Reporting 

($) 

Total Capital/ 

Maintenance 

Costs ($) 

Total 

Cost 

($) 

§ 422.2605 N/A 52 52 5 260 83.35 83.35 0 21,671.00 

§ 422.2610 N/A 5 5 5 25 83.35 83.35 0 2083.75 

§ 422.2615 N/A 1 1 5 5 83.35 83.35 0 416.75 

§ 423.2605 N/A 52 52 5 260 83.35 83.35 0 21,671.00

§ 423.2610 N/A 5 5 5 25 83.35 83.35 0 2083.75 

§ 423.2615 N/A 1 1 5 5 83.35 83.35 0 416.75 

TOTAL N/A 116 116 N/A 580 0 48,343 

If you comment on these information collection and recordkeeping requirements, 

please do either of the following: 

 1. Submit your comments electronically as specified in the ADDRESSES section 

of this proposed rule; or 

 2. Submit your comments to the Office of Information and Regulatory Affairs, 

Office of Management and Budget, 

 Attention: CMS Desk Officer, CMS-4159-P 

 Fax: (202) 395-6974; or 

 Email: OIRA_submission@omb.eop.gov 

V. Response to Comments 

Because of the large number of public comments we normally receive on Federal 

Register documents, we are not able to acknowledge or respond to them individually. 

We will consider all comments we receive by the date and time specified in the 

"DATES" section of this preamble, and, when we proceed with a subsequent document, 

we will respond to the comments in the preamble to that document.
 479 

VI. Regulatory Impact Analysis 

A. Statement of Need

The purpose of this proposed rule is to make revisions to the MA program (Part 

C) and Prescription Drug Benefit Program (Part D), implement provisions specified in 

the Affordable Care Act, and make other changes to the regulations based on our 

continued experience in the administration of the Part C and Part D programs. These 

latter revisions are necessary to: (1) clarify various program participation requirements; 

(2) make changes to strengthen beneficiary protections; (3) strengthen our ability to 

identify strong applicants for Part C and Part D program participation and remove 

consistently poor performers; and (4) make other clarifications and technical changes. 

B. Overall Impact

We have examined the impacts of this rule as required by Executive Order 12866 

on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on 

Improving Regulation and Regulatory Review (January 18, 2011), the Regulatory 

Flexibility Act (RFA) (September 19, 1980, Pub. L. 96–354), section 1102(b) of the 

Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 

(March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism 

(August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)). 

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits 

of available regulatory alternatives and, if regulation is necessary, to select regulatory 

approaches that maximize net benefits (including potential economic, environmental, 

public health and safety effects, distributive impacts, and equity). Executive Order 13563 
 480 

emphasizes the importance of quantifying both costs and benefits, of reducing costs, of 

harmonizing rules, and of promoting flexibility. A regulatory impact analysis (RIA) 

must be prepared for major rules with economically significant effects ($100 million or 

more in any 1 year). This proposed rule has been designated an ''economically 

significant'' rule under section 3(f)(1) of Executive Order 12866. Accordingly, we have 

prepared a regulatory impact analysis that details the anticipated effects (costs, savings, 

and expected benefits), and alternatives considered by proposed requirement. Finally, in 

accordance with the provision of the Executive Order 12866, this proposed rule was 

reviewed by the Office of Management and Budget. 

Two provisions result in a total of 4,768 annual burden hours and a total 

annualized monetized impact of $148,939. See sections IV.G. and IV.K. of this 

proposed rule for details regarding the burden associated with the requirements of this 

proposed rule. The RFA requires agencies to analyze options for regulatory relief of 

small entities, if a rule has a significant impact on a substantial number of small entities. 

For purposes of the RFA, small entities include small businesses, nonprofit organizations, 

and small governmental jurisdictions. The great majority of hospitals and most other 

health care providers and suppliers are small entities, either by being nonprofit 

organizations or by meeting the SBA definition of a small business (having revenues of 

less than $7.0 million to $34.5 million in any 1 year). Individuals and states are not 

included in the definition of a small entity. This proposed rule primarily affects the 

Federal government, Medicare Advantage plans, and Part D Sponsors. 
 481 

Part D sponsors and MA plans, entities that will be affected by the provisions of 

this rule, are not generally considered small business entities. MA plans and Part D 

sponsors must meet minimum enrollment requirements (5,000 in urban areas and 1,500 in 

nonurban areas) and because of the revenue from such enrollments, these entities are 

generally above the revenue threshold required for analysis under the RFA. We 

determined that there were very few MA plans and Part D sponsors that fell below the 

size thresholds for ''small'' businesses established by the Small Business Administration 

(SBA). Currently, the SBA size threshold is $7 million in total annual receipts for health 

insurers (North American Industry Classification System, or NAICS, Code 524114) and 

we have confirmed that most Part D sponsors have Part D receipts above the $7 million 

threshold. 

While a very small rural plan could fall below the threshold, we do not believe 

that there are more than a handful of such plans. A fraction of MA organizations and 

sponsors are considered small businesses because of their non-profit status. HHS uses as 

its measure of significant economic impact on a substantial number of small entities, a 

change in revenue of more than 3 to 5 percent. Consequently, we do not believe that this 

threshold would be reached by the proposed requirements in this proposed rule because 

this proposed rule would have minimal impact on small entities. Therefore, an analysis 

for the RFA will not be prepared because the Secretary has determined that this proposed 

rule would not have a significant impact on a substantial number of small entities. 

In addition, section 1102(b) of the Act requires us to prepare an analysis if a rule 

may have a significant impact on the operations of a substantial number of small rural 
 482 

hospitals. This analysis must conform to the provisions of section 603 of the RFA. For 

purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that 

is located outside of a metropolitan statistical area and has fewer than 100 beds. We are 

not preparing an analysis for section 1102(b) of the Act because the Secretary has 

determined that this proposed rule would not have a significant impact on the operations 

of a substantial number of small rural hospitals. 

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 

requires that agencies assess anticipated costs and benefits before issuing any rule whose 

mandates require spending in any 1 year by state, local, or tribal governments, in the 

aggregate, or by the private sector of $100 million in 1995 dollars, updated annually for 

inflation. In 2013, that threshold is approximately $141 million. This proposed rule is 

not expected to reach this spending threshold. 

Executive Order 13132 establishes certain requirements that an agency must meet 

when it promulgates a proposed rule (and subsequent final rule) that imposes substantial 

direct requirement costs on state and local governments, preempts state law, or otherwise 

has Federalism implications. Based on CMS Office of the Actuary estimates, we do not 

believe that this proposed rule imposes substantial direct requirement costs on state and 

local governments, preempts state law, or otherwise has Federalism implications. 

Table 14 details the proposed rule's impacts by entity, including the federal 

government and MA organizations and Part D sponsors. We note that the estimated 

savings do not represent net social benefits because they consist of transfers of value 

from drug manufacturers, pharmacies, incarcerated individuals and individuals not 
 483 

lawfully present in the United States to the federal government, MA organizations, Part 

D sponsors and beneficiaries who continue in the programs. 

C. Anticipated Effects

1. Effects of Closing Cost Contract Plans to New Enrollment 

In our proposal to ensure that organizations do not move enrollees from one of 

their cost or MA plan types to another based on financial or some other interest, we 

propose to revise §422.503(b)(5) so that an entity seeking to contract as an MA 

organization must "not accept new enrollees under a section 1876 reasonable cost 

contract in any area in which it seeks to offer an MA plan if the MA organization and 

reasonable cost contract are offered by the same parent organization." We believe this 

provision will have minimal or no financial impact as only a handful of parent 

organizations currently offer MA and cost plans in the same service area. In addition, as 

the regulation requires that affected cost plans close to new enrollment, not that they 

terminate operations, we believe that there will be little or no impact to beneficiaries. 

2. Effects of Two-year Limitation on Submitting a New Bid in an Area Where an MA 

has been Required to Terminate a Low-enrollment MA Plan 

Under §422.506(b)(1)(iv), we must non-renew a MA plan that does not have a 

sufficient number of enrollees to establish that it is a viable independent plan option. We 

have established the threshold for termination due to insufficient number of enrollees at 

fewer than 500 enrollees for non SNPs and fewer than 100 enrollees for SNPs over a 

specified time period of 3 years. If we did not implement this, an MA organization 

required to terminate or consolidate one of its MA plans due to sustained low enrollment 
 484 

could avoid the consequences of such a requirement by submitting a bid for a new plan in 

the same service area. 

 We are proposing to amend the MA regulations at§422. 504(a)(19) to impose a 

contractual requirements that when CMS non renews, or asks the MA organization to 

terminate an MA plan due to sustained low enrollment pursuant to §422.506(b)(1)(iv), 

the MA organization may not introduce any new MA plan in that service area for 2 

contract years. We believe this requirement will enhance our ongoing efforts to ensure 

that MA organization offerings in a service area present beneficiaries with viable plans 

that are responsive to their needs. We see no financial impact on MA organizations as 

this requirement has very limited application and imposes no independent financial 

burden. 

3. Effects of Authority to Impose Intermediate Sanctions and Civil Money Penalties 

We are proposing to make two changes to existing authority for the imposition of 

intermediate sanctions and civil money penalties (CMPs). First, under the Affordable 

Care Act, new authority was provided to the Secretary, which now permits CMS to 

impose intermediate sanctions for additional contract violations in the areas of marketing 

and enrollment. This new authority further permits CMS to impose intermediate 

sanctions on contracting organizations' that employ or contract with organizations, 

agents, and suppliers who commit any of the contract violations contained in §422.752 

and §423.752. 

Second, we are clarifying our authority to impose CMPs for the aforementioned 

contract violations. Current regulations designate the OIG as the sole government 
 485 

agency with the authority to impose CMPs for the contract violations contained in 

§422.752 and/or §423.752. We are modifying the language of these provisions to clarify 

that CMS or the OIG may impose CMPs for these contract violations except the 

provision that relates to the misrepresentation of falsification of information furnished to 

CMS, an individual or entity. 

We believe these provisions would not result in additional burden to sponsors nor 

would they have a financial impact on sponsors. 

4. Effects of Contract Termination Notification Requirements and Contract Termination 

Basis 

In current regulations, we are required to provide 90-day notice to organizations 

whose contracts are being terminated by CMS. The authorizing statute at section 

1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act states that the Secretary must provide 

reasonable notice and opportunity for hearing (including the right to appeal the initial 

determination) before terminating a contract (except under certain circumstances). We 

are proposing to modify the notice timeframe from 90 days to 45 days. We believe these 

provisions would not result in additional burden to sponsors nor would it have a financial 

impact on sponsors. 

5. Effects of Reducing the Burden of the Compliance Program Training Requirements 

We are proposing to lessen the burden placed on contracting organizations and 

their first tier, downstream and related entities (FDRs). Current regulations specify that 

contracting organizations are required to provide general compliance program training 

for their FDRs upon initial contracting and annually thereafter. To lessen this burden, we 
 486 

would require all contracting organizations to accept a certificate of completion of the 

CMS Standardized General Compliance Program Training and Education Module as 

evidence of satisfaction of this program requirement. Under this program change, 

contracting organizations would not be permitted (or required) to develop or implement 

organization specific training for FDRs. We anticipate that this would greatly reduce the 

burden on various sectors of the industry including, but not limited to, insurance 

providers, hospitals, suppliers, pharmacists and physicians. We anticipate that this 

change would actually provide savings for sponsors and the FDRs since FDRs would 

only have to take one training as opposed to the possible numerous trainings they may 

take under current requirements. Additionally, sponsors would save because they would 

not be required to provide training materials to each FDR with which they contract. 

We believe these provisions would not result in additional burden to sponsors nor 

would they have a financial impact on sponsors. 

6. Effects of Audit and Inspection Authority 

We are proposing two changes to §422.503(d)(2) and §423.504(d)(2) that would 

allow CMS to require sponsors (MA organizations and Part D sponsors) to hire an 

independent auditor to conduct full or partial program audits of the sponsors' operational 

areas and/or correction validation exercises. We currently conduct program audits of 

approximately 30 sponsors per year. Under this proposal, each MA organization and/or 

Part D sponsor would be required to hire an independent auditor to perform a full or 

partial program audit at least every 3 years. There are currently 298 sponsors in the Parts 

C & D programs. Under this new authority, approximately 99, or one-third of these 
 487 

organizations would be required to hire an independent auditor to perform a program 

audit, beginning in contract year 2015. Once the sponsor's audit is concluded in the year 

in which it was chosen, the sponsor would not be subject to another audit until its third 

year occurs (that is, plans selected for audit in contract year 2015, would not be selected 

for audit again until contract year 2018); unless the sponsor demonstrates behavior that 

we believe poses a risk to Medicare beneficiaries, the Trust Fund or both. Sponsors 

demonstrating this type of noncompliance may be subjected to a CMS program audit at 

any time in order to identify and mitigate any risk of potential harm to our beneficiaries. 

This proposal ensures that all sponsors will be audited on at least a 3-year cycle while 

continuing to maintain the integrity of the program by allowing CMS to continue to 

conduct audits when it believes beneficiaries are at risk. 

Each independent auditor would work within CMS' specifications and guidelines. 

 We would make available to the sponsors all of the methods of evaluations, 

methodologies and protocols to be used by the independent auditor when conducting the 

audit. We would also provide technical assistance to auditors as necessary. 

We currently conduct program audits that examine the following operational 

areas: 

● Formulary and Benefits Administration (Part D) 

● Coverage Determinations, Appeals & Grievances(Part D) 

● Organization Determinations, Appeals & Grievances (Parts C) 

● Compliance Program effectiveness (Parts C & D) 

● Outbound Enrollment Verification (OEV) (Parts C & D) 
 488 

● Special Needs Plan Model of Care (SNP MOC) implementation (Parts C & D) 

We estimate that the independent auditor hired will need to have a team consisting of the 

following professionals: 

● Formulary and Benefits Administration –pharmacist, a senior claims analyst, 

and a senior auditor. 

● Coverage Determinations, Part D Appeals, Part D Grievances – pharmacist, 

senior auditor. 

● Organization Determinations, Part C Appeals, Part C Grievances – nurse 

practitioner, senior auditor, auditor. 

● Compliance Program effectiveness –two auditors (at least one senior). 

● Outbound Enrollment Verification (OEV) – two auditors (at least one senior). 

● Special Needs Plan Model of Care (SNP MOC) implementation – two auditors 

(at least one senior). 

We used the most recent (2010) wage statistics supplied by the Department of 

Labor, Bureau of Labor Statistics to develop estimates of direct wages. We also added 

fringe benefits, overhead costs, and general and administrative expenses using 

percentages that are consistent with CMS contracts. Based on our experience and in 

consultation with program experts, we developed an estimate of the hourly burden. The 

estimated mean cost per hour for each sponsor is $35.80 (wages, fringe benefits, and 

overhead). The team of 14 professionals (listed previously) is necessary for the 

performance of each program audit. The estimated mean number of hours the team will 

need to perform the audit per sponsor is 160. The mean cost per sponsor to procure and 
 489 

support the auditor is therefore: 14 x 160 x $35.80 = $80,192. The auditing costs will be 

allowable costs in the plan's bid. Since, sponsors will only be subjected to these audits 

every 3 years; it is our expectation that sponsors will include one-third of this cost in its 

bid each year. Therefore, each plan year, the total cost included in a sponsors bid is: 

$80,192 ÷ 3 = $26,731. 

The total annual estimated burden hours related to the time and effort for all 

sponsors being audited is estimated to be 298 sponsors x $26, 731 per sponsor, per year 

= $7,965,838. Therefore, the estimated annual cost for this requirement is $7,965,838. 

We are also proposing to revise our regulations to permit CMS to require MA 

organizations or Part D sponsors with audit results that reveal non-compliance with CMS 

requirements to hire an independent auditor to validate that correction has occurred. As 

mentioned previously, under our existing authority we currently conduct approximately 

30 audits per year. Based on our experience, the number of deficiencies identified and 

requiring corrective action can vary widely from sponsor to sponsor, which therefore 

affects the time and effort required for subsequent correction validation. Therefore, we 

have decided to provide an estimate that assumes that each sponsor audited has failed 50 

percent of all elements audited; thereby requiring correction validation. We recognize 

that some sponsors may have far fewer elements that require validation and some 

sponsors may have more elements that require validation, but we believe that this is the 

most accurate estimate we can provide of the number of sponsors that will undergo 

validation and the associated effort required with that validation. 

Under these circumstances we estimate that the independent auditor hired will 
 490 

need to have a team consisting of the following professionals: 

● Formulary and Benefits Administration –pharmacist, a senior claims analyst, 

and a senior auditor. 

● Coverage Determinations, Part D Appeals, Part D Grievances – pharmacist, 

senior auditor. 

● Organization Determinations, Part C Appeals, Part C Grievances – nurse 

practitioner, senior auditor. 

● Compliance Program effectiveness –one senior auditor. 

● Outbound Enrollment Verification (OEV) – one senior auditor. 

● Special Needs Plan Model of Care (SNP MOC) implementation – one senior 

auditor. 

We used the same wage statistics provided previously to develop an estimate of 

the hourly burden (which includes fringe benefits, overhead costs, and general and 

administrative expenses that use percentages that are consistent with CMS contracts). 

The estimated mean cost per hour for these sponsors is $35.80. A team of 10 

professionals (listed previously) is necessary for the performance of each correction 

validation. The average hourly cost for a validation with a team of 10 professionals is the 

same as the average hourly cost of an initial audit with a team of 14 professionals 

because in both scenarios, the mix of auditors to specialists (or non-auditors) is roughly 

70 percent auditors and 30 percent specialists. Since the need for specialists can vary 

widely (that is, in some validations they may not be needed at all, and in other cases, all 

of the specialists from the original audit may be needed), we determined that the average 
 491 

breakdown of the team is the same for initial audit and validation. Therefore, the average 

hourly cost has not changed, despite the change in the number of team members. The 

estimated mean number of hours the team will need to perform the correction validation 

per sponsor is 80. The mean cost per sponsor to procure and support the independent 

auditor is therefore: 10 x 80 x $35.80 = $28,640. The validation costs will be allowable 

costs in the plan's bid. Under existing regulations the total annual estimated burden 

hours related to the time and effort for sponsors to perform the correction validation is 

estimated to be 30 sponsors x $28,640 per sponsor, per year = $859,200. Therefore, the 

estimated annual cost for this requirement under existing regulations is $859,200. 

If the provision proposing that we acquire the authority to require sponsors to hire 

an independent auditor to conduct program audits is finalized, the number of sponsors 

being audited per year will increase from 30 (current) to 99 (proposed). Using the same 

weighted data assuming that each sponsor audited has failed at least 50 percent of audited 

elements, the estimated mean cost per sponsor to procure and support the independent 

auditor is: 10 x 80 x $35.80 = $28,640. The correction validation costs will be allowable 

costs in the plan's bid. Since, sponsors will only be subjected to these audits/validations 

every 3 years; it is our expectation that sponsors will include one-third of this cost in its 

bid each year. Therefore, each plan year, the total cost included in a sponsors bid is: 

$28,640 ÷ 3 = $9,547. The total annual estimated burden hours related to the time and 

effort for all sponsors being audited to perform the correction validation is estimated to 

be 99 sponsors x $9,547 per sponsor, per year = $945,120. Therefore, the potential 

estimated annual cost for this requirement is $945,120. 
 492 

7. Effects of Procedures for Imposing Intermediate Sanctions and Civil Money Penalties 

under Parts C and D 

We are proposing to make changes to our authority for imposing intermediate 

sanctions and for determining when such sanctions will be lifted. Sections 1857(g) and 

1860D-12(b)(3)(E) of the Act provide the Secretary the ability to impose intermediate 

sanctions on MA organizations and PDP sponsors. Intermediate sanctions consist of 

suspension of enrollment, suspension of marketing and suspension of payment. Current 

regulations governing intermediate sanctions are contained in subparts O of part 422 and 

Part 423. Sections 422.756 and §423.756 provide specific procedures for imposing 

intermediate sanctions, and include provisions which address the duration of the sanction 

and the standard that we apply when determining if a sanction should be lifted. As 

specified in the Act and regulations, when intermediate sanctions are imposed on 

contracting organizations, the sanctions remain in place until the Secretary/CMS is 

satisfied that the basis for the sanction determination has been corrected and is not likely 

to recur. 

In the October 2009 proposed rule (74 FR 54634), we proposed a change that 

included a rule that allows us to require a plan under a marketing and/or enrollment 

sanction to market or accept enrollments or both for a limited period of time. As we 

explained in that proposed rule, the purpose of the test period is to assist us in making a 

determination as to whether the deficiencies that are the bases for the intermediate 

sanctions have been corrected and are not likely to recur. The test period provides us 

with the opportunity to observe a sanctioned plans ability to enroll or market to Medicare 
 493 

beneficiaries prior to lifting the sanction. 

We are proposing to extend the applicability of such a test period to include all 

intermediate sanctions and to clarify that while we may require a sponsor to receive 

enrollments during this test period, the sponsor would not receive any LIS annual or auto 

facilitated reassignments. 

We believe these provisions would not result in additional burden to sponsors nor 

would they have a financial impact on sponsors. 

8. Effects on Timely Access to Mail Order Services 

We believe it is necessary and appropriate to establish mail order fulfillment 

requirements defining maximum turnaround times from when the pharmacy receives the 

prescription order to when it is shipped. This would underscore the importance of 

consistent and reliable access to medications, protecting beneficiaries from inconsistent 

or unreliable practices that may otherwise jeopardize timely access to prescriptions. The 

proposed standards are in alignment with requirements already in place in the market, 

and as such we do not expect significant financial impacts to implement. 

9. Effects of Collections of Premiums and Cost Sharing 

In the proposed provision, "Waivers and Incorrect Collections of Premiums and 

Cost Sharing," we propose to codify our existing guidance pertaining to the waiver of 

premiums and cost sharing by Part D sponsors and to specifically require sponsors to 

refund incorrect collections of premiums and cost sharing or retroactively collect 

underpayments of cost sharing. Since our policy on waivers of premiums and cost 

sharing has been specified in informal guidance since the beginning of the Part D 
 494 

program and the timeframe for sponsor refunds and recoveries is codified in regulations 

at §423.466(a) indicating that such refunds and collections are required, we do not 

believe the proposed changes would result in any additional costs. 

10. Effects of Enrollment Eligibility for Individuals Not Lawfully Present in the United 

States 

In section III.A.10. of this proposed rule, we discuss our proposals to add 

'citizenship or lawful presence' as an eligibility requirement to enroll and remain enrolled 

in MA, Part D, and section 1876 cost contracts to align with section 401 of the PRWORA 

mandating that aliens not lawfully present in the United States are not eligible to receive 

any federal benefit. In CY 2012, there were close to 50 million Medicare beneficiaries. 

Approximately 34.4 million beneficiaries were enrolled in MA plans, PDPs or cost plans, 

which accounted for 68.8 percent of the total Medicare population. In the same year, an 

average of 4,285 Medicare beneficiaries enrolled in MA or Part D plans were identified 

by SSA as being unlawfully present. By directing MA plans, PDPs, and cost plans to 

disenroll individuals who, at the time of notification from CMS, are not lawfully present, 

we intend to prevent improper payment for these individuals to MA plans, PDPs, and 

cost plans for periods when these individuals were ineligible to receive such services. 

Based on data for capitation payments for MA and PDPs, as well as the prepayments 

provided to cost plans, we estimate that the disenrollment of individuals who are 

unlawfully present would result in a decrease in payments made by CMS and would 

result in a cost savings of $10 million in 2015. We estimate, based on the numbers 

previously mentioned, that this change could save the MA program approximately 
 495 

$5 million in 2015, increasing to $8 million in 2019, and could save the Part D program 

(includes the Part D portion of MA-PD plans) approximately $5 million in 2015, 

increasing to $9 million in 2019. As cost plans are paid based on the reasonable costs 

delivering Medicare-covered services to their enrollees, instead of the fixed capitation 

amounts paid to MA plans and PDPs, we believe the impact to cost plans associated with 

this provision to be negligible. 

TABLE 9—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE 

TO LOSS OF LAWFUL PRESENCE AND ESTIMATED SAVINGS TO THE 

MEDICARE ADVANTAGE PROGRAM BY PROVISION FOR CALENDAR 

YEARS 2015 THROUGH 2019 

2015 2016 2017 2018 2019 

Totals 

(CYs 

2105-2019

) 

Projected number 

of unlawfully 

present 

beneficiaries 

enrolled in MA 

plans 

1,118 1,247 1,375 1,503 1,632 6,875 

Projected federal 

impact due to 

unlawfully-present 

individuals 

disenrolled 6 

months sooner 

-$5 

million 

-$6 

million 

-$6 

million 

-$7 

million 

-$8 

million 

-$32 

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data 

provided by the SSA. 
 496 

TABLE 10—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE 

TO LOSS OF LAWFUL PRESENCE AND ESTIMATED SAVINGS TO THE 

MEDICARE PART D PROGRAM BY PROVISION FOR CALENDAR YEARS 

2015 THROUGH 2019 

 Totals 

(CYs 2015 – 

2019)

2015 2016 2017 2018 2019 

Projected number 

of unlawfully 

present 

beneficiaries 

enrolled in Part D 

plans (including 

MA-PDs) 

5,780 6,276 6,771 7,267 7,762 33,856 

Projected federal 

impact due to 

unlawfully-present 

individuals 

disenrolled 6 

months sooner 

-$5 

million 

-$6 

million 

-$7 

million 

-$8 

million 

-$9 

million 

-$35 

million 

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data 

provided by the SSA. 

11. Effects of Part D Notice of Changes 

This section would codify current guidance for Part D sponsors to inform 

beneficiaries about changes to plan benefits from year to year and also correct an 

oversight whereby such a regulation currently exists for Part C but not for Part D. We 

anticipate that this proposal would result in no additional costs because Part D sponsors 

already typically provide this information. 

12. Effects of Separating the Annual Notice of Change (ANOC) from the Evidence of 

Coverage (EOC) 

Currently, members must receive the plan's combined ANOC/EOC prior to the 

Annual Election Period (AEP). We propose to separate the distribution and 
 497 

dissemination requirements, such that, the ANOC is received by beneficiaries before the 

AEP and the EOC is received closer to the enrollment effective date. This way, 

beneficiaries who choose to leave their current plans and enroll in other plans will only 

receive an EOC from the plan in which they have enrolled. We believe that this will 

reduce confusion among beneficiaries about which EOC is for the plan in which they 

have enrolled. It eliminates the unnecessary waste from the production of EOCs that end 

up being discarded. It also allows MA organizations and Part D sponsors additional time 

to develop better quality documents. 

We propose to revise the language in §422.111(a)(3) and §423.128(a)(3) to allow 

the EOC to be sent to members a few months after the ANOC. We believe this provision 

will have minimal or no financial impact as the proposal would merely change the timing 

of notices that MA organizations and Part D sponsors already provide. Further, the delay 

in providing the EOC could result in savings as MA organizations and Part D sponsors 

have additional time to ensure that these documents are accurate, thus eliminating the 

need for updates and correction notices. 

13. Effects of the Modification of the Agent/Broker Compensation Requirements 

 The current independent agent compensation structure (as originally published as 

CMS-4138-IFC2 in November 2008) is comprised of a 6-year cycle and is scheduled to 

end December 31, 2013. MA organizations and Part D sponsors provide an initial 

compensation payment to independent agents for new enrollees or unlike plan changes 

(Year 1), and pay a renewal rate (equal to 50 percent of the initial year compensation) for 

Years 2 through 6. CMS is proposing to revise this existing compensation structure. MA 
 498 

Organizations and PDP sponsors would have the discretion to decide, on an annual basis, 

whether to pay initial and/or renewal compensation payments to their independent 

agents. For new or unlike plan change enrollments, MA Organizations and PDP sponsors 

could make an initial payment that is no greater than the fair market value (FMV) amount 

for such services, set annually by CMS in guidance interpreting these regulations. For 

renewals in Year 2 and subsequent years, the MA organization or PDP sponsor could pay 

up to 35 percent of the FMV amount for that year. We are proposing that recovery of 

compensation payments not happen when the disenrollment does not result from the 

agent's behavior. In addition to the agent and broker compensation structures, we are 

amending the training and testing requirements and setting limits on referral fees for 

agents and brokers. 

We do not believe that any of these revisions will add additional burden or have 

financial impact. We are simply revising the existing compensation structure under 

which MA organizations may pay independent agents and believe that the total 

compensation amounts will generally remain unaffected. Furthermore, we believe these 

proposed changes would actually lessen the burden and impact on MA organizations by 

simplifying the compensation structure for independent agent brokers. 

14. Effects of Drug Categories or Classes of Clinical Concern and Exceptions 

We believe that this proposed provision to establish new criteria for identifying 

Part D drug categories or classes of clinical concern would generate significant Part D 

savings. This provision would require that Part D sponsors include all Part D drugs on 

their formularies in categories or classes of clinical concern that CMS specifies for a 
 499 

typical individual with a disease or condition treated by the drugs in the category or class 

meet the following proposed criteria: (1) hospitalization, persistent or significant 

disability or incapacity, or death likely will result if initial administration (including 

self-administration) of a drug in the category or class does not occur within 7 days of the 

date the prescription for the drug was presented to the pharmacy to be filled; and (2) 

more specific CMS formulary requirements will not suffice to meet the universe of 

clinical drug-and-disease-specific applications due to the diversity of disease or condition 

manifestations and associated specificity or variability of drug therapies necessary to 

treat such manifestations. 

The expected savings to the Part D program would result from reducing the 

number of categories or classes of drugs for which Part D sponsors currently must 

include all Part D drugs on their formularies, as compared to existing requirements. 

Specifically, in applying the proposed criteria to all categories and classes of Part D 

drugs, CMS has determined that three existing categories and classes of Part D drugs 

would meet the new criteria and that no additional categories or classes of drugs would 

meet the criteria. Specifically, we determined that only the antineoplastic, antiretroviral 

and anticonvulsant categories and classes would meet the new criteria. This means that 

Part D sponsors would no longer be required to include all Part D drugs from within the 

antidepressant and immunosuppressant (used for transplants rejection) classes on their 

formularies. Relative to the antipsychotic class, however, we are deferring any change in 

formulary requirements for the antipsychotic class at this time and will continue to 
 500 

require that all drugs within the antipsychotic class be included on all Part D formularies, 

subject to the exceptions that get finalized in §423.120(b)(2)(vi). 

Based upon this determination, we estimated that full implementation (including 

the antipsychotic class) of this provision would result in federal savings to the Medicare 

Part D program of $720 million for the period CY 2015 through CY 2019, with most of 

these savings generated from the antipsychotic class (see table 14). We note this estimate 

is based upon the information that is available. Projected savings are based upon full 

implementation of the criteria and do not reflect that changes for the antipsychotic class 

of drugs are deferred at this time. However, there could be additional savings when new 

drugs enter the market and compete with each other by providing higher rebates. 

A consensus panel applied our proposed criteria to determine the categories or 

classes of clinical concern. Our consensus panel determined that of the current six 

categories or classes of clinical concern, three met both of the proposed criteria, three did 

not, and no new drug categories or classes met both criteria. Finally, we estimated the 

impact on drug expenditures for those drugs that ultimately met the criteria, as well as 

those drug categories or classes that no longer qualify as categories or classes of clinical 

concern. 

To arrive at the cost estimate for the implementation of the categories or classes 

of clinical concern, we began by putting drug spending into three groupings: (1) drugs 

that were already included in the six categories or classes of clinical concern; (2) drugs 

with a greater likelihood of being affected by this change because formularies without 

them would be acceptable under our formulary review process; (3) drugs with a lesser 
 501 

likelihood of being affected by this statutory change because formularies without them 

would not be acceptable under our formulary review process; and (4) drugs in the 

research and development pipeline in the six categories or classes of clinical concern that 

would be affected by this statutory change. Because we reduced the number of 

categories or classes of clinical concern relative to the six for which we currently require 

formulary inclusion of all Part D drugs, we expect Part D sponsors' negotiating power to 

increase. As a result, Part D sponsors could incur lower drug costs and could lower their 

bids, which could result in lower premiums and co-pays. We also believe that direct 

savings would be generated by the increasing generic utilization by removing brand 

products from formularies. Although, based on other categories and classes of drugs that 

exhibit generic saturation, we have reason to believe that some plans would still cover the 

brand products. Moreover, we believe that the program would avoid future costs because 

some drugs in the research and development pipeline would not be required on 

formularies as a result of this change. 

To support the panel's conclusion that our formulary checks could efficiently 

require adequate access to these categories and classes without requiring that every drug 

in them be included on Part D formularies, we compared a Part D formulary to other 

formularies. To accomplish this, we took an approved CY 2014 formulary containing the 

average number of RxNorm Concept Unique Identifiers (RxCUIs). This formulary 

includes the following: 23 generic (ANDA) antidepressant drug entities, 7 brand (NDA) 

antidepressant drug entities, 18 generic antipsychotic drug entities, and 9 brand 

antipsychotic drug entities. We then reviewed the drugs comprising the previously 
 502 

mentioned list against our formulary review requirements standards for treatment 

guidelines, common Medicare drugs, and the discrimination review. We found that the 

formulary could have passed these checks with 9 generic antidepressant drug entities, and 

6 generic antipsychotic drug entities. No brands were necessary to meet the formulary 

review requirements. Thus, this formulary includes an excess of 16 brand drug entities 

and 26 generic drug entities within these two classes of medications. Because all these 

products are currently required on all Part D formularies, there is significantly less need 

for manufacturers to restrain list prices or offer rebates to sponsors for formulary 

placement. In contrast, under our proposal, 100 percent of the brands (16/16) and 63 

percent of the generics (26/41) would be expected to meet or exceed the price 

concessions applicable to the least expensive products in those classes to remain 

competitive. If manufacturers increased price concessions in response, sponsors might 

elect to keep the products on the formulary. Otherwise, we would expect sponsors to 

take those products off formulary. Thus, individuals on brand versions of these drugs or 

on the 63 percent of generic versions would in most cases either stay on the drug at that 

more competitive price, or switch to an even cheaper alternative that remains on 

formulary. Either way, the beneficiary's drug costs and costs to the program would 

decrease. Moreover, to evaluate whether plans would continue to offer brand drugs 

(because new generic drugs would be available), and therefore whether any rebates 

would be available, we evaluated CY 2014 formularies for three classes of drugs that face 

saturation by generics. We found that even though the majority of drugs in those classes 

were generic, some plans continued to offer brand drugs. We also propose to establish 
 503 

exceptions that we believe permit Part D sponsors to apply meaningful utilization 

management to these drugs without compromising access. Although these exceptions are 

generally similar to existing policy, we propose to permit prior authorizations for drugs in 

the categories and classes of clinical concern to verify medically accepted indications or 

in Part A/B versus D situations. These lower costs could be reflected in bids submitted to 

CMS by Part D sponsors and could result in decreased premiums for Medicare 

beneficiaries. 

Although Part D sponsors would be required to include all Part D drugs on their 

formularies in fewer categories or classes than are currently required, we believe that our 

formulary review processes are sufficient to ensure that the implementation of this 

provision would not negatively impact beneficiary access to drugs or enrollment in Part 

D plans. Moreover, robust transition, exceptions and coverage determination, appeals 

and grievances processes ensure beneficiary access in the event that they have enrolled, 

either self-enrolled or auto-enrolled, in a plan where their drugs are not on formulary. 

We also do not believe that the proposed provisions would lead to greater beneficiary 

confusion or any increased difficulty in making enrollment decisions. We continue to 

believe that overall enrollment would increase given demographic trends and the 

increasing cash prices for drugs paid by beneficiaries who must pay cash because they do 

not enroll. Accordingly, we believe Medicare beneficiaries would continue to find Part 

D to be a cost efficient method of obtaining robust drug coverage at a range of acceptable 

costs. 

We plan on working closely with Part D sponsors as our guidance in this area 
 504 

develops to ensure that they continue to provide high quality prescription drug coverage 

at the most economical price. It is not clear to us whether PBMs would experience a 

decrease in administrative costs. On one hand, the provisions in this rule may decrease 

formulary maintenance expenses, such as managing a small formulary. This may result 

in PBMs decreasing their fees to Part D sponsors. On the other hand, these provisions 

may increase exception requests, appeals, prior authorizations, and outreach to Part D 

sponsors, thereby increasing PBMs' administrative costs. However, because these types 

of administrative costs exist for PBMs today, it is unclear how much of an increase we 

would see specifically as a result of these provisions. Similar to our ongoing 

communications with our Part D sponsors, we intend to work closely with the industry to 

minimize the likelihood of any unanticipated increases in beneficiary costs. 

15. Effects of Medication Therapy Management Program (MTMP) under Part D 

Current regulations require that Part D sponsors must have established a 

Medication Therapy Management Program that targets beneficiaries who: (1) have 

multiple chronic diseases with three chronic diseases being the maximum number a Part 

D plan sponsor may require for targeted enrollment; (2) are taking multiple Part D drugs, 

with eight Part D drugs being the maximum number of drugs a Part D plan sponsor may 

require for targeted enrollment; and (3) are likely to incur costs for covered Part D drugs 

in an amount greater than or equal to $3000, as increased by an annual percentage. We 

specified in guidance that while Part D sponsors are permitted to target beneficiaries with 

select chronic diseases, they must include at least five of nine core chronic diseases in 

their criteria. These provisions have generated wide variability in MTM programs. 
 505 

Moreover, despite opt-out enrollment, completion rates for comprehensive medication 

reviews (CMR) remain very low. 

We propose to broaden the MTM criteria to require that Part D sponsors now 

target beneficiaries who have two or more chronic diseases and are taking two or more 

covered Part D drugs. We propose to set the annual cost threshold at an amount 

commensurate with the annual amount of Part D costs incurred by individuals that meet 

the first two criteria regarding multiple chronic conditions and use of multiple covered 

Part D drugs. Applying this methodology, we would set the cost threshold at $620, 

which is the approximate cost of filling two generic prescriptions. We propose to revise 

this number periodically to reflect more up-to-date information regarding the drug 

spending of beneficiaries that have two or more chronic conditions and use two covered 

Part D drugs. We estimate that 2.5 million beneficiaries are currently eligible for MTM 

services, 13 percent opt-out of the MTM program, and 10 percent of participating 

beneficiaries will receive an annual CMR. We also estimate that an average CMR 

requires 35 minutes to complete and the average hourly compensation (including fringe 

benefits, overhead, general, and administrative expenses and fee) of the MTM provider is 

$120 (labor cost per CMR is $70), and that it costs $0.91 to print and mail a CMR 

summary in CMS' standardized format. Therefore, the estimated total annual cost of 

providing CMRs in all settings is $15,422,925 ($70.91/CMR x 217,500 CMRs). 

Previously, prior to the availability of more precise opt-out and CMR rates, we estimated 

that the total burden associated with conducting CMRs and delivering the CMR written 

summary in CMS' standardized format was 1,192,429 hours with a cost of $143,363,555, 
 506 

including delivery of 1,896,500 CMRs in all settings under the current eligibility criteria, 

and implementation and mailing costs for the CMR summary in standardized format (see 

OMB Control No. 0938-1154). We do not currently have data or estimates to determine 

the costs associated with quarterly targeted medication reviews and follow-up 

interventions, if necessary. 

We estimate that 18 million beneficiaries would be eligible for MTM services 

based on the proposed criteria. Using the same opt-out, CMR, and expense rates as 

before, the estimated total annual cost of providing CMRs in all settings is $111,045,060 

($70.91/CMR x 1,566,000 CMRs). This is below previous estimates. 

Additionally, there is currently no requirement to ensure that beneficiaries in 

special populations receive focused targeting, outreach, or engagement for enrollment or 

participation in MTM. Moreover, the opt-out method of enrolling targeted beneficiaries 

into MTM at 42 CFR 423.153(d)(1)(v) may only partly address the increased barriers to 

care faced by some beneficiaries. Without being prescriptive about what strategies must 

be employed, we are proposing that sponsors develop an effective strategy to ensure 

access to services for all MTM-eligible beneficiaries. We would expect to see details 

concerning sponsors' specialized strategies regarding outreach and service provisions in 

their bids. We believe that current plan reporting requirements, along with other CMS 

data sources, will be sufficient for us to evaluate the impact of such strategies. 

We cannot definitively score this proposal because the portion of the 

administrative costs attributable to MTM is not a specific line item that can be easily 

extracted from the bid. Although the increase in the number of CMRs is estimated to 
 507 

cost $111 million, mounting evidence shows that MTM services may generate overall 

medical savings. 

Supporting this conclusion, a recent study conducted in conjunction with the 

Center for Medicare and Medicaid Innovation ("CMMI MTM study") (available at 

http://innovation.cms.gov/Files/reports/MTM-Interim-Report-01-2013.pdf) found that 

MTM programs effectively targeted high risk individuals who had problems with their 

drug-therapy regimens and had high rates of hospital and emergency room visits before 

enrollment as well as those that experienced a recent visit to the hospital or emergency 

room. The study also found that individuals enrolled in MTM programs – particularly 

those who received annual CMRs – experienced significant improvements in drug 

therapy outcomes when compared to beneficiaries who did not receive any MTM 

services, thus supporting the hypothesis that the annual CMR may be one of the more 

crucial elements of MTM. Significant cost savings associated with all-cause 

hospitalizations at the overall PDP and MA-PD levels were found, which may be due to 

MTM's comprehensive rather than disease-specific approach. This research supports 

statements in a recent Congressional Budget Office report that programs and services that 

manage the benefit well or improve prescription drug use might result in medical savings 

(Congressional Budget Office, "Offsetting Effects of Prescription Drug Use on 

Medicare's Spending for Medical Services", November 2012, available at 

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43741-MedicalOffsets-11-29-

12.pdf). 

We anticipate that many more beneficiaries will have access to MTM services 
 508 

under the proposed revisions to the eligibility criteria, and believe that these changes will 

simplify the MTM criteria and minimize beneficiary confusion when choosing or 

transitioning between plans. Moreover, we believe these changes will reduce disparity 

and allow more beneficiaries with drug therapy problems to receive MTM services. 

Similarly, we expect the proposed requirement that sponsors develop an effective 

strategy to ensure access to services for all MTM-eligible beneficiaries will help to 

ensure that beneficiaries in special populations receive focused targeting, outreach, or 

engagement for enrollment or participation in MTM. 

16. Effects of Business Continuity for MA Organizations and Part D Sponsors 

Proposed §422.504(o) and §423.505(p) would, respectively, require MA 

organizations and Part D sponsors to develop and maintain business continuity plans 

which assess risks posed by disasters and contain strategies to mitigate those risks. We 

also would require that essential functions—including at a minimum benefit 

authorization, claim adjudication, call center and supporting operations--be restored 

within 24 hours after such functions fail or are disrupted. 

Business continuity plans are well established in the business community, and we 

believe that most MA organizations and Part D sponsors already have business continuity 

plans in place which cover the basic proposed subject areas. We estimate that 5 percent 

of the contracting entities (532 MA organizations and Part D sponsors in 2013), or about 

27 entities, will be affected by this requirement, resulting in an initial burden of 2,080 

hours. 
 509 

We estimate the first year burden of an emergency management director to help 

design the plan would be a burden of 56,160 hours (27 x 2,080). The estimated cost 

associated with such expert is the estimated number of hours multiplied by the estimated 

hourly rate of $36.50 (hourly rate for an emergency management director, General 

Medical and Surgical Hospitals, according to May 2012 wage data from Bureau of Labor 

Statistics Occupational Employment Statistics) plus 48 percent for fringe benefits and 

overhead, which equals a first year cost of $3,033,763. 

In subsequent years, the burden associated with this proposed requirement would 

be the costs of an emergency management director working on a part time basis for an 

ongoing burden of 28,080 (27 x 1,040). The estimated cost associated with such expert is 

the estimated number of hours multiplied by the estimated hourly rate of $36.50 plus 

48 percent for fringe benefits and overhead, which equals an annual cost of $1,516,882 

for subsequent years. 

We do expect that the burden would, should a disaster or other disruption of 

business occur, ultimately result in savings from planning that would avoid even more 

losses, but such offsets cannot be calculated here. 

Requiring business continuity plans would benefit Medicare beneficiaries in these 

Part C and Part D plans because planning helps to negate problems: the more prepared 

that MA organizations and Part D sponsors are for disasters and other disruptions to 

business, the more likely it would be that these organizations would address timely any 

problems encountered and ultimately return to regular operations and the less likely it 

would be that individuals would lose access to benefits as a result of disruptions. 
 510 

Requiring the restoration of essential functions within 24 hours after failure would help 

by providing a clear deadline by which priority operations must be available to 

beneficiaries. Our proposal to deem as essential benefit authorization certain minimum 

functions, including claim adjudications, and all supporting operations would benefit 

individuals by providing the means to ensure beneficiaries access to their Medicare 

benefits--and therefore health care and drugs. Designating operation of the call center as 

essential would provide beneficiaries real time customer support which could be critical 

to ensuring access to benefits in times of disaster or other disruption. For instance, if 

beneficiaries could not get to their regular places of business or found their claims were 

rejected at point of sale, customer service representatives could then send them to 

providers and pharmacies that could provide them with benefits or resolve questions in 

real time such that they would be more likely to leave pharmacies with any appropriate 

drugs in hand.

17. Effects of Requirement for Applicants or their Contracted First Tier, Downstream, or 

Related Entities to Have Experience in the Part D Program Providing Key Part D 

Functions 

Based on CMS' authority at section 1860D-12(b)(3)(D) of the Act to adopt 

additional contract terms, not inconsistent with the Part C and D statutes, that are 

necessary and appropriate to administer the Part D program, we are proposing at 

§423.504(b)(8)(i) through (iii) that Part D organizations seeking a new Medicare contract 

must have arrangements in place such that either the applicant, or a contracted entity that 

will be performing certain key Part D functions, has at least one full benefit year of 
 511 

experience providing key Part D functions. This proposal ensures that applicants take 

advantage of the abundant Part D industry expertise and experience that exists today in 

the development of their Part D program operations, rather than relying on technical 

assistance from CMS and having their inexperience place beneficiaries' access to 

prescription drugs at risk. We believe this provision will have a very minor savings 

impact on the federal budget, based on savings of time and effort (staff time and 

contracted auditor time and resources) that the government would spend on overseeing 

the disproportionate level of problems experienced by organizations operating Part D 

plans without prior Part D experience. For each inexperienced organization allowed into 

the program in the absence of this proposal, we would anticipate a savings of 1,000 staff 

hours at an average rate of $50 per hour, for a total of $50,000 in employee time, plus an 

additional savings of $200,000 in contractor dollars to conduct an emergency audit, for a 

total of $250,000. In the absence of this proposal, we would anticipate no more than two 

such inexperienced entities beginning Part D operations per year, for a total annual 

savings of $500,000. 

The burden associated with this proposal on industry would be minimal, with a 

total estimated number of labor hours of 3.25 to submit information during the Part D 

application process. Using the same average hourly salary as previously mentioned, the 

total cost to Part D applicants would be $162.50. We do not believe there are any 

non-administrative costs to industry associated with this proposal, as Part D applicants 

are already required to have arrangements in place to perform the key Part D functions 

discussed in our proposal. 
 512 

The main anticipated effect from this proposal is ensuring that only entities with 

some experience with Part D in critically important functional areas are permitted to offer 

new Part D contracts, thus strengthening the Part D program by enhancing the 

qualification criteria. We considered the alternate proposal of requiring the prior Part D 

experience to be tied to specific quality outcomes. We rejected the alternative because 

we believed it added unnecessary complexity and burden to the process, and we believe a 

simple experience requirement is currently sufficient. 

18. Effects of Requirement for Applicants for Stand Alone Part D Plan Sponsor 

Contracts to Be Actively Engaged in the Business of the Administration of Health 

Insurance Benefits 

Based on CMS' authority at section 1860D-12(b)(3)(D) of the Act to adopt 

additional contract terms, not inconsistent with the Part C and D statutes, that are 

necessary and appropriate to administer the Part D program, we proposed at 

§423.504(b)(9)(i) through (ii) that organizations seeking to offer a stand-alone 

prescription drug plans (PDP) for the first time must have either: (i) actively offered 

health insurance or health benefits coverage for 2 continuous years immediately prior to 

submitting an application, or (ii) actively managed prescription drug benefits for a 

company offering health insurance or health benefits coverage for 5 continuous years 

immediately prior to submitting an application. This proposal would ensure that 

applicants have substantial experience in administering health insurance benefits prior to 

becoming a Part D sponsor. We believe this provision will have a very minor savings 

impact on the federal budget, based on savings of time and effort (staff time and 
 513 

contracted auditor time and resources) that the government would spend on overseeing 

the disproportionate level of problems experienced by organizations operating 

stand-alone PDPs without prior health insurance administration experience. For each 

inexperienced organization not allowed into the program in the absence of this proposal, 

we would anticipate a savings of 1,000 staff hours at an average rate of $50 per hour, for 

a total of $50,000 in employee time, plus an additional savings of $200,000 in contractor 

dollars to conduct an emergency audit, for a total of $250,000. In the absence of this 

proposal, we would anticipate no more than two such inexperienced entities beginning 

Part D operations per year, for a total annual savings of $500,000. 

The burden associated with this proposal on industry would be minimal, with a 

total estimated number of labor hours of 3.25 to submit information during the Part D 

application process. Using the same average hourly salary as previously mentioned, the 

total cost to Part D applicants would be $162.50. We do not believe there are any 

non-administrative costs to industry associated with this proposal, as Part D applicants 

are already required to be licensed in at least one state prior to offering Part D benefits. 

The main anticipated effect from this proposal is ensuring that only entities with 

some experience administering health insurance benefits will be permitted to offer new 

stand-alone PDPs, thus strengthening the Part D program by enhancing the qualification 

criteria. CMS considered the alternate proposal of requiring the prior health insurance 

benefit administration experience to be tied to specific quality outcomes. We rejected 

this alternative because we believed it added unnecessary complexity and burden to the 

process, and we believe a simple experience requirement is currently sufficient. 
 514 

19. Effects of Limit Parent Organizations to One Prescription Drug Plan (PDP) Sponsor 

Contract per PDP Region 

 This provision has no quantifiable impact because the savings that might be 

achieved likely will be offset by the burden necessary with the consolidation activities 

and legal work necessary to implement these changes. 

20. Effects of Limit Stand-Alone Prescription Drug Plan Sponsors to Offering No More 

Than Two Plans per PDP Region 

 This provision has no quantifiable impact because the savings that might be 

achieved likely will be offset by the burden necessary with the consolidation activities 

and legal work necessary to implement these changes. 

21. Effects of Efficient Dispensing and in Long Term Care Facilities and Other Changes 

We are proposing the following specific changes to the LTC short-cycle 

dispensing requirements at §423.154: (1) add a prohibition on payment arrangements 

that penalize the offering and adoption of more efficient LTC dispensing techniques; (2) 

eliminate language that has been misinterpreted as requiring the proration of dispensing 

fees; (3) incorporate an additional waiver for LTC pharmacies using restock and reuse 

dispensing methodologies under certain conditions; and 4) make a technical correction to 

eliminate the requirement that Part D sponsors report on the nature and quantity of 

unused brand and generic drugs. Medicare Part D plan sponsors are already required to 

comply with the LTC short-cycle dispensing requirements. 

The prohibition on payment arrangements that penalize the offering and adoption 

of more efficient LTC dispensing techniques is a clarification of the Congress' intent in 
 515 

enacting section 1860D-4(c)(3) of the Act, and we do not believe it will impose any new 

costs on stakeholders. Indeed, this proposal should reduce Part D sponsors' costs by 

preventing Part D sponsors from penalizing the most efficient LTC dispensing 

techniques. The resulting reduction in brand drug costs should offset or surpass increases 

in dispensing fees. 

22. Effects of Applicable Cost-Sharing for Transition Supplies: Transition Process 

Under Part D 

We propose to add at § 423.120(b)(3)(vi) a paragraph clarifying that a Part D 

sponsor must charge cost sharing as follows: (a) For low-income subsidy (LIS) 

enrollees, a sponsor must not charge higher cost sharing for transition supplies than the 

statutory maximum copayment amounts; (b) for non-LIS enrollees, a sponsor must 

charge: (1) the same cost sharing for non-formulary Part D drugs provided during the 

transition that would apply for non-formulary drugs approved under a coverage 

exception; and (2) the same cost sharing for formulary drugs subject to utilization 

management edits provided (for example, prior authorization and step therapy) during the 

transition that would apply once the utilization management criteria are met. 

Because increases or decreases in cost sharing during transition supplies under the 

various circumstances are likely to offset one another, we anticipate that there would be 

no cost impact on plans. 

23. Effects of Medicare Coverage Gap Discount Program and Employer Group Waiver 

Plans 

The regulation amends §423.2325 by adding a new paragraph (h), "Medicare 
 516 

Coverage Gap Discount Program and Employer Group Waiver Plans". This new 

provision requires Part D sponsors to fully disclose to each employer group the projected 

and actual manufacturer discount payments under the Discount Program attributable to 

the employer group's enrollees. 

We believe that the provision will have negligible regulatory impact because, in 

the interest of Full Disclosure requirements, the great majority of sponsors with employer 

group clients have likely already integrated Discount Program data into their existing 

client reporting. This additional reporting has enabled employer groups to begin to 

incorporate the manufacturer payments into their benefit packages. Also, for those few 

Part D sponsors that have not already incorporated the discounts into client reports, the 

provision creates a minimal financial burden. The requirement does not entail 

development or gathering of any new data as currently, Part D sponsors report 

beneficiary-level discounts to CMS on Prescription Drug Event (PDE) data, and report 

aggregated enrollee utilization to employer group clients. The new provision requires 

only that sponsors who have not yet modified their existing reports provide the 

aggregated discount amounts to each employer group, and use the existing processes for 

report dissemination. 

In estimating the associated regulatory costs we assumed that 80 percent of the 

sponsors were already supplying employer group clients with Discount Program 

information and that 20 percent of the plans would need to modify the reports as a result 

of this provision. We used 2013 data to determine the number of sponsors that would be 

affected by this new requirement. In 2013, 131 Part D sponsors operated one or more 
 517 

EGWP plans. If 20 percent of these Part D sponsors were required to change their client 

reporting, approximately 26 sponsors would be affected. Our research indicates that it 

would take each sponsor employing a mid-level analyst about 2-business days to 

aggregate the manufacturer discounts for each client and modify the existing reports to 

include the discount payments. Assuming an average hourly wage and benefits of $505, 

the cost of these 16 hours would be $50 x 16 = $800 for each Part D sponsor or a total of 

$800 x 26 = $20,800 for all 26 sponsors combined. In subsequent years we do not 

believe that there will be any incremental costs associated with the regulation as sponsors 

will update the discount data per their existing processes. 

There is no quantifiable monetary value to CMS. Rather, requiring Part D 

sponsors to report amounts they receive on behalf of employer group enrollees will 

enable the employer group to use the payments in a way that best serves retirees. 

24. Effects of Interpreting the Non-Interference Provision 

We are proposing to formally interpret section 1860D-11(i) of the Act, referred to 

as the non-interference provision. This provision prohibits CMS from interfering with 

the negotiations between drug manufacturers and pharmacies and Part D sponsors, and 

requiring a particular formulary or instituting a price structure for the reimbursement of 

covered part D drugs. We have not previously interpreted the statutory provision, which 

has resulted in different stakeholders having different views about its scope. 

Consequently, we believe that a clear interpretation of the statutory provision will 

 

5 Depart of Labor quarterly census of Employment and Wages indicates that the average 2011 wage for private health 

insurance plans was $74,431. To project a 2015 wage this figure was increased 3 percent per year to $83,772 in 2015. 

This lead to an hourly wage projection of $40.27 or with 20 percent benefits an hourly rate of $48.33, which was in 

turn rounded upward to derive an hourly rate of $50. 
 518 

remove ambiguity. We do not believe there is any regulatory impact because we are 

codifying an existing requirement that currently prohibits CMS from interfering in 

certain activities between Part D sponsors, pharmacies and manufacturers without adding 

any new requirements. 

25. Effects of Pharmacy Price Concessions in Negotiated Prices 

We propose to revise the definition of negotiated prices at §423.100 to specify 

that all pharmacy price concessions must be included in the negotiated price. This would 

preclude the differential reporting that is taking place today in the realm of reporting drug 

costs and price concessions from network pharmacies. This proposal would change 

current policy that permits sponsors to elect to take some price concessions from 

pharmacies in forms other than the negotiated price and report them outside the PDE. 

This practice currently allows price concessions to be applied disproportionately to costs 

that plans are liable for, and thus may shift more low-income cost-sharing subsidy and 

reinsurance costs to the government, as well as to manufacturers in the calculation of 

coverage gap discount payments. A sponsor that engages in this practice can reduce its 

bid and achieve a competitive advantage relative to a sponsor that applies all price 

concessions to the negotiated price – a competitive advantage stemming not from greater 

efficiency, but from a technical difference in how costs are reported to CMS. 

Meanwhile, the higher the negotiated price, the higher beneficiary coinsurance will be, 

the faster the beneficiary is moved through the benefit, and the higher government 

subsidies for low-income cost sharing (LICS) and reinsurance subsidies will be. Our 

proposal would impose consistent treatment of drug price reporting. 
 519 

Our proposal to require all price concessions to be reflected in the negotiated 

price received by the pharmacy would not necessarily change the level of price 

concessions received from network pharmacies, but would impose a single consistent 

price concession reporting process on all Part D sponsors. Therefore, it is not clear that 

any contractual arrangements between a subset of sponsors and network pharmacies 

would require renegotiation, since only the form of the price concession, rather than its 

level, would be affected by this proposal. 

 In addition, when price concessions from pharmacies are in forms other than the 

negotiated price, the degree of price concession that the pharmacy has agreed is no longer 

reflected in the negotiated prices available at point of sale or reflected on the Medicare 

Prescription Drug Plan Finder (Plan Finder) tool. Thus, the true price of drugs at 

individual pharmacies is no longer transparent to the market. Consequently, consumers 

cannot efficiently minimize both their costs (cost sharing) and costs to the taxpayers by 

seeking and finding the lowest-cost drug/pharmacy combination. This proposal would 

ensure that the actual level of price competition is transparent to the Part D market. 

Under current policy, a sponsor may be able to offer a lower bid than its 

competitors and may achieve a competitive advantage stemming not from greater 

efficiency, but from a technical difference in how costs are reported to CMS. When this 

happens, such differential reporting may result in bids that are no longer comparable, and 

in premiums that are no longer valid indicators of relative plan efficiency. The changes 

we are proposing would lead to Part D bids being more accurately comparable and 

premiums more accurately reflecting relative plan efficiencies. The lowest premiums 
 520 

would more accurately direct beneficiaries to the plans that have the lowest costs to the 

program overall. 

We do not collect sufficient detail in price concession data reported to CMS to 

quantify the impact of this proposed change to standardize price concession reporting. 

We believe that only certain sponsors are engaging in the differential reporting practices 

today, and these sponsors face close competition from larger competitors that do not 

appear to be employing the same strategies. Consequently, if the sponsors employing 

these tactics increase their bids to maintain margin, they could likely risk losing market 

share. Therefore, we would expect these sponsors to carefully consider the risk of losing 

market share before raising their bids in response to our regulatory proposals, particularly 

those that are committed to the LIS market. 

 We expect that the effect of our proposal to require consistent and transparent 

pricing would not only provide higher-quality information to the Part D market, but also 

promote increased price competition among network pharmacies. This expectation is 

consistent with economic theory that holds that increased price transparency will increase 

price competition. We believe pharmacies will support including the full price 

concession in the point-of-sale price, and fully transparent price competition will align 

beneficiary and taxpayer interests in minimizing costs. Our proposal would not change 

the level of price concessions and therefore costs under the program as a whole, but 

would apply consistency to how these are reported to CMS and treated in bidding and 

payment processes. Therefore, we anticipate that there would be no cost impact on plans. 

26. Effects of Payments to PDP Plan Sponsors for Qualified Prescription Drug Coverage 
 521 

and Payments to Sponsors of Retiree Prescription Drug Plans 

 This section is not anticipated to have any significant impact since it is only a 

conforming change, necessary to align with the proposed definition change in another 

section of the regulation. 

27. Effects of Preferred Cost Sharing 

 We propose to require that sponsors may offer reduced copayments or 

coinsurance for covered Part D drugs obtained through a subset of network pharmacies, 

as long as such preferred cost sharing is in return for consistently lower negotiated prices 

relative to the same drugs when obtained in the rest of the pharmacy network. Therefore, 

we intend to clarify that preferred cost sharing should consistently be aligned with and 

accurately signal lower costs. We propose that by "consistently lower" we mean that 

sponsors must offer better prices on all drugs in return for the lower cost sharing. In 

practice we believe this would mean that whatever pricing standard is used to reimburse 

drugs purchased from network pharmacies in general, a lower pricing standard must be 

applied to drugs offered at the preferred level of cost sharing. Our analysis shows that 

most sponsors offering preferred cost sharing are currently achieving these levels of 

savings, and therefore our proposed policy would only require a change in price 

concession levels or reporting for a limited number of sponsors. Our proposal would 

apply a consistent expectation across all sponsors to compete on the same basis on 

negotiated prices, including in related-party pharmacy operations. 

 Instead of consistently passing through lower costs available through economies 

of scale or steeper discounts, some (but not the majority of) sponsors are actually 
 522 

charging the program higher negotiated prices in some cases. In other cases, the 

negotiated prices offered for preferred cost sharing are only slightly lower than the prices 

in the rest of the network. When either higher prices or very nearly the same prices are 

combined with significantly lower cost sharing, such pricing increases the proportion of 

costs borne by the plan and the government. Moreover, the lower cost sharing provides a 

defective price signal that distorts market behavior. In these cases, the lower cost sharing 

does not incent enrollees to select pharmacies with lower prices and thus make more 

efficient choices in the market, but the exact opposite. This would be expected to result 

in higher costs to the Part D program overall. Therefore, we believe our proposed policy 

change to require consistently lower negotiated prices in return for preferred cost sharing 

may not only decrease overall price levels in certain sponsor's networks, but would also 

encourage beneficiaries to make drug purchase decisions that are better aligned with 

lower costs to the program overall. However, we do not have enough information on 

how negotiated prices might change – particularly in combination with the requirements 

for all price concessions from pharmacies to be reflected in negotiated prices, and for 

any-willing-pharmacy terms and conditions to include minimum price concession terms 

for preferred cost sharing – to predict the overall change in Part D costs. 

28. Effects of Maximum Allowable Cost Pricing Standard 

 We are proposing a change to the regulations at §423.505(b)(21) and 

§423.505(i)(3) governing the disclosure and updating of prescription drug pricing 

standards used by Part D sponsors to reimburse network pharmacies to make clear that 

drug pricing based on maximum allowable cost (MAC) is subject to these regulations. In 
 523 

the final rule at 76 FR 54600 (September 1, 2011), we did not estimate a regulatory 

impact for Part D sponsors to comply with the prescription drug pricing standard 

requirements, and we do not believe these proposed changes would result in any 

regulatory impact. Read together, the new provisions in §423.501, §423.505(b)(21), and 

§423.505(i)(3)(viii) require sponsors, when applicable, to include provisions in network 

pharmacy contracts, to address the disclosure of MAC prices themselves to be updated to 

the applicable pharmacies in advance of their use for reimbursement of claims, because 

the source of the MAC prices is not publicly available. Addressing prices that will be 

paid to a subcontractor is an activity undertaken in the normal course of business. Also, 

whether to use MAC prices is voluntary for Part D sponsors. Finally, sponsors must have 

procedures, systems, and technology currently in place to use these prices for 

reimbursement of pharmacy claims in the normal course of business. These systems 

would have to be adapted to also disclose the prices to pharmacies in advance of their 

use, which we believe would involve negligible effort for Part D sponsors' existing 

employees and/or subcontractors. Therefore, we estimate the impact of these provisions 

to be negligible. 

29. Effects of Any Willing Pharmacy Standard Terms & Conditions 

Proposed changes to §423.120(a)(8) would require Part D sponsors to offer the 

contract terms and conditions (T&C) for every level of cost sharing offered under a Part 

D plan (preferred, standard retail, mail order, etc.) to any willing pharmacy. We expect 

the burden for Part D sponsors to amend contracts, where necessary, to offer every level 

of cost sharing would be negligible. Sponsors already must meet any willing pharmacy 
 524 

requirements for retail and mail order cost sharing. In 2013, nearly half of non-employer 

group Part D sponsors were designing and marketing plans with T&C for preferred cost 

sharing levels. For these sponsors, the only change associated with this proposal will be 

to ensure that now T&C for all levels of cost sharing, including preferred, are being 

offered (if they are not already) to all interested pharmacies. For the other half of Part D 

sponsors not currently offering preferred cost sharing options, this proposal does not 

require them to start. 

Part D sponsors already negotiate contracts regularly with pharmacies in order to 

meet network access requirements. We estimate that for sponsors who currently offer 

benefit packages with a preferred cost sharing level (approximately 500 plans), an 

estimated new burden of 5,000 legal hours (500 plans x 10 hours) for revising contract 

language and 2,000 hours (500 plans x 4 hours) for additional contract support staff time 

negotiating with and assisting pharmacies contracting at the preferred cost sharing level 

for the first time. The estimated cost associated with this change is the estimated number 

of hours multiplied by available average hourly rates ($62.93 per hour for a lawyer, 

$32.22 per hour for a financial specialist [May 2012 wage data from Bureau of Labor 

Statistics Occupational Employment Statistics]), plus 48 percent for fringe benefits and 

overhead, which equals a first year cost of $561,053.20. Once a sponsor has revised 

contracts to meet the proposed requirement, no extraordinary additional expenses are 

anticipated for subsequent years. For a plan not currently offering preferred cost sharing 

levels, it is expected that preferred cost sharing terms and conditions would be offered to 

any willing pharmacy if they ever decide to offer them. 
 525 

Any new burden on pharmacies is similarly expected to be negligible, as they are 

already reviewing and implementing terms from contracts, often annually. Pharmacies 

are not being directed to choose one set of T&C over another, but rather are gaining the 

option to review and implement terms for preferred cost sharing, if they so choose to 

accept the applicable negotiated pricing terms. 

Beneficiaries are expected to benefit from an increased number of pharmacies offering 

preferred cost sharing levels. 

30. Effects of Enrollment Requirements for the Prescribers of Part D Covered 

Our proposal is that prescribers must be enrolled in Medicare in order for their 

prescriptions to be coverable under the Part D program. This will entail Part D sponsors 

or their designated PBMs checking the prescriber's individual NPI to determine whether 

the prescriber's is validly enrolled in Medicare before paying a claim from a network 

pharmacy or request for reimbursement from a beneficiary. 

When we promulgated the NPI PDE requirement in a final regulation published 

on April 12, 2012 (77 FR 22072), we estimated the impact for PBMs and plan 

organizations to contract for or build prescriber ID validation services. Thus, while this 

proposal entails a new requirement for Part D sponsors, we do not believe it would have 

any new or additional impact because Part D sponsors must already have prescriber 

validation capabilities to meet the NPI PDE requirement. 

Additionally, under our proposal, we do not estimate any savings. We presume 

that if a beneficiary's prescriber is not enrolled or does not enroll in Medicare, the 

beneficiary will find a new prescriber who is enrolled, rather than go without needed 
 526 

medications. Therefore, we do not estimate any savings from this proposal. 

31. Effects of Improper Prescribing Practices and Patterns 

Our proposed revisions in § 424.530(a)(11) and § 424.535(a)(13) would likely 

result in additional application denials and revocations. The DEA web site found at 

http://www.deadiversion.usdoj.gov/crim_admin_actions/index.html contains a list of 

physicians, eligible professionals, and pharmacies that have had their DEA Certificate of 

Registration suspended or revoked since 2000. Based on our review of this data, we 

believe that approximately 200 Medicare-enrolled physicians and eligible professionals 

would be affected by proposed § 424.535(a)(13). However, we do not have data 

available to assist us in calculating the potential costs to physicians and eligible 

professionals in lost potential billings or the potential costs or savings to the government 

arising from this provision; nor are we able to estimate the number of denials per year 

that would result from proposed § 424.530(a)(11). 

Our proposed §424.535(a)(14) would result in an increase in the total number of 

revocations under § 424.535(a). We are unable, though, to project the number of 

providers and suppliers that would be revoked under §424.535(a)(14) because we do not 

have data available that can be used to make such an estimate. Thus, we cannot project: 

(1) the potential costs to providers and suppliers in lost billings, or (2) the potential costs 

or savings to the government arising from our proposed provision. 

32. Effects of the Transfer of TrOOP Between Part D Sponsors Due to Enrollment 

Changes during the Coverage Year 

We do not expect that codifying the requirement for Part D sponsors to report 
 527 

TrOOP-related data to a subsequent plan in which a beneficiary enrolls during the 

coverage year, and for the new plan to accept that data and use it to position the 

beneficiary in their benefit would generate savings or increase costs. 

We expect the requirement to report TrOOP-related data and to accept and use the 

data to position a beneficiary in a new plan benefit when the member changes plans 

during the coverage year would ensure the Part D benefit is correctly administered by the 

new plan and prevent a beneficiary who has already moved through the initial phase(s) of 

the Part D benefit from starting the benefit anew as a result of the enrollment change. 

33. Effects of Broadening the Release of Part D Data 

We are proposing to revise our regulations governing the release of Part D data to 

expand the release of unencrypted prescriber, plan and pharmacy identifiers contained in 

prescription drug event (PDE) records to external researchers, as well as to make other 

changes to our policies regarding release of PDE data, as currently codified at §423.505 

(f)(3) and (m). This proposal does not impose any new costs on any stakeholders. 

Medicare Part D plan sponsors are already required to, and do, submit the information 

that may be released in accordance with this proposal. Therefore, we are not including 

any assessment of this proposal for the regulatory impact statement. 

34. Effects of Establish Authority to Directly Request Information From First Tier, 

Downstream, and Related Entities 

Pursuant to sections 1857(d)(2) and 1860D 12(b)(3)(c) of the Act, we are now 

proposing to specify at §422.504(i)(2)(ii) and §423.505(i)(2)(ii) that HHS, the 

Comptroller General, or their designees have the right to audit, evaluate, collect, and 
 528 

inspect any records directly from any first tier, downstream, or related entity. This 

proposed regulatory change would not grant CMS (or the MEDIC, the contractor that 

conducts fraud investigations on our behalf) any oversight authority beyond what we 

already possess. 

In enabling CMS or its designee(s) to directly request information from a first 

tier, downstream, or related entity, we would provide a more efficient avenue to obtain 

necessary information. This proposal would change the current policy, which requires 

going through the plan sponsor in order to collect information. Our proposal would save 

money and time for CMS as well as the plan sponsor. 

We anticipate that adoption of this proposal would result in cost savings for plan 

sponsors. Under the current regulatory structure, assuming that the MEDIC (the CMS 

contractor that typically would put forth such requests) puts forth 1000 requests per year 

to Part C and D sponsors, each request requires the plan sponsor to spend 5 hours 

developing and making the request for information from its first tier, downstream, or 

related entity, and communicating the results of that request back to CMS. At a rate of 

$55 per hour, plan sponsors may save a total of $275,000 in employee costs in the 

aggregate. Additionally, we believe this provision will have a very minor savings impact 

on the federal budget. This calculation is based on the savings in time and effort the 

MEDIC will experience (2 hours per information request) resulting from the ability to 

request information directly from first tier, downstream, and related entities. The 2 hours 

reflects the time the MEDIC currently spends resolving ambiguities in the request or in 

the information provided in response that are created by the presence of an intermediary 
 529 

(that is, the plan sponsor) between the requestor (MEDIC) and the custodian of the 

information (that is; first tier, downstream, or related entity). 

In addition to cost savings, this proposed regulatory change will reduce the 

administrative burden on plan sponsors. The plan sponsor will no longer have to act as 

the gatekeeper between the MEDIC and its first tier, downstream, or related entity. 

We do not anticipate any additional burden relating to the proposed requirement 

that we alert the plan sponsor that we are contacting its first tier, downstream or related 

entity since CMS will be merely copying the plan sponsor on the request. 

35. Effects of Eligibility of Enrollment for Incarcerated Individuals 

We are proposing to amend §417.460(b)(2)(i), §417.460(f)(1)(i), §422.2, 

§422.74(d)(4)(i)(A), §422.74(d)(4)(v), §423.4, and §423.44(d)(5) to clarify the eligibility 

requirement for residing in the plan's service area related to incarceration for the purposes 

of enrolling into and remaining enrolled in MA, Part D, and Medicare cost plans. We 

expect the impact of this change to be primarily that of savings to the MA and Part D 

programs. In CY 2012, there were close to 50 million Medicare beneficiaries. 

Approximately 34.4 million of those beneficiaries were enrolled in MA plans, PDPs, or 

cost plans which accounts for 68.8 percent of the total Medicare population. In the same 

year, an average of 21,329 Medicare beneficiaries enrolled in MA or Part D plans were 

identified by SSA as being incarcerated. 

We issued guidance to MA plans and PDPs to investigate each individual's 

incarcerated status and disenroll the individual for no longer residing in the plan's service 

area if the plan confirmed incarcerated status. If the MA plan or PDP could not confirm 
 530 

the incarcerated status, those plans were to continue to investigate each instance of 

incarceration for up to 6/12 months and disenroll the individuals at the end of that time 

following §422.74(b)(4)(ii)/§423.44(b)(5)(ii) if they couldn't verify the incarcerated 

status sooner. As a result, the plan received capitated payments when the individual was 

ineligible to receive payment of Medicare benefits. Section 1876 Cost contracts had no 

such instructions to disenroll individuals who are incarcerated. By directing MA plans, 

PDPs, and cost plans to disenroll incarcerated individuals at the time of notification from 

CMS, we intend to prevent improper payment for these individuals to MA plans, PDPs, 

and cost plans for periods when they were ineligible to receive such services. Based on 

the data for capitation payments for MA and PDPs, as well as the prepayments provided 

to cost plans, we estimate that the disenrollment of incarcerated individuals would result 

in a decrease in payments made by CMS and would result in a cost savings of 

$70 million in 2015. 

We estimate, based on the numbers mentioned previously, that this change could 

save the MA program approximately $27 million in 2015, increasing to $62 million in 

2019, and could save the Part D program (includes the Part D portion of MA-PD plans) 

approximately $46 million in 2015, increasing to $90 million in 2019. As cost plans are 

paid based on the reasonable costs delivering Medicare-covered services to their 

enrollees, instead of the fixed capitation amounts paid to MA and PDPs, we believe the 

impact to cost plans associated with this provision to be negligible. 
 531 

TABLE 11: PROJECTED NUMBER OF INDIVIDUALS DISENROLLED 

DUE TO INCARCERATION AND ESTIMATED SAVINGS TO THE MEDICARE 

ADVANTAGE PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 

THROUGH 2019 

 

2015 2016 2017 2018 2019 

Totals 

(CYs 

2105-2019) 

Projected number of 

incarcerated 

beneficiaries enrolled 

in MA plans 

6,280 7,750 9,221 10,691 12,162 46,104 

Projected federal 

impact due to 

incarcerated 

individuals disenrolled 

6 months sooner 

-$27 

million 

-$35 

million 

-$43 

million 

-$52 

million 

-$62 

million 

-$219 

million 

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided 

by the SSA. 
 532 

TABLE 12: PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE 

TO INCARCERATION AND ESTIMATED SAVINGS TO THE MEDICARE 

PART D PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 

THROUGH 2019 

2015 2016 2017 2018 2019 

Totals 

(CYs 2015 – 

2019) 

Projected 

number of 

incarcerated 

beneficiaries 

enrolled in 

Part D plans 

(including 

MA-PDs) 

49,275 55,970 62,666 69,362 76,058 313,331 

(accumulated; not 

unique individuals) 

Projected 

federal 

impact due 

to 

incarcerated 

individuals 

disenrolled 

12 months 

sooner 

-$46 

million 

-$55 million -$65 million -$77 million -$90 million -$333 million 

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided by the 

SSA. 

36. Effects of Rewards and Incentives Program Regulations for Part C Enrollees 

 This proposal would permit plans to provide limited rewards and incentives to 

enrollees who participate in activities that focus on promoting improved health, 

preventing injuries and illness, and promoting efficient use of health care resources. 

While there would be a cost associated with providing rewards and incentives, we 

anticipate that there may be savings as a result of healthier beneficiary behavior. 

Because plans are not required to provide rewards and incentives and CMS does not have 

a means of calculating the costs and benefits of rewards/incentives at this time, we are 

not providing an impact analysis for this provision. 
 533 

37. Effects of Expand Quality Improvement Program Regulations 

 The proposed regulation changes are only technical changes for the established 

quality improvement program requirements. These changes would clarify how MA 

organizations report quality improvement program information to CMS. As MA 

organizations are already reporting this information to CMS and the changes are only to 

codify the process, the changes will not increase costs for MA organizations. 

38. Effects of Authorization of Expansion of Automatic or Passive Enrollment 

Non-Renewing Dual Eligible SNPs (D-SNPs) to Another D-SNP to Support Alignment 

Procedures 

We propose to modify the situations in which CMS may passively enroll 

beneficiaries to include the situation when a Medicare Advantage Dual Eligible SNP 

(D-SNP) is non-renewing. More specifically, passive enrollment would be permitted for 

full-benefit dual eligible beneficiaries in the non-renewing D-SNP when there is another 

D-SNP in the service area that offers substantially similar benefits, network, and 

cost-sharing as the non-renewing D-SNP, and that also offers the Medicaid managed care 

organization in which the beneficiary is enrolled. 

SNPs are due to sunset in 2014. Consequently, we are not scoring this provision 

for contract years 2015 through 2019. 

39. Effects of Improving Payment Accuracy: Reporting Overpayments, RADV Appeals, 

Part D Payment Reopening, LIS Cost Sharing, and Coverage Gap Discount Program 

This proposed section proposes only technical changes for overpayment 

reporting, RADV appeals, Part D payment reopening, LIS cost sharing, and the Coverage 
 534 

Gap Discount Program. These technical changes will not result in costs to MA 

organizations and Part D sponsors, nor do we expect the impact of these technical 

changes to result in savings. 

40. Effects of Part C and Part D RAC Determination Appeals 

 In section III.B.x of this proposed rule, to establish an administrative appeals 

process for overpayment determinations by the Part C and Part D RACs. The cost 

associated with these provisions involves the preparation and submission of appeal 

requests by plans. We estimate this cost to be $48,343 as summarized in the following 

Table 13. 

TABLE 13: SUMMARY OF RAC DETERMINATION APPEALS 

COSTS AND BENEFITS 

Provision Description Costs (in $Millions) Benefits 

Submission of MA plans' first level 

Request for Reconsideration 

0.02167 Administrative appeal rights and 

accuracy in recovery demands 

Submission of Part D plans' first level 

Request for Reconsideration 

0.02167 Administrative appeal rights and 

accuracy in recovery demands 

Submission of MA plans' second level 

Request for Review 

0.00208 Administrative appeal rights and 

accuracy in recovery demands 

Submission of Part D plans' second level 

Request for Review 

0.00208 Administrative appeal rights and 

accuracy in recovery demands 

Submission of MA plans' third level 

Request for Review by the CMS 

Administrator 

0.0004 Administrative appeal rights and 

accuracy in recovery demands 

Submission of Part D plans' third level 

Request for Review by the CMS 

Administrator 

0.0004 Administrative appeal rights and 

accuracy in recovery demands 

41. Effects of Requirement to Provide High Quality Health Care 

The proposal to add contractual requirements for MA plans and Part D plans to 

provide high quality health care proposes to include in the terms and conditions in our 

contracts with Part D sponsors and explicit requirement that Part D plans administer a 
 535 

benefit that promotes and supports high quality care. We believe that we have conveyed 

this expectation in other ways, such as through our performance and quality 

measurements and methodologies. This proposal provides a basis for enforcement or 

corrective action for low-performing plans. Therefore, we do not believe there is an 

impact associated with this proposal. 

42. Effects of MA-PD Coordination Requirements for Drugs Covered under Part D 

To ensure that Part A, Part B and Part D drug benefits are coordinated by 

MA-PDs so that enrollees receive needed medications on a timely basis, we are 

proposing to add a new section (b)(7) to §422.112 to require MA-PDs to establish 

adequate messaging and processing requirements with network pharmacies to ensure that 

appropriate payment is assigned at the point of sale (POS) and to ensure that when 

coverage is denied under Part D due to available coverage under Part A or Part B, that 

such coverage is authorized expeditiously so that the drug may be provided to the 

enrollee as his or her health condition requires. Our proposed regulation requires that 

MA-PDs have systems in place to accurately and timely adjudicate claims at the POS. 

In addition, we would like to ensure that MA-PD plans are coordinating their 

benefits appropriately during the coverage determination process. If an MA-PD denies 

PDP coverage due to the availability of Part A or Part B coverage, we expect the MA 

organization to ensure that the decision results in authorization or provision of the drug 

under Part B pursuant to the requirements in parts 422 and 423, subpart M. We do not 

expect MA-PD enrollees to have to request an initial Part A or B versus Part D coverage 

determination more than once. We are soliciting comments about our proposal, as well 
 536 

as other possible approaches to minimizing delays in beneficiary access to needed 

medications caused by inadequate coordination of Part A, Part B and Part D benefits at 

the POS and during the coverage determination process. In particular, we would 

appreciate organizations sharing their expertise regarding best practices for benefit 

coordination at the POS and plan processes that enhance those coverage determinations. 

We also are soliciting comments on challenges MA-PDs currently encounter in their 

efforts to integrate these benefits. Under Medicare regulations MA-PD plans are already 

required to coordinate member coverage for both Part A and B and Part D covered drugs. 

 It is our understanding that the majority of MA-PDs are effectively performing this 

activity. However, we are aware that some MA-PDs have been less successful. With 

this regulation we propose to identify drug coverage standards that all MA-PDs can 

follow that have proven to be both cost effective and efficient. This proposed regulation 

does impose any new requirements or costs but rather will assist low performing 

MA-PDs in clarifying the necessary actions to meet existing regulatory requirements for 

the effective coordination of Part A, Part B and Part D covered drugs. 

43. Effects of Revisions to Good Cause Processes 

We are proposing to revise § 417.460, §422.74, and §423.44 to allow an entity 

acting on behalf of CMS to conduct good cause reviews. Shifting responsibility for this 

activity from CMS to entities such as MA, Part D and cost plans would not change the 

number of individuals requesting reinstatement for good cause nor the number of those 

individuals who meet the criteria for reinstatement. While some plans may increase their 

bids to cover the costs to complete this work, the administrative burden to plans is 
 537 

negligible. Therefore, we do not expect this change to have a monetary impact to the 

Medicare Trust Funds or affect enrollment, as the policies permitting involuntary 

disenrollment for non payment of premiums and allowing beneficiaries to request 

reinstatement for good cause have been in existence for some time. 

44. Effects of the Definition of Organization Determination 

The proposed revisions at §422.566 are intended to clarify the meaning of 

organization determination and to maintain consistency between the regulatory definition 

of organization determination and the definition used elsewhere in CMS documents and 

subregulatory guidance. Specifically, we are seeking to include additional types of 

coverage decisions that are subject to Medicare appeals processing requirements set forth 

in subpart M. In other words, cases where a provider under contract with an MA 

organization provides a service directly to an enrollee and when a contract provider refers 

an enrollee to a non-contract provider for an item or service. Because this proposed 

change codifies the existing definition of organization determination, this proposal does 

not represent any new burden on MA organizations or burden for small businesses, rural 

hospitals, states or the private sector. 

45. Effects of MA Organization Extension of Adjudication Timeframes for Organization 

Determinations and Reconsiderations 

The proposed changes to §422.568(b), §422.572(b), and §422.590 would clarify 

the limited circumstances in which MA organizations are permitted to extend the 

adjudication timeframe for organization determinations and reconsiderations. We believe 

these proposed changes would have a minimal impact on MA organizations, because they 
 538 

are not likely to alter the number of coverage requests plans would receive or the 

required clinical resources to process each request. During audits of MA organizations, 

we identified cases where plans are improperly extending the applicable adjudication 

timeframe (for example, where clinical documentation is needed from a contract provider 

or where the plan has failed to develop and review the case during the required 

timeframe) but we do not have data on the overall frequency with which extensions are 

being invoked and what percentage of those cases involve the scenarios described. 

46. Effects of Two-Year Prohibition When Organizations Terminate Their Contracts 

 As part of a group of proposals intended to strengthen our ability to distinguish 

stronger applicants for Part C participation we propose to revise the regulation text at 

§422.506 and §422.512 to explicitly apply the 2-year prohibition on re-application after 

an organization has terminated its contract to applications for service area expansions in 

addition to applications for new contracts. These changes to §422.506 and 

§422.512would make the text of these regulations consistent with the language of a 

similar provision at §422.503 and §422.508 (which bans re-application for 2 years after 

we have terminated an organization's contract). We believe this provision will have 

minimal financial impact as it only affects those organizations that choose to non-renew 

or mutually terminate a contract with CMS. This provision will not affect current 

beneficiaries as it only applies when an organization is applying for a new contract or to 

expand the service area of its existing contract; beneficiaries who are currently enrolled 

in an organization's existing contracts are therefore not affected. 
 539 

47. Effects of Withdrawal of Stand Alone Prescription Drug Plan Bid Prior to Contract 

Execution 

This provision is not anticipated to have any significant impacts, as the withdrawn 

bids that this provision would not relate to any existing enrollees. 

48. Effects of Essential Operations Test Requirement for Part D 

This provision has no quantifiable impact because the requirement affects 

unknown individuals/entities in the future. Nevertheless, we believe this proposal to 

require new Part D sponsors to pass an essential operations test prior to being permitted 

to accept enrollments will enhance our ability to ensure that beneficiaries are permitted to 

choose only from among those Part D plans offered by sponsors truly qualified to 

administer the full range of benefits to which beneficiaries are entitled. This approach 

will reduce both the likelihood of disruptions in beneficiaries' access to outpatient 

prescription drugs and the resources CMS has to dedicate to addressing such disruptions. 

49. Effects of Termination of the Contracts of Medicare Advantage Organizations 

Offering Part D for Failure for Three Consecutive Years to Achieve Three Stars on Both 

Part C and Part D Summary Star Ratings in the Same Contract Year 

This provision has no quantifiable impact because this affects unknown 

individuals/entities in the future. We believe the proposal to authorize the termination of 

contracts that fail to achieve three-star ratings for both Part C and D within three years is 

consistent with our overall emphasis on ensuring that beneficiaries receive quality 

services from their plan sponsors. Eliminating poor performing contracts will promote 

beneficiary satisfaction with the Part C and D programs and reduce the amount of effort 
 540 

we must apply to overseeing and correcting the performance of organizations that 

consistently fail to demonstrate a commitment to quality. 

50. Effects of Requirements for Urgently Needed Services 

The proposed revisions of §422.113(b)(1)(iii) removes the requirement of 

"extraordinary and unusual" for in-service-area, out-of-network coverage for urgent 

needed services. Typically, this will mean that enrollees with non-emergent weekend 

medical problems will now be covered for services furnished out of network thus 

eliminating the need for beneficiaries to seek out-of-network care. Many plans already 

contract with 24/7 walk-in clinics providing in-network coverage. Historically, the 

alternative to plan coverage has been emergency-room care. We therefore expect 

minimal cost and possible savings as a result of this change. 

51. Effects of Skilled Nursing Facility Stays 

 Our proposal that would relocate the MA regulation language currently located at 

§422.101(c), "Requirements Related to Basic Benefits" to §422.102(a)(5), "Supplemental 

Benefits" is a technical change only and would have no financial impact. 

52. Effects of Agent and Broker Training and Testing Requirements 

 At §422.2274 and §423.2274, we are proposing to revise §422.2274 (b) and (c) 

and §423.2274 (b) and (c) to remove the concept of a CMS endorsed or approved training 

and testing, and require instead that agents be trained and tested annually, as specified by 

CMS. We believe this proposed change continues to ensure that all agents/brokers 

selling Medicare products have a comprehensive understanding of Medicare program 

rules. The changes made to this regulation will not result in any additional costs for MA 
 541 

plans or Part D plans, or a new collection of information. We are simply revising the 

existing language to remove an obligation for CMS to endorse or approve a training 

program in favor of CMS providing such training directly. 

53. Effects of Deemed Approval of Marketing Materials 

 At §422.2266 and §423.2266, CMS provides the regulatory requirements for 

materials that are deemed approved. It also provides the requirements for the review and 

distribution of marketing materials. We are proposing to move the current requirements 

in §§422.2266 and 423.2266 to §§422.2262(a)(2) and 423.2262(a)(2), respectively. We 

also propose to simplify the language in §§422.2266 and 423.2266 by stating if CMS 

does not approve or disapprove marketing materials within the specified review 

timeframe, the materials will be deemed approved. Deemed approved means that a MA 

organization or Part D sponsor may use the material. Changes to this regulation will not 

result in additional. We are simply revising the existing language to clarify the existing 

requirements for deemed approved materials. 

54. Effects of Part C Disclosure Requirements 

This provision would simply replace the current, incorrect, reference in §422.111 

to the marketing materials and elections form requirements at §422.80, with the correct 

reference to subpart V, Medicare Advantage Marketing Requirements. This is a 

technical change and represents no costs or impact. 

55. Effects of Managing Disclosure and Recusal in P&T Conflicts of Interest: 

Formulary Development and Revision by a Pharmacy and Therapeutics Committee under 

Part D 
 542 

 We propose to revise our regulations at §423.120(b)(1) to reorder the existing 

provisions and add a new paragraph (b)(1)(iv) to require that a Part D sponsor's P&T 

committee clearly articulates and documents processes to determine that the requirements 

under paragraphs (b)(1)(i), (ii), and (iii) have been met, including the determination by an 

objective party of whether disclosed financial interests are conflicts of interest and that 

management of any recusals due to such conflicts of interest. 

 Because plans were previously required to have these processes in place, and we 

are only asking that they document them, we anticipate that there would be no cost 

impact on plans. 

56. Effects of the Technical Changes to the Definition of Part D Drug 

 There is no impact associated with this provision as it is a technical change to 

regulation language. 

57. Effects of Thirty Sixth Month Coordination of Benefits (COB) Limit 

 There is no impact associated with this provision as it is a technical change to 

regulation language. 

58. Effects of Application and Calculation of Daily Cost-Sharing Rates 

 There is no impact associated with this provision, as it is a technical change to 

regulation language. 

59. Effects of Technical Change to Align Regulatory Requirements for Delivery of the 

Standardized Pharmacy Notice 

Our proposed revision to §423.562(a)(3) is a technical change and does not 

represent a burden for small businesses, rural hospitals, states, or the private sector. 
 543 

60. Effects of Special Part D Access Rules During Disasters 

In proposed §423.126(a), we would codify requirements similar to existing 

guidance that pertains to relaxing "refill-too-soon" (RTS) edits to permit one refill in the 

event of any imminent or occurring disaster or emergency that would hinder an enrollee's 

access to covered Part D drugs. 

The proposed changes would not result in any additional costs. For one, we 

currently expect through guidance that sponsors will relax edits after the issuance of 

certain federal declarations. We also do not anticipate that providing a general 

framework for when sponsors must relax RTS edits would necessitate an increase in 

resources because it is currently not uncommon for Part D sponsors to relax edits for 

particular individuals under certain circumstances. 

The proposed provisions would require Part D sponsors to relax "refill-too-soon" 

(RTS) edits when, as evidenced by a declaration of a disaster or emergency or its 

imminence by an appropriate federal, state, or local official, it is reasonable to conclude 

that an occurring or imminent disaster or emergency would make it difficult for 

beneficiaries to obtain refills of their medications. Relaxing RTS edits in these 

circumstances would benefit beneficiaries by better ensuring that they do not run out of 

their medications when a disaster is imminent or after it strikes. 

61. Effects of MA Organization Responsibilities in Disasters and Emergencies 

The proposed addition of section § 422.100(m) requires plan activities during 

disasters that are currently recommended in our guidance. Since plans are already 

cooperating with our recommendations we expect no impact as a result of this 
 544 

requirement. Additionally, we are requiring a dedicated web page for disasters on plan 

websites. Since plans already have websites and technical staff supporting them, we 

expect minimal cost, if any, for the additional page. We are also requiring plans to 

annually notify enrollees about disaster preparation. Since plans, as required at 

§ 422.111, already annually notify beneficiaries using the Evidence of Coverage 

template, we expect minimal cost, if any, for the additional notification about disasters. 

62. Effects of the Technical Changes Regarding the Termination of a Contract, 

Contract Determination and Other Appeals, and Intermediate Sanctions and Civil 

Money Penalties Under Parts C and D 

Sections III.E.13. and 14 this proposed rule include provisions making minor 

technical and clarifying changes. These changes include making language consistent, 

aligning titles and correcting references. These technical and clarifying changes will not 

result in additional burden to sponsors nor will they have a financial impact on sponsors. 

 

63. Effects of Technical Change to the Restrictions on use of Information under Part D 

 There is no impact associated with this provision as it is a technical change to 

regulation language to reflect the expansion, pursuant to section 6402(b)(1) of the 

Affordable Care Act, in the purposes for which HHS, its contractors, and the Attorney 

General, and Comptroller General may use information disclosed or obtained pursuant to 

section 1860D-15 of the Act. 
 545 

TABLE 14: ESTIMATED1 AGGREGATE COSTS AND SAVINGS 

TO THE HEALTH CARE SECTOR BY PROVISION 

FOR CALENDAR YEARS 2015 THROUGH 2019 

Provision Regulation Calendar Year ($ in millions) 

Section(s) 2015 2016 2017 2018 2019 

Total ($ in 

millions) 

CYs 

2015-2019 

Impacts to MA Organizations and Part D Sponsors 

A.6 

Changes to Audit 

and Inspection 

§422.503(d)(2), 

§423.504(d)(2) 

8.9 8.9 8.9 8.9 8.9 44.5 

Total ($ in millions) 8.9 8.9 8.9 8.9 8.9 44.5 

Federal Government (Medicare) Impacts

A.10. Enrollment 

Eligibility for 

Individuals Not 

Lawfully Present in 

the United States 2

§422.1, §422.50, AND 

§422.74; 

§423.1, §423.30, and 

§423.44 

-10 -12 -13 -15 -17 -67 

A.14. 

Drug Categories or 

Classes of Clinical 

Concern and 

Exceptions3

§423.102(b)(2)(v)-(vi) 0 -30 -50 -220 -420 -720

A.35. Eligibility of 

Enrollment for 

Incarcerated 

Individuals4

§422.74 -73 -90 -108 -129 -152 -552 

Total ($ in millions) -83 -132 -171 -364 -589 -1,339 

Notes: 

1. Estimates of costs and savings reflect scoring by the CMS, Office of the Actuary. Also, only provisions with 

savings or cost exceeding $1,000,000 are listed. Other provisions either have no expected savings or cost, or, have a 

savings or cost under $1,000,000. Details on these savings and cost may be found in the RIA narrative. 

2. Supporting 2012 lawful presence data provided by SSA. 

3. Projected savings are based upon full implementation of the criteria and do not reflect that changes for the 

antipsychotic class of drugs are deferred at this time. 

4. Supporting 2012 incarceration data provided by the SSA. 

D. Expected Benefits

1. Drug Categories or Classes of Clinical Concerns and Exceptions 

(§423.102(b)(2)(v)-(vi)

Proposed codification of the categories or classes of clinical concern provisions 

would assist PBMs in applying the Part D plans and managing the Part D sponsor's 

benefit packages more efficiently. 
 546 

2. Medication Therapy Management Program under Part D 

We anticipate that many more beneficiaries will have access to MTM services 

and believe that the proposed changes will simplify the MTM criteria and minimize 

beneficiary confusion when choosing or transitioning between plans. Moreover, we 

believe the proposed changes would reduce disparity and allow more beneficiaries with 

drug therapy problems to receive MTM services. Similarly, we expect the proposed 

requirement that sponsors develop an effective strategy to ensure access to services for 

all MTM-eligible beneficiaries will help to ensure that beneficiaries in special 

populations receive focused targeting, outreach, or engagement for enrollment or 

participation in MTM. 

E. Alternatives Considered

1. Separating the Annual Notice of Change from the Evidence of Coverage 

We considered reverting back to requirements in place prior to the 2009 contract 

year, which allowed issuing EOCs as late as January 31 of the applicable contract year. 

We determined the EOC should be received by members before the effective date of their 

coverage for that contract year, beginning on January 1, in order for members to have full 

disclosure of plan rules prior to the beginning of the contract year. 

2. Modifying the Agent/Broker Compensation Requirements 

In the preamble we outlined a few alternative compensation schedules. 

Ultimately we determined that the best approach was a two tier payment schedule, 

incorporating an initial payment and a continuous renewal payment. 

3. Medicare Coverage Gap Discount Program and Employer Group Waiver Plans 
 547 

In the preamble we outlined the alternative approaches we considered in our 

efforts to make sure that the discounts were used to benefit enrollees. Ultimately we 

determined that the best approach would be to make sure that employer groups have the 

information needed to incorporate the payments into their benefit packages. 

4. Prescription Drug Pricing Standards and Maximum Allowable Cost 

No alternatives were considered. 

5. Access to covered Part D drugs(c) Use of standardized technology 

No alternatives were considered. 

6. Any Willing Pharmacy Standard Terms & Conditions 

We considered the alternative of maintaining the current process where Part D 

plans can limit pharmacy access to preferred cost-sharing contracts. We have observed 

this in practice to be limiting market competition, creating a barrier to entry, and further, 

not producing the savings to the program that were initially anticipated. 

7. Negotiated Prices 

We did not identify any alternatives that both maintained consistent reporting 

among sponsors leading to comparable bids, and maximized price competition. 

8. Preferred Cost Sharing 

We considered whether a methodology that was based on lower average costs (or 

any other function of costs in the rest of the network) in return for preferred cost sharing 

would suffice to meet the statutory requirement. While such a methodology might 

technically meet the requirement not to increase CMS payments to plans, whether it did 

so or not would be dependent on the actual negotiated prices paid and could be 
 548 

determined only long after a coverage year had ended and complete the PDE data was 

available. We believe that to promote price competition, the relative levels of negotiated 

prices offered for preferred cost sharing and in the rest of the network should be 

transparent and verifiable at the point of sale, as well as to CMS oversight at any point 

prior to and during a coverage year. We were unable to identify any methodology other 

than our proposal to accomplish these goals. We solicit comments on alternative 

approaches to ensuring that the offering of preferred cost sharing does not increase CMS 

payments. We believe that any alternative methodology must be based solely on the level 

of negotiated prices and thus consistent with our proposal to amend that definition. We 

also solicit comments on whether we should also establish standards on how much lower 

drug costs should be in return for preferred cost sharing. 

9. Transfer of TrOOP between Part D Sponsors Due to Enrollment Changes during the 

Coverage Year No alternative proposals were considered. 

10. Part D Notice of Changes 

We did not consider any alternatives for the proposed provision because it 

proposes to codify a longstanding policy. 

11. Special Part D Access Rules During Disasters or Emergencies 

We did not consider alternatives to requiring Part D sponsors to lift "refill too soon" 

(RTS) edits in the event of any imminent or occurring disaster or emergency that would 

hinder an enrollee's access to covered Part D drugs. It is important for the well-being and 

health of beneficiaries that they be able to obtain their medications after disasters strike. 

Furthermore, given the complexities of moving large numbers of people with different 
 549 

health conditions to safer locations, we also believed we had no alternative but to require 

Part D sponsors to relax RTS edits when a disaster is imminent and access to services 

might be jeopardized rather than waiting for it to strike. 

12. Business Continuity for MA Organizations and Part D Sponsors 

We did not consider any alternatives for the initial part of the provision found in 

§§422.504(o)(1) and 423.505(p)(1) that would, respectively, require MA organizations 

and Part D sponsors to develop and maintain business continuity plans. Creating such a 

plan is an accepted business practice and we would require MA organizations and Part D 

sponsors to address a standard list of areas; in short, we know of no other options. 

In contrast, we considered other options when drafting proposed §§422.504(o)(2) 

and 423.505(p)(2), which would require the restoration of essential functions within 24 

hours after failure. We considered requiring MA organizations and Part D sponsors to 

restore even more functions, but decided disruptions to business would presumably limit 

resources and that it was important to focus on only the most vital functions. We also 

considered paring down the list of essential functions, but found that we could not do so 

without jeopardizing the mandate of the Act--to ensure access to health care and covered 

Part D drugs through the provision of appropriate Medicare benefits. Benefit 

authorization, claim adjudications, and call center operations are all essential to providing 

appropriate Medicare coverage for beneficiaries both living inside and outside of areas 

hit by disasters and other disruptions. 

Lastly, we considered the option of requiring restoration of essential functions to 

occur for a shorter or longer time period than 24 hours after failure proposed. We decided 
 550 

that 12 hours might present operational challenges for MA organizations and Part D 

sponsors; conversely, requiring beneficiaries to wait more than 24 hours to access their 

coverage and therefore health care and drug benefits, seemed to pose an undue risk to 

both their present and possibly future health and well-being. 

13. Drug Categories or Classes of Clinical Concerns and Exceptions

The critical policy decision was how broadly or narrowly to establish criteria and 

exceptions to those criteria pursuant to Affordable Care Act provisions. Broad criteria 

might easily encompass many classes of drugs and significantly increase costs to the Part 

D program by eliminating the need for manufacturers to aggressively rebate their 

products for formulary placement. Only narrow criteria would limit the number of 

categories or classes of clinical concern receiving additional protections under the 

Affordable Care Act. Similarly, broad exceptions further limit the products within those 

categories or classes of clinical concern that would receive additional protection under 

the Affordable Care Act. 

14. Medication Therapy Management Program (MTM) Under Part D 

We considered leaving the maximum number of multiple chronic diseases a plan 

may require for targeted enrollment at three, but believed this threshold significantly 

limited the number of beneficiaries who qualified for MTM services and was inconsistent 

with literature concerning the relative risk of the combination of multiple disease states 

and the need for access to MTM interventions. Similarly, we considered other numbers 

of Part D drugs less than eight, but again believed these thresholds decreased access to 

MTM services, contributed to beneficiary confusion, and led to racial disparities in 
 551 

access to MTM services. We also considered other cost thresholds less than $3,000, for 

example, $900 or $1,200, which roughly coincide with cost thresholds achieved by 

taking 3 or 4 generic drugs, and we solicit stakeholder comment on where the threshold 

might alternatively be set. 

Relative to the requirement for sponsors to establish effective strategies for 

reaching all MTM-eligible beneficiaries, we do not believe it is appropriate at this time to 

prescribe outreach activities for Part D sponsors to effectively reach diverse, special 

populations of their enrolled beneficiaries. Rather, we propose that sponsors develop an 

effective strategy to ensure access to MTM services for all MTM-eligible beneficiaries. 

We will continue to monitor the efficacy of such programs and the impact of any change 

to the requirements and will consider other options as may be necessary.

15. Requirement for Applicants or their Contracted First Tier, Downstream, or Related 

Entities to have Experience in the Part D Program Providing Key Part D Functions 

Based on CMS' authority at section 1860D-12(b)(3)(D) of the SSA to adopt 

additional contract terms that are necessary and appropriate to administer the Part D 

program, we proposed at § 423.504(b)(8)(i) through (iii) that Part D organizations 

seeking a new Medicare contract must have arrangements in place such that either the 

applicant or a contracted entity that will be performing certain key Part D functions has at 

least one full benefit year of experience providing the function for another Part D plan 

sponsor. This proposal ensures that applicants take advantage of the abundant Part D 

industry expertise and experience that exists today in the development of their Part D 

program operations, rather than relying on technical assistance from CMS and having 
 552 

their inexperience place beneficiaries' access to prescription drugs at risk. We believe 

this provision will have a very minor savings impact on the federal budget, based on 

savings of time and effort (staff time and contracted auditor time and resources) that the 

government would spend on overseeing the disproportionate level of problems 

experienced by organizations operating Part D plans without prior Part D experience. For 

each inexperienced organization allowed into the program in the absence of this proposal, 

we would anticipate a savings of 1,000 staff hours at an average rate of $50 per hour, for 

a total of $50,000 in employee time, plus an additional savings of $200,000 in contractor 

dollars to conduct an emergency audit, for a total of $250,000. In the absence of this 

proposal, we would anticipate no more than two such inexperienced entities beginning 

Part D operations per year, for a total annual savings of $500,000. 

The burden associated with this proposal on industry would be minimal, with a 

total estimated number of labor hours of 3.25 to submit information during the Part D 

application process. Using the same average hourly salary as previously mentioned, the 

total cost to Part D applicants would be $162.50. We do not believe there are any 

non-administrative costs to industry associated with this proposal, as Part D applicants 

are already required to have arrangements in place to perform the key Part D functions 

discussed in our proposal. 

The main anticipated effect from this proposal is ensuring that only entities with 

some experience with Part D in critically important functional areas are permitted to offer 

new Part D contracts, thus strengthening the Part D program by enhancing the 

qualification criteria. CMS considered the alternate proposal of requiring the prior Part D 
 553 

experience to be tied to specific quality outcomes. CMS rejected the alternative because 

we believed it added unnecessary complexity and burden to the process, and we believe a 

simple experience requirement is currently sufficient. 

F. Accounting Statement and Table 

As required by OMB Circular A-4 (available at 

http://www.whitehouse.gov/omb/circulars/a0004/a-4/pdf), in Table 15, we have prepared 

an accounting statement showing the classification of the expenditures, costs, and savings 

associated with the provisions of this proposed rule for CYs 2015 through 2019. 

TABLE 15– ACCOUNTING STATEMENT: 

CLASSIFICATIONS OF ESTIMATED COSTS AND TRANSFERS 

FROM CALENDAR YEARS 2015 TO 2019 [$ in millions] 

TRANSFERS 

CATEGORY Discount Rate 

7% 3% 

PERIOD 

COVERED 

Annualized Monetized -$251.23 -$260.49 CYs 2015 - 2019

Transfers (Federal) 

 Whom to Whom? 

Federal Government, MA Organizations and Part D Sponsors 

Costs (All Other Provisions) 

Discount Rate 

7% 3% 

PERIOD 

COVERED 

Annualized Costs to 

MA Organizations 

and Part D Sponsors

$8.9 $8.9 CYs 2015 – 2019 

Note: Monetized Figures in 2014 Dollars. 

G. Conclusion 

We estimate the savings to the federal government from implementing these 

provisions will be $83 million in CY 2015. The savings will increase annually. In CY 

2019, the federal government savings from implementing these provisions will be 

$589 million. For the entire estimated period, CYs 2015 through 2019, we estimate the 
 554 

total federal government (Medicare) impact to result in savings of approximately $1.34 

billion in 2014 dollars. The cost impact to MA organizations and Part D sponsors is 

estimated at $8.9 million annually during CYs 2015 through 2019. We note that these 

savings do not represent net social benefits because they consist of transfers of value 

from drug manufacturers, pharmacies, incarcerated individuals and individuals not 

lawfully present in the United States to the federal government, MA organizations, Part 

D sponsors and beneficiaries who continue in the programs. 
 555 

List of Subjects 

42 CFR Part 409 

Health facilities and Medicare. 

42 CFR Part 417

Administrative practice and procedure, Grant programs-health, Health care, 

Health insurance, Health maintenance organizations (HMO), Loan programs-health, 

Medicare, and Reporting and recordkeeping requirements. 

42 CFR Part 422 

Administrative practice and procedure, Health facilities, Health maintenance 

organizations (HMO), Medicare, Penalties, Privacy, and Reporting and recordkeeping 

requirements. 

42 CFR Part 423 

 Administrative practice and procedure, Emergency medical services, Health 

facilities, Health maintenance organizations (HMO), Health professionals, Medicare, 

Penalties, Privacy, Reporting and record keeping requirements. 

42 CFR Part 424 

Administrative practice and procedure, Emergency medical services, Health facilities, 

Health maintenance organizations (HMO), Health professionals, Medicare, Penalties, 

Privacy, Reporting and record keeping requirements. 
 556 

 For the reasons set forth in the preamble, the Centers for Medicare & Medicaid 

Services proposes to amend 42 CFR Chapter IV as follows: 

PART 409—HOSPITAL INSURANCE BENEFITS 

1. The authority citation for part 409 continues to read as follows: 

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

1395hh). 

 2. Section 409.30 is amended by revising paragraph (b)(2)(ii) to read as follows: 

§ 409.30 Basic requirements. 

 (b) * * * 

 (2) * * * 

 (ii) If, upon admission to the SNF, the beneficiary was enrolled in an M+C plan, 

as defined in § 422.4 of this chapter, offering the benefits described in § 422.102(a)(5) of 

this chapter, the beneficiary will be considered to have met the requirements described in 

paragraphs (a) and (b) of this section, and also in § 409.31(b)(2), for the duration of the 

SNF stay. 

PART 417 – HEALTH MAINTENANCE ORGANIZATION, COMPETITIVE 

MEDICAL PLANS, AND HEALTH CARE PREPAYMENT PLANS 

3. 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. 
 557 

4. Section 417.1 is amended by revising the definition of “service area” to read as 

follows: 

§ 417.1 Definitions. 

* * * * * 

Service area means a geographic area, defined through zip codes, census tracts, or 

other geographic measurements, that is the area, as determined by CMS, within which the 

HMO furnishes basic and supplemental health services and makes them available and 

accessible to all its enrollees in accordance with § 417.106(b). Facilities in which 

individuals are incarcerated are not included in the geographic service area of an HMO or 

CMP plan. 

* * * * * 

5. Section 417.2 is amended by revising paragraph (b) to read as follows:

§ 417.2 Basis and scope. 

* * * * * 

(b) Subparts G through R of this part set forth the rules for Medicare contracts 

with, and payment to, HMOs and competitive medical plans (CMPs) under section 1876 

of the Act and 8 U.S.C. 1611. 

* * * * * 
 558 

§ 417.420 [Amended] 

6. In §417.420, paragraph (a) is amended by removing the phrase "Individuals 

who are entitled to" and adding in its place the phrase "Eligible individuals who are 

entitled to". 

7. Section 417.422 is amended— 

A. In the introductory text, by removing the phrase "any individual who--" and 

adding in its place the phrase "any individual who meets all of the following:" 

B. In paragraphs (a) through (e), by removing the ";" and adding in its place ".". 

C. In paragraph (f), by removing the "; and" and adding in its place ".". 

D. Adding paragraph (h). 

The addition reads as follows: 

§ 417.422 Eligibility to enroll in an HMO or CMP. 

* * * * * 

(h) Is a United States citizen or qualified alien who is lawfully present in the 

United States as determined in 8 CFR 1.3. 

8. Section 417.460 is amended— 

A. Revising paragraph (b)(2)(i). 

B. In paragraph (b)(2)(iii), by removing “; or” and adding in its place “;”. 

C. By removing the period at the end of (b)(2)(iv) and adding “; or” in its place. 

D. By adding paragraph (b)(2)(v). 

E. In paragraph (b)(3), by removing the cross-reference "paragraphs (c) through 

(i)" and adding in its place the cross-reference “paragraphs (c) through (j)”. 
 559 

F. By revising paragraph (c)(3). 

G. In paragraph (c)(4), by removing the phrase "non-payment of premiums." and 

adding in its place the phrase "non-payment of premiums or other charges.". 

H. By adding new paragraphs (f)(1)(i)(A) through (C). 

I. By adding paragraph (j). 

The revisions and the additions read as follows: 

§ 417.460 Disenrollment of beneficiaries by an HMO or CMP. 

* * * * * 

 (b) * * * 

 (2) * * * 

 (i) Moves out of the HMO’s or CMP’s geographic area or is incarcerated. 

* * * * * 

(v) Loses qualified alien status or lawful presence in the United States. 

* * * * * 

 (c) * * * 

(3) Good cause and reinstatement. When an individual is disenrolled for failure 

to pay premiums or other charges imposed by the HMO or CMP for deductible and 

coinsurance amounts for which the enrollee is liable, CMS (or its designee) may reinstate 

enrollment in the plan, without interruption of coverage, if the individual shows good 

cause for failure to pay and pays all overdue premiums or other charges within 3 calendar 

months after the disenrollment date. The individual must establish by a credible 

statement that failure to pay premiums or other charges was due to circumstances for 
 560 

which the individual had no control, or which the individual could not reasonably have 

been expected to foresee. 

* * * * * 

 (f) * * * 

 (1) * * * 

 (i) * * * 

 (A) Incarceration. The HMO or CMP must disenroll an individual if the HMO or 

CMP establishes, on the basis of evidence acceptable to CMS, that the individual is 

incarcerated per § 417.1. 

 (B) Notification by CMS of incarceration. When CMS notifies an HMO or CMP 

of disenrollment due to an incarceration as per § 417.1, disenrollment is effective the first 

of the month following the start of incarceration, unless otherwise specified by CMS. 

(C) Exception. The exception in paragraph (f)(2) of this section does not apply 

to individuals who are incarcerated. 

* * * * * 

(j) Loss of qualified alien status. Disenrollment is effective the first day of the 

month following the last month of lawful presence or qualified alien status in the United 

States. 

Part 422--MEDICARE ADVANTAGE PROGRAM 

9. The authority citation for part 422 continues to read as follows: 

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

1395hh). 
 561 

10. Section 422.1 is amended by revising paragraph (a) to read as follows: 

§ 422.1 Basis and scope. 

(a) Basis. This part is based on the indicated provisions of the following: 

(1) The following provisions of the Act: 

1128J(d) – Reporting and Returning of Overpayments. 

1851—Eligibility, election, and enrollment. 

1852—Benefits and beneficiary protections. 

1853—Payments to Medicare Advantage (MA) organizations. 

1854—Premiums. 

1855—Organization, licensure, and solvency of MA organizations. 

1856—Standards. 

1857—Contract requirements. 

1858—Special rules for MA Regional Plans. 

1859—Definitions; enrollment restriction for certain MA plans. 

 (2) 8 U.S.C. 1611 -- Aliens who are not qualified aliens ineligible for Federal 

public benefits 

* * * * * 

11. Section 422.2 is amended by-- 

A. Revising the definition of "Attestation process". 

B. Removing the definition of "Initial Validation Contractor (IVC)". 

C. Adding the definitions of "Parent organization" and "RADV appeal process". 

D. Removing the definition of "RADV payment error calculation appeal process" 
 562 

E. Revising the definition of "Risk adjustment data validation (RADV) audit" 

F. Revising introductory text of the definition of "Service area". 

G. Removing the definition of "The one best medical record for the purposes of 

Medicare Advantage Risk Adjustment Validation (RADV)". 

The revisions and additions read as follows: 

§ 422.2 Definitions. 

* * * * * 

Attestation process means a CMS-developed RADV audit-related process that is 

part of the medical record review process that enables MA organizations undergoing 

RADV audit to submit CMS-generated attestations for eligible medical records with 

missing or illegible signatures or credentials. The purpose of the CMS-generated 

attestations is to cure signature and credential issues. CMS-generated attestations do not 

provide an opportunity for a provider or supplier to replace a medical record or for a 

provider or supplier to attest that a beneficiary has the medical condition 

* * * * * 

Parent organization means a legal entity that owns one or more other subsidiary 

legal entities. 

* * * * * 

RADV appeal process means an administrative process that enables MA 

organizations that have undergone RADV audit to appeal the Secretary’s medical record 

review determinations and the Secretary’s calculation of an MA organization's RADV 

payment error. 
 563 

* * * * * 

Risk adjustment data validation (RADV) audit means a payment audit of a MA 

organization administered by the Secretary that ensures the integrity and accuracy of risk 

adjustment payment data. 

* * * * * 

Service area means a geographic area that for local MA plans is a county or 

multiple counties, and for MA regional plans is a region approved by CMS within which 

an MA-eligible individual may enroll in a particular MA plan offered by an MA 

organization. Facilities in which individuals are incarcerated, with the exclusion of 

Institutions for Mental Disease, are not included in the service area of an MA plan. Each 

MA plan must be available to all MA-eligible individuals within the plan’s service area. 

In deciding whether to approve an MA plan’s proposed service area, CMS considers the 

following criteria: 

* * * * * 

12. Section 422.50 is amended-- 

A. In paragraph (a) introductory text, by removing the phrase " if he or she--" and 

adding in its place the phrase "if he or she meets all of the following:" 

B. In paragraphs (a)(1) and (4), by removing ";" and adding in its place ".". 

C. In paragraph (a)(5), by removing “; and” and adding in its place ".". 

D. By adding paragraph (a)(7). 

The addition reads as follows: 

§ 422.50 Eligibility to elect an MA plan. 
 564 

 * * * * * 

(a) * * * 

(7) Is a United States citizen or qualified alien who is lawfully present in the 

United States as determined in 8 CFR 1.3. 

* * * * * 

13. Section 422.60 is amended by redesignating paragraphs (g) introductory text through 

(g)(3) as paragraphs (g)(1) through (4), and by revising newly redesignated paragraph 

(g)(1) to read as follows: 

§ 422.60 Election process. 

* * * * * 

 (g) * * * 

 (1) Passive enrollment by CMS. CMS may implement passive enrollment 

procedures (as described in paragraph (g)(2) of this section) in any of the following 

situations: 

 (i) Immediate terminations as provided in §422.510(a)(5). 

(ii) Other situations in which CMS determines that remaining enrolled in a plan 

poses potential harm to the members. 

(iii) Situations which meet all of the following criteria: 

(A) A specialized MA plan for special needs individuals in which the individual 

is enrolled will no longer be offered following the end of the current calendar year, 

(B) The individual is a-- 
 565 

(1) Special needs individual entitled to medical assistance under a Medicaid State 

plan, as defined in section 1859(b)(6)(B)(ii) of the Act and § 422.2; and 

(2) Full-benefit dual eligible beneficiary, as defined in section 1935(c) of the Act. 

(C) The passive enrollment is into a specialized MA plan for special needs 

individuals with a network and benefits that are substantially similar, as determined by 

CMS, to the non-renewing plan, and where the sponsoring organization also offers the 

Medicaid managed care organization in which the individual is also enrolled.. 

* * * * * 

14. Section 422.74 is amended by-- 

A. Adding paragraph (b)(2)(v). 

B. Revising paragraphs (d)(1)(v) and (d)(4)(i)(A). 

C. Adding paragraphs (d)(4)(v)and (d)(8). 

The additions and revisions read as follows: 

§ 422.74 Disenrollment by the MA organization. 

* * * * * 

 (b) * * * 

 (2) * * * 

(v) The individual loses qualified alien status or is no longer lawfully present in 

the United States. 

* * * * * 

 (d) * * * 

 (1) * * * 
 566 

(v) Extension of grace period for good cause and reinstatement. When an 

individual is disenrolled for failure to pay the plan premium, CMS (or its designee) may 

reinstate enrollment in the MA plan, without interruption of coverage, if the individual 

shows good cause for failure to pay within the initial grace period, and pays all overdue 

premiums within 3 calendar months after the disenrollment date. The individual must 

establish by a credible statement that failure to pay premiums within the initial grace 

period was due to circumstances for which the individual had no control, or which the 

individual could not reasonably have been expected to foresee. 

* * * * * 

 (4) * * * 

 (i) * * * 

 (A) Out of the MA plan’s service area or is incarcerated as specified in paragraph 

(d)(4)(v) of this section. 

* * * * * 

(v) Incarceration. (A) The MA organization must disenroll an individual if the 

MA organization establishes, on the basis of evidence acceptable to CMS, that the 

individual is incarcerated as specified § 422.2 or when notified of the incarceration by 

CMS as specified paragraph (d)(4)(v)(B) of this section. 

(B) Notification by CMS of incarceration. When CMS notifies the MA 

organization of the disenrollment due to an incarceration as specified in § 422.2, 

disenrollment is effective the first of the month following the start of incarceration, 

unless otherwise specified by CMS. 
 567 

* * * * * 

(8) Loss of qualified alien status. Disenrollment is effective with the month 

following the last month of lawful presence or qualified alien status in the United States. 

* * * * * 

15. Section 422.100 is amended by adding paragraph (m) to read as follows: 

§ 422.100 General requirements. 

* * * * * 

(m) Special requirements during a disaster or emergency. (1) When a state of 

disaster is declared as described in paragraph (m)(2) of this section, an MA organization 

offering an MA plan must, until one of the conditions described in paragraph (m)(3) of 

this section occurs, ensure access to benefits in the following manner: 

(i) Cover Medicare Parts A and B services and supplemental Part C plan benefits 

furnished at non-contracted facilities subject to §422.204(b)(3). 

(ii) Waive, in full, requirements for gatekeeper referrals where applicable. 

(iii) Provide the same cost-sharing for the enrollee had the service or benefit been 

furnished at a plan-contracted facility. 

(iv) Make changes that benefit the enrollee effective immediately without the 

30-day notification requirement at §422.111(d)(3). 

(2) Declarations of disasters. A declaration of disaster will identify the 

geographic area affected by the event and may be made as one of the following: 

(i) Presidential declaration of a disaster or emergency under the either of the 

following: 
 568 

(A) Stafford Act. 

(B) National Emergencies Act. 

(ii)(A) Secretarial declaration of a public health emergency under section 319 of 

the Public Health Service Act. 

(B) If the President has declared a disaster as described in paragraph (m)(2)(i) or 

(2)(ii) of this section, then the Secretary may also authorize waivers or modifications 

under section 1135 of the Act. 

(iii) Declaration by the Governor of a State or Protectorate. 

(3) End of the disaster. The public health emergency or state of disaster ends 

when any of the following occur: 

(i) The source that declared the public health emergency or state of disaster 

declares an end. 

(ii) The CMS declares an end of the public health emergency or state of disaster. 

(iii) Thirty days have elapsed since the declaration of the public health 

emergency or state of disaster and no end date was identified in paragraph (m)(3)(i) or 

(3)(ii) of this section. 

(4) MA plans unable to operate. An MA plan that cannot resume normal 

operations by the end of the public health emergency or state of disaster must notify 

CMS. 

(5) Disclosure. In addition to other requirements of annual disclosure under 

§422.111, an organization must do all of the following: 

(i) Indicate the terms and conditions of payment during the public health 
 569 

emergency or disaster for non-contracted providers furnishing benefits to plan enrollees 

residing in the state-of-disaster area. 

(ii) Annually notify enrollees of the information listed in paragraphs (m)(1) 

through (3) and (m)(5) of this section. 

(iii) Provide the information described in paragraphs (m)(1) through (3) and 

(m)(4)(i) of this section on its website. 

§ 422.101 [Amended] 

 16. Section 422.101 is amended by removing and reserving paragraph (c). 

17. Section 422.102 is amended by adding paragraph (a)(5) to read as follows: 

§ 422.102 Supplemental benefits. 

 (a) * * * 

 (5) MA organizations may elect to furnish, as part of their Medicare covered 

benefits, coverage of post hospital SNF care as described in subparts C and D of this part, 

in the absence of the prior qualifying hospital stay that would otherwise be required for 

coverage of this care. 

* * * * * 

18. Section 422.111 is amended by revising paragraphs (a)(3) and (d)(1) to read 

as follows: 

§ 422.111 Disclosure requirements. 

(a) * * * 

(3) At the time of enrollment and at least annually thereafter by December 31 for 

the following contract year. 
 570 

* * * * * 

(d) * * * 

(1) Submit the changes for CMS review under procedures of Subpart V of this 

part. 

* * * * * 

19. Section 422.112 is amended by adding paragraph (b)(7) to read as follows: 

§ 422.112 Access to services. 

* * * * * 

 (b) * * * 

(7) With respect to drugs for which payment as so prescribed and dispensed or 

administered to an individual may be available under Part A or Part B, or under Part D, 

MA-PD plans must coordinate all benefits administered by the plan and-- 

(i) Establish and maintain a process to ensure timely and accurate claims 

adjudication at the point-of-sale; and 

(ii) Issue the determination and authorize or provide the benefit under Part A or 

Part B or as a benefit under Part D as expeditiously as the enrollee’s health condition 

requires, in accordance with the requirements of part 422, subpart M and Part 423, 

subpart M, as appropriate, when a party requests a coverage determination.

* * * * * 

20. Section 422.113 is amended by revising paragraph (b)(1)(iii) introductory 

text to read as follows: 

§422.113 Special rules for ambulance services, emergency and urgently needed 
 571 

services, and maintenance and post-stabilization care services. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) Urgently needed services means covered services that are not emergency 

services as defined in this section, provided when an enrollee is temporarily absent from 

the MA plan's service (or, if applicable, continuation) area (or provided when the enrollee 

is in the service or continuation area but the organization's provider network is 

temporarily unavailable or inaccessible) when the services are medically necessary and 

immediately required— 

* * * * * 

21. Section 422.134 is added to subpart C to read as follows: 

§ 422.134 Reward and incentive programs. 

(a) General rule. The MA organization may create one or more programs 

consistent with the standards of this section that provide rewards and incentives to 

enrollees in connection with participation in activities that focus on promoting improved 

health, preventing injuries and illness, and promoting efficient use of health care 

resources. 

(b) Non-discrimination. Reward and incentive programs-- 

(1) Must not discriminate against enrollees based on race, gender, chronic 

disease, institutionalization, frailty, health status or other impairments; 

(2) Must be designed so that all enrollees are able to earn rewards; and 
 572 

(3) Are subject to sanctions at § 422.752(a)(4). 

(c) Requirements. (1) A rewards and incentives program must meet all of the 

following: 

(i) Be offered in connection with completion of the entire service or activity. 

(ii) Be offered to all eligible members without discrimination. 

(iii) Have a monetary cap, as determined by CMS, of a value that may be 

expected to impact enrollee behavior but not exceed the value of the health related 

service or activity itself. 

(iv) Otherwise comply with all relevant fraud and abuse laws, including, when 

applicable, the anti-kickback statute and civil money penalty prohibiting inducements to 

beneficiaries. 

(2) Reward and incentive items may not-- 

(i) Be offered in the form of cash or other monetary rebates; or 

(ii) Be used to target potential enrollees. 

(3) The MA organization must make information available to CMS upon request 

about the form and manner of any rewards and incentives programs it offers and any 

evaluations of the effectiveness of such programs. 

22. Section 422.152 is amended as follows: 

A. Paragraph (a) introductory text is amended by: 

i. Removing the phrase "for each of those plans" and adding in its place the 

phrase "for each plan". 
 573 

.ii. Removing the phrase "a plan must—" and adding in its place the phrase "a 

plan must do all of the following:" 

B. By redesignating paragraphs (a)(1) through (3) as (a)(2) through (4), 

respectively. 

C. By adding a new paragraph (a)(1). 

D. In newly redesignated paragraph (a)(2), by removing the ";" and adding in its 

place ".". 

E. In newly redesignated paragraph (a)(3), by removing the "; and" and adding in 

its place ".". 

F. By revising paragraphs (c), (g) introductory text, and (h). 

The addition and revisions read as follows: 

§ 422.152 Quality improvement program. 

(a) * * * 

(1) Create a quality improvement program plan that sufficiently outlines the 

elements of the plan’s quality improvement program. 

* * * * * 

(c) Chronic care improvement program requirements. (1) Develop criteria for a 

chronic care improvement program. These criteria must include all of the following: 

(i) Methods for identifying MA enrollees with multiple or sufficiently severe 

chronic conditions that would benefit from participating in a chronic care improvement 

program. 
 574 

(ii) Mechanisms for monitoring MA enrollees that are participating in the chronic 

improvement program and evaluating participant outcomes such as changes in health 

status. 

(iii) Performance assessments that use quality indicators that are objective, 

clearly and unambiguously defined, and based on current clinical knowledge or research. 

(iv) Systematic and ongoing follow-up on the effect of the program. 

(2) The organization must report the status and results of each program to CMS 

as requested. 

* * * * * 

(g) Special requirements for specialized MA plans for special needs individuals. 

All special needs plans (SNPs) must be approved by the National Committee for Quality 

Assurance (NCQA) effective January 1, 2012 and subsequent years. SNPs must submit 

their model of care (MOC), as defined under § 422.101(f), to CMS for NCQA evaluation 

and approval, in accordance with CMS guidance. In addition to the requirements under 

paragraphs (a) and (f) of this section, a SNP must conduct a quality improvement 

program that meets all of the following: 

* * * * * 

(h) Requirements for MA private-fee-for-service plans and Medicare medical 

savings account plans. MA PFFS and MSA plans are subject to the requirement that may 

not exceed the requirement specified in § 422.152(e). 

§ 422.300 [Amended] 

23. Section 422.300 is amended by removing the phrase "and 1858 of the Act." 
 575 

and adding in its place the phrase "1858, and 1128J(d) of the Act." 

24. Section 422.310 is amended by: 

A. Redesignating the text of paragraph (e) as paragraph (e)(2) and adding new 

paragraph (e)(1) following current paragraph (e) subject heading. 

B. Adding new paragraph (e)(1). 

C. Revising paragraph (g)(2). 

D. Adding paragraph (g)(3). 

The additions and revision read as follows: 

§ 422.310 Risk adjustment data. 

* * * * * 

(e) * * * 

(1) Any medical record reviews conducted by an MA organization must be 

designed to determine the accuracy of diagnoses submitted under §422.308(c) and 

§422.310(g). 

* * * * * 

 (g) * * *. 

 (2) After the payment year is completed, CMS recalculates the risk factors for 

affected individuals to determine if adjustments to payments are necessary. 

(i) Prior to calculation of final risk factors for a payment year, CMS allows a 

reconciliation process to account for risk adjustment data submitted after the March 

deadline until the final risk adjustment data submission deadline in the year following the 

payment year. 
 576 

(ii) After the final risk adjustment data submission deadline, which is announced 

by CMS, an MA organization can submit data to correct overpayments but cannot submit 

diagnoses for additional payment. 

(3) Submission of corrected risk adjustment data in accordance with 

overpayments after the final risk adjustment data submission deadline, as described in 

paragraph (g)(2) of this section, must be made as provided in § 422.326. 

25. Section 422.311 is amended as follows: 

 A. In paragraph (a), by removing the phrase "CMS annually" and adding in its 

place the phrase "the Secretary annually". 

 B. In paragraph (b)(2), by removing the phrase "to CMS or its contractors" and 

adding in its place the phrase "to the Secretary". 

 C. By removing paragraph (b)(3). 

 D. By revising paragraph (c). 

The revision read as follows: 

§ 422.311 RADV audit dispute and appeal processes. 

* * * * * 

(c) RADV audit appeals. (1) Appeal rights. MA organizations that do not agree 

with their RADV audit results may appeal. 

(2) Issues eligible for RADV appeals. (i) General rules. MA organizations may 

appeal RADV medical record review determinations and the Secretary’s RADV payment 

error calculation. In order to be eligible for RADV appeal, MA organizations must 

adhere to the following: 
 577 

(A) Established RADV audit procedures and requirements. 

(B) RADV appeals procedures and requirements. 

(ii) Failure to follow RADV rules. Failure to follow the Secretary’s RADV audit 

procedures and requirements and the Secretary’s RADV appeals procedures and 

requirements will render the MA organization’s request for appeal invalid. 

(iii) RADV appeal rules. The MA organization’s written request for medical 

record review determination appeal must specify the following: 

(A) The audited HCC(s) that the Secretary identified as being in error. 

(B) A justification in support of the audited HCC selected for appeal. 

(iv) Number of medical records eligible for appeal. For each audited HCC, MA 

organizations may appeal one medical record that has undergone RADV review. If an 

attestation was submitted to cure a signature or credential-related error, the attestation 

may be included in the HCC appeal. 

(v) Selection of medical record for appeal. The MA organization must select the 

medical record that undergoes appeal. 

(vi) Written request for RADV payment error calculation appeal. The written 

request for RADV payment error calculation appeal must clearly specify the following: 

(A) The MA organization’s own RADV payment error calculation. 

(B) Where the Secretary’s RADV payment error calculation was erroneous. 

(3) Issues ineligible for RADV appeals. (i) MA organizations’ request for 

appeal may not include HCCs, medical records or other documents beyond the audited 
 578 

HCC, RADV-reviewed medical record, and any accompanying attestation that the MA 

organization chooses for appeal. 

(ii) MA organizations may not appeal the Secretary’s medical record review 

determination methodology or RADV payment error calculation methodology. 

(iii) As part of the RADV payment error calculation appeal– MA organizations 

may not appeal RADV medical record review-related errors. 

(iv) MA organizations may not appeal RADV errors that result from an MA 

organization’s failure to submit a medical record. 

(4) Burden of proof. The MA organization bears the burden of proof by a 

preponderance of the evidence in demonstrating that the Secretary’s medical record 

review determination(s) or payment error calculation was incorrect. 

(5) Manner and timing of a request for RADV appeal. (i) At the time the 

Secretary issues its RADV audit report, the Secretary notifies audited MA organizations 

of the following: 

(A) That they may appeal RADV HCC errors that are eligible for medical record 

review determination appeal. 

(B) That they may appeal the Secretary’s RADV payment error calculation. 

(ii) MA organizations have 30 days from date of issuance of the RADV audit 

report to file a written request with CMS for RADV appeal. This request for RADV 

appeal must specify one of the following: 
 579 

(A) Whether the MA organization requests medical record review determination 

appeal, the issues with which the MA organization disagrees, and the reasons for the 

disagreements. 

(B) Whether the MA organization requests RADV payment error calculation 

appeal, the issues with which the MA organization disagrees, and the reasons for the 

disagreements. 

(C) Whether the MA organization requests both medical record review 

determination appeal and RADV payment error calculation appeal, the issues with which 

the MA organization disagrees, and the reasons for the disagreements. 

(iii) For MA organizations that appeal both medical record review determination 

appeal and RADV payment error calculation appeal: 

(A) The Secretary adjudicates the request for RADV payment error calculation 

following conclusion of reconsideration of the MA organization’s request for medical 

record review determination appeal. 

(B) MA organizations may not appeal their RADV payment error calculation 

until appeals of RADV medical record review determinations filed by the MA 

organization have been completed and the decisions are final. 

(6) Reconsideration stage. (i) Written request for medical record review 

reconsideration. A MA organization’s written request for medical record review 

determination reconsideration must specify the following: 

(A) The audited HCC that the Secretary identified as being in error that the MA 

organization wishes to appeal. 
 580 

(B) A justification in support of the audited HCC chosen for appeal. 

(ii) Written request for payment error calculation. The MA organization's written 

request for payment error calculation reconsideration-- 

(A) Must include the MA organization’s own RADV payment error calculation 

that clearly specifies where the Secretary’s RADV payment error calculation was 

erroneous; and 

(B) May include additional documentary evidence pertaining to the calculation of 

the payment error that the MA organization wishes the reconsideration official to 

consider. 

(iii) Conduct of the reconsideration. (A) For medical record review 

determination reconsideration, a medical record review professional who was not 

involved in the initial medical record review determination of the disputed audited HCCs 

does the following: 

(1) Reviews the medical record and accompanying dispute justification. 

(2) Reconsiders the initial audited medical record review determination. 

(B) For payment error calculation reconsideration, CMS ensures that a third party 

not involved in the initial RADV payment error calculation does the following: 

(1) Reviews the Secretary’s RADV payment error calculation. 

(2) Reviews the MA organization’s RADV payment error calculation; 

(3) Recalculates the payment error in accordance with CMS’s RADV payment 

error calculation procedures. 
 581 

(iv) Effect of the reconsideration official’s decision. (A) The reconsideration 

official issues a written reconsideration decision to the MA organization. 

(B) The reconsideration official’s decision is final unless the MA organization 

disagrees with the reconsideration official’s decision. 

(C) If the MA organization disagrees with the reconsideration official’s decision, 

they may request a hearing in accordance with paragraph (c)(8) of this section. 

(7) Hearing stage. (i) Errors eligible for hearing. At the time the reconsideration 

official issues his or her reconsideration determination to the MA organization, the 

reconsideration official notifies the MA organization of any RADV HCC errors or 

paymemt error-calculations that are eligible for RADV hearing. 

(ii) General hearing rules. A MA organization that requests a RADV hearing 

must do so in writing in accordance with procedures established by CMS. 

(iii) Written request for hearing. The written request for a hearing must be filed 

with the Hearing Officer within 30 days of the date the MA organization receives the 

reconsideration officer’s written reconsideration decision. 

(A) If the MA organization appeals medical record review reconsideration 

determination, the written request for RADV hearing must-- 

(1) Include a copy of the written decision of the reconsideration official; 

(2) Specify the audited HCCs that the reconsideration official confirmed as being 

in error; and 

(3) Specify a justification why the MA organization disputes the reconsideration 

official’s determination. 
 582 

(B) If the MA organization appeals the RADV payment error calculation, the 

written request for RADV hearing must include the following: 

(1) A copy of the written decision of the reconsideration official. 

(2) The MA organization’s own RADV payment error calculation that clearly 

specifies where the Secretary’s payment error calculation was erroneous. 

(iv) Designation of hearing officer. A hearing officer will conduct the RADV 

hearing. 

(v) Disqualification of the 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. 

(D) If the hearing officer withdraws, another hearing officer conducts the 

hearing. 

(E) 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 the Secretary. 

(vi) Hearing Officer review. The hearing officer reviews the following: 

(A) For medical record review determination appeal all of the following: 
 583 

(1) The RADV-reviewed medical record and any accompanying attestation that 

the MA organization selected for review. 

(2) The reconsideration official’s written determination. 

(3) The written brief submitted by the MA organization or the Secretary in 

response to the reconsideration official’s determination. 

(B) For payment error calculation appeal all of the following: 

(1) A copy of the written decision of the reconsideration official that clearly 

specifies whether the Secretary’s payment error calculation was erroneous. 

(2) Briefs addressing the reconsideration decision. 

(vii) Hearing procedures. (A) Authority of the Hearing Officer. The hearing 

officer has full power to make rules and establish procedures, consistent with the law, 

regulations, and the Secretary rulings. These powers include the authority to dismiss the 

appeal with prejudice and take any other action which the hearing officer considers 

appropriate, including for failure to comply with such rules and procedures. 

(B) The hearing is on the record. (1) Except as specified in paragraph 

(c)(viii)(B)(2), the hearing officer is limited to the review of the record. 

(2)(i) Subject to the hearing officer’s full discretion, the parties may request a 

live or telephonic hearing regarding some or all of the disputed medical records. 

(ii) The hearing officer may, on his or her own-motion, schedule a live or 

telephonic hearing. 

(3) The record is comprised of the following: 

(i) Documents described at paragraphs (c)(6)(iv) and (7)(vi) of this section. 
 584 

(ii) Written briefs from the MA organization explaining why they believe the 

reconsideration official’s determination was incorrect. 

(iii) The Secretary’s optional brief that responds to the MA organization’s brief-- 

(4) The hearing officer neither receives testimony nor accepts any new evidence 

that is not part of the record. 

(5) Either the MA organization or the Secretary may ask the hearing officer to 

rule on a motion for summary judgment. 

(viii) Hearing Officer decision. The hearing officer decides whether to uphold or 

overturn the reconsideration official’s decision, and sends a written determination to 

CMS and the MA organization, explaining the basis for the decision. 

(ix) Computations based on hearing decision. (A) Once the hearing officer’s 

decision is considered final pursuant to subsection (x), a third party not involved in the 

initial RADV payment error calculation recalculates the MA organization’s RADV 

payment error and issues a new RADV audit report to the appellant MA organization and 

CMS. 

(B) For MA organizations appealing the RADV error calculation only, a third 

party not involved in the initial RADV payment error calculation recalculates the MA 

organization’s RADV payment error and issues a new RADV audit report to the 

appellant MA organization and CMS. 

(x) Effect of the Hearing Officer’s decision. The hearing officer’s decision is 

final unless the decision is reversed or modified by the CMS Administrator. 
 585 

(8) CMS Administrator review stage. (i) A request for CMS Administrator 

review must be made in writing and filed with the CMS Administrator. 

(ii) CMS or a MA organization that has received a hearing officer’s decision and 

requests review by the CMS Administrator must do so within 30 days of receipt of the 

hearing officer’s decision. 

(iii) After receiving a request for review, the CMS Administrator has the 

discretion to elect to review the hearing officer’s decision or to decline to review the 

hearing officer’s decision. 

(iv) If the CMS Administrator elects to review the hearing decision— 

(A) The CMS Administrator acknowledges the decision to review the hearing 

decision in writing and notifies CMS and the MA organization of their right to submit 

comments within 15 days of the date of the notification; and 

(B) The CMS Administrator is limited to the review of the record. The record is 

comprised of the following: 

(1) The record is comprised of documents described at paragraphs (c)(6)(iv), 

(7)(vii), and (7)(ix) of this section. 

(2) The hearing record. 

(3) Written arguments from the MA organization or CMS explaining why either 

or both parties believe the hearing officer’s determination was correct or incorrect. 

(C) The CMS Administrator reviews the record and determines whether the 

hearing officer’s determination should be upheld, reversed, or modified. 
 586 

(v) The CMS Administrator renders his or her final decision in writing to the 

parties within 60 days of acknowledging his or her decision to review the hearing 

officer’s decision. 

(vi) The decision of the hearing officer is final if the CMS Administrator— 

(A) Declines to review the hearing officer’s decision; or 

(B) Does not make a decision within 60 days. 

26. Section 422.326 is added to subpart G to read as follows: 

§ 422.326 Reporting and returning of overpayments. 

(a) Terminology. For purposes of this section-- 

Applicable reconciliation occurs on the date of the annual final deadline for risk 

adjustment data submission described at §422.310(g), which is announced by CMS each 

year. 

Funds means any payment that an MA organization has received that is based on 

data submitted by the MA organization to CMS for payment purposes, including 

§422.308(f) and §422.310. 

Overpayment means any funds that an MA organization has received or retained 

under title XVIII of the Act to which the MA organization, after applicable 

reconciliation, is not entitled under such title. 

(b) General rule. If an MA organization has identified that it has received an 

overpayment, the MA organization must report and return that overpayment in the form 

and manner set forth in this section. 

(c) Identified overpayment. The MA organization has identified an overpayment 
 587 

if it has actual knowledge of the existence of the overpayment or acts in reckless 

disregard or deliberate ignorance of the existence of the overpayment. An MA 

organization must exercise reasonable diligence to determine the accuracy of information 

it receives that an overpayment may exist. 

(d) Reporting and returning of an overpayment. An MA organization must report 

and return any overpayment it received no later than 60 days after the date on which it 

identified it received an overpayment. 

(1) Reporting. An MA organization must notify CMS, of the amount and reason 

for the overpayment, using a notification process determined by CMS. 

(2) Returning. An MA organization must return identified overpayments in a 

manner specified by CMS. 

(3) Enforcement. Any overpayment retained by an MA organization after the 60-

day deadline for reporting and returning is an obligation under 31 U.S.C. 3729(b)(3). 

(e) Look-back period. An MA organization must report and return any 

overpayment identified for the 6 most recent completed payment years. Overpayments 

resulting from fraud are not subject to this limitation of the look-back period. 

§422.502 [Amended] 

27. Section 422.502(b)(3) is amended by removing the phrase "CMS may deny 

an application based on the applicant's" and adding in its place the phrase "CMS may 

deny an application for a new contract or service are expansion based on the applicant's". 

28. Section 422.503 is amended by – 

A. Adding paragraph (b)(4)(vi)(C)(3). 
 588 

B. Adding and reserving paragraph (b)(4)(vi)(G)(4). 

C. Revising paragraph (b)(4)(vi)(G)(5). 

D. In paragraph (d)(2) introductory text, removing the phrase "has the right to:" 

and adding in its place the phrase "has the right to timely do all of the following:". 

E. In paragraph (d)(2)(i), removing the ";" and adding in its place a ".". 

F. In paragraph (d)(2)(ii), removing the "; and" and adding in its place a ".". 

G. Adding paragraph (d)(2)(iv). 

The revisions and additions are as follows: 

§ 422.503 General provisions. 

* * * * * 

(b) * * * 

(4) * * * 

(vi) * * * 

(C) * * * 

(3) An MA organization must require all of its first tier, downstream and related 

entities to take the CMS training and accept the certificate of completion of the CMS 

training as satisfaction of this requirement. MA organizations are prohibited from 

developing and implementing their own training or providing supplemental training 

materials to fulfill this requirement. 

* * * * * 

(G) * * * 

(5) Not accept, or share a corporate parent organization with an entity that 
 589 

accepts, new enrollees under a section 1876 reasonable cost contract in any area in which 

it seeks to offer an MA plan. 

(d) * * *

(2) * * *

(iv) CMS may require that the MA organization hire an independent auditor to 

conduct full or partial program audits or to provide CMS with information to determine if 

deficiencies found during an audit or inspection have been corrected and are not likely to 

recur. The independent auditor must work in accordance with CMS specifications and 

must be willing to attest that a complete and full independent review has been performed. 

* * * * * 

29. Amend § 422.504 by: 

A. Adding paragraphs (a)(3)(iv) and (a)(19). 

B. Redesignating paragraph (i)(2)(ii) as (i)(2)(iii). 

C. Adding new paragraph (i)(2)(ii) and paragraphs (1)(5) and (o). 

§ 422.504 Contract provisions. 

* * * * * 

(a) * * * 

(3) * * * 

(iv) Such benefits and access in a manner that provides good quality health care 

demonstrated by scores of three or higher on CMS performance standards for patient 

outcomes, intermediate outcomes, process, patient experience, and patient access to care. 

* * * * * 
 590 

(19) That it will not submit a bid for the same type of MA plan that is 

non-renewed under § 522.506(b)(1)(iv) in the service area of the non-renewed plan for 2 

years. 

* * * * * 

(i)* * * 

 (2)* * * 

 (ii) HHS, the Comptroller General, or their designees have the right to audit, 

evaluate, collect, and inspect any records under (i)(2)(i) of this section directly from any 

first tier, downstream, or related entity. 

* * * * * 

(l) * * *

(5) Certification of accuracy of data for overpayments. The CEO, CFO, or COO 

must certify (based on best knowledge, information, and belief) that the information 

provided for purposes of reporting and returning of overpayments under § 422.326 is 

accurate, complete, and truthful. 

* * * * * 

(o) Business continuity. (1) The MA organization agrees to develop, maintain, 

and implement a business continuity plan containing policies and procedures to ensure 

the continuation of business operations during disruptions to business operations which 

would include natural or man-made disasters, system failures, emergencies, and other 

similar circumstances and the threat of such occurrences. To meet the requirement, the 

business continuity plan must, at a minimum, include the following: 
 591 

(i) Risk assessment. Identify threats and vulnerabilities that might affect 

business operations. 

(ii) Mitigation strategy. Design strategies to mitigate hazards. Identify essential 

functions in addition to those specified in paragraph (o)(2) of this section and prioritize 

the order in which to restore all other functions to normal operations. At a minimum, 

each MA organization must do the following: 

(A) Identify specific events that will activate the business continuity plan. 

(B) Develop a contingency plan to maintain, during any business disruption, the 

availability and, as applicable, confidentiality of communication systems and essential 

records in all forms (including electronic and paper copies). The contingency plan must 

do the following: 

(1) Ensure that during any business disruption the following systems will operate 

continuously or, should they fail, be restored to operational capacity on a timely basis: 

(i) Information technology (IT) systems including those supporting claims 

processing at point of service. 

(ii) Provider and enrollee communication systems including telephone, website, 

and e-mail. 

(2) With respect to electronic protected health information, comply with the 

contingency plan requirements of the Health Insurance Portability and Accountability 

Act of 1996 Security Regulations at 45 CFR 160 and 164, Subparts A and C. 

(C) Establish a chain of command. 

(D) Establish a business communication plan that includes emergency 
 592 

capabilities and procedures to contact and communicate with the following: 

(1) Employees. 

(2) First tier, downstream, and related entities. 

(3) Other third parties (including pharmacies, providers, suppliers, and 

government and emergency management officials). 

(E) Establish employee and facility management plans to ensure that essential 

operations and job responsibilities can be assumed by other employees or moved to 

alternate sites as necessary. 

(F) Establish a restoration plan including procedures to transition to normal 

operations. 

(G) Comply with all applicable Federal, State, and local laws. 

(iii) Testing and revision. On at least an annual basis, test and update the 

business operations continuity plan to ensure the following: 

(A) That it can be implemented in emergency situations. 

(B) That employees understand how it is to be executed. 

(iv) Training. On at least an annual basis, educate all employees, including 

contract staff about the business continuity plan and their own respective roles. 

(v) Records. (A) Develop and maintain records documenting the elements of the 

business continuity plan described in paragraphs (o)(1)(i) through (iv) of this section. 

(B) Make the information specified in paragraph (o)(1)(v)(A) of this section 

available to CMS upon request. 

(2) Restoration of essential functions. Every MA organization must restore 
 593 

essential functions within 24 hours after any of the essential functions fail or otherwise 

stop functioning as usual. In addition to any essential functions that the MA organization 

identifies under paragraph (o)(1)(ii) of this section, for purposes of this paragraph (o)(2) 

of the section essential functions include, at a minimum, the following: 

(i) Benefit authorization (if not waived), adjudication, and processing of health 

care claims for services furnished at a hospital, clinic, provider office or other place of 

service. 

(ii) Operation of an enrollee exceptions and appeals process including coverage 

determinations. 

(iii) Operation of call center customer services. 

 30. Section 422.506 by revising paragraphs (a)(4) and (b)(1)(iv) to read as 

follows: 

§ 422.506 Nonrenewal of contract. 

 (a) * * * 

(4) If an MA organization does not renew a contract under this paragraph (a) of 

this section, CMS may deny an application for a new contract or a service area expansion 

from the MA organization for 2 years unless there are special circumstances that warrant 

special consideration, as determined by CMS. This prohibition may apply regardless of 

the product type, contract type or service area of the previous contract. 

* * * * * 

(b) * * * 

(1) * * * 
 594 

 (iv) The contract must be non-renewed as to an individual MA plan if that plan 

does not have a sufficient number of enrollees to establish that it is a viable independent 

plan option. 

* * * * * 

31. Section 422.508 is amended by revising paragraphs (c) and (d) introductory 

text to read as follows: 

§422.508 Modification or termination of contract by mutual consent. 

* * * * * 

(c) Agreement to limit new MA applications. As a condition of the consent to a 

mutual termination CMS requires, as a provision of the termination agreement, language 

prohibiting the MA organization from applying for new contracts or service area 

expansions for a period of 2 years, absent circumstances warranting special 

consideration. This prohibition may apply regardless of the product type, contract type 

or service area of the previous contract. 

(d) Prohibition against Part C program participation by organizations whose 

owners, directors, or management employees served in a similar capacity with another 

organization that mutually terminated its Medicare contract within the previous 2 years. 

During the same 2-year period, CMS does not contract with an organization whose 

covered persons also served as covered persons for the mutually terminating sponsor. 

This prohibition may apply regardless of the product type, contract type or service area of 

the previous contract. A “covered person” as used in this paragraph means one of the 

following: 
 595 

* * * * * 

 32. Amend §422.510 as follows; 

 A. By redesigating paragraphs (a)(4) through (15) as paragraphs (a)(4)(i) through 

(xii). 

B. By adding new paragraph (a)(4) introductory text. 

C. In newly redesignated paragraphs (a)(4)(ii), (v), (vi), and (viii) by removing 

the term “fails” and adding in its place the term “failed”. 

D. In newly redesignated paragraphs (a)(4)(iii), (iv), (vii), (ix), and (x), by 

removing the term “Fails” and adding in its place the term “Failed”. 

E. By revising newly redesignated paragraphs (a)(4)(xi) and (xii). 

F. In paragraph (b)(1)(i), by removing the phrase “90 days” and adding in its 

place the phrase “at least 45 calendar days”. 

G. By revising paragraph (b)(1)(iii) and the heading for paragraph (b)(2). 

H. In paragraph (b)(2)(i)(C), by removing the cross-reference “(a)(4) of this 

section” and adding in its place the cross reference “(a)(4)(i) of this section”. 

I. In paragraph (c)(2)(iii), by removing the cross reference “(a)(4) of this section” 

and adding in its place the cross reference “(a)(4)(i) of this section”. 

The additions and revisions read as follows: 

§422.510 Termination of Contract by CMS. 

* * * * * 

(a) * * * 

(3) * * * 
 596 

(4) CMS may make a determination under paragraph (a)(1), (2), or (3) of this 

section if the MA organization has had one or more of the following occur: 

* * * * * 

(xi) Achieves a Part C summary plan rating of less than 3 stars for 3 consecutive 

contract years. Plan ratings issued by CMS before September 1, 2012, are not included 

in the calculation of the 3–year period. 

(A) Holds a MA contract that does not include a Part D addendum and achieves a 

Part C summary plan rating of less than 3 stars for 3 consecutive contract years 

(B) Holds a MA contract that includes a Part D addendum and fails for three 

consecutive years to achieve both Part C and D summary ratings of 3 or more stars in the 

same year. 

(xii) Has failed to report MLR data in a timely and accurate manner in 

accordance with §422.2460 or that any MLR data required by this subpart is found to be 

materially incorrect or fraudulent. 

* * * * * 

 (b) * * * 

(1) * * * 

(i) CMS notifies the MA organization in writing at least 45 calendar days before 

the intended date of the termination. 

(ii) The MA organization notifies its Medicare enrollees of the termination by 

mail at least 30 calendar days before the effective date of the termination. 

(iii) The MA organization notifies the general public of the termination at least 
 597 

30 calendar days before the effective date of the termination by releasing a press 

statement to news media serving the affected community or county and posting the press 

statement prominently on the organization’s website. 

(2) Immediate termination of contract by CMS. 

* * * * * 

33. Section 422.512 is amended by revising paragraph (e)(1) to read as follows: 

§422.512 Termination of contract by the MA organization. 

* * * * * 

(e) * * * 

(1) CMS may deny an application for a new contract or a service area expansion 

from an MA organization that has terminated its contract within the preceding 2 years 

unless there are circumstances that warrant special consideration, as determined by CMS. 

 This prohibition may apply regardless of the contract type, product type, or service area 

of the previous contract. 

* * * * * 

34. Amend §422.566 by revising paragraphs (b) introductory text, and (b)(1) 

through (3) and adding paragraph (b)(6) to read as follows: 

§ 422.566 Organization determinations. 

* * * * * 

(b) Actions that are organization determinations. The following actions by an 

MA organization are organization determinations: 

(1) Any determination with respect to payment for temporarily out of the area 
 598 

renal dialysis services, emergency services, post-stabilization care, or urgently needed 

services. 

(2) Any determination with respect to payment for any other health services 

furnished by a provider other than the MA organization that the enrollee believes— 

(i) Are covered under Medicare; or 

(ii) If not covered under Medicare, should have been furnished, arranged for, or 

reimbursed by the MA organization. 

(3) Any determination by the MA organization not to provide or pay for services, 

in whole or in part, including the type, level or duration of services, that the enrollee 

believes should be furnished or arranged for by the MA organization. 

* * * * * 

(6) Any determination by the MA organization to provide or pay for an item or 

service, including the initial or continued provision of an item or service by a contract 

provider of the MA organization. 

* * * * * 

 35. Section 422.568 is amended by revising paragraph (b) to read as follows: 

§ 422.568 Standard timeframes and notice requirements for organization 

determinations. 

* * * * * 

(b) Timeframe for requests for service. Except as provided in paragraph (b)(1) of 

this section, when a party has made a request for a service, the MA organization must 

notify the enrollee of its determination as expeditiously as the enrollee's health condition 
 599 

requires, but no later than 14 calendar days after the date the organization receives the 

request for a standard organization determination. 

(1) Extensions. The MA organization may extend the timeframe by up to 14 

calendar days if-- 

(i) The enrollee requests the extension; 

(ii) The extension is justified and in the enrollee’s interest due to the need for 

additional medical evidence from a noncontract provider that may change an MA 

organization's decision to deny an item or service; or 

(iii) The extension is justified due to extraordinary, exigent, or other non-routine 

circumstances and is in the enrollee’s interest. 

(2) Notice of extension. When the MA organization 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 MA organization's 

decision to grant an extension. The MA organization 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. 

* * * * * 

36. Section 422.572 is amended by revising paragraph (b) to read as follows: 

§ 422.572 Timeframes and notice requirements for expedited organization 

determinations. 

* * * * * 
 600 

(b) Extensions. (1) The MA organization may extend the 72-hour deadline by 

up to 14 calendar days if-- 

(i) The enrollee requests the extension; 

(ii) The extension is justified and in the enrollee’s interest due to the need for 

additional medical evidence from a noncontract provider that may change an MA 

organization's decision to deny an item or service; or 

(iii) The extension is justified due to extraordinary, exigent, or other non-routine 

circumstances and is in the enrollee’s interest. 

(2) Notice of extension. When the MA organization 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 MA organization's 

decision to grant an extension. The MA organization 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. 

* * * * * 

37. Section 422.590 is amended as follows: 

A. By revising paragraph (a)(1). 

B. In paragraph (d)(1), by removing the cross reference “(d)(2)” and adding in its 

place the cross-reference “(e)”. 

C. By removing paragraph (d)(2). 

D. By redesignating paragraphs (d)(3) through (5) as paragraphs (d)(2) through 

(4), respectively. 
 601 

E. By redesignating paragraphs (e) through (g) as paragraphs (f) through (h), 

respectively; 

F. By adding new paragraph (e). 

The additions and revisions read as follows: 

§ 422.590 Timeframes and responsibility for reconsiderations. 

(a) * * *

(1) Except as provided in paragraph (e) of this section, if the MA organization 

makes a reconsidered determination that is completely favorable to the enrollee, the MA 

organization must issue the determination (and effectuate it in accordance with 

§ 422.618(a)) 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 reconsideration. 

* * * * * 

(e) Extensions. (1) As described in paragraphs (e)(1)(i) through (e)(1)(iii) of this 

section, the MA organization may extend the standard or expedited reconsideration 

deadline by up to 14 calendar days if-- 

(i) The enrollee requests the extension; or 

(ii) The extension is justified and in the enrollee’s interest due to the need for 

additional medical evidence from a noncontract provider that may change an MA 

organization's decision to deny an item or service; or 

(iii) The extension is justified due to extraordinary, exigent or other non-routine 

circumstances and is in the enrollee’s interest. 
 602 

(2) Notice of extension. When the MA organization 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 MA organization's 

decision to grant an extension. The MA organization 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. 

* * * * * 

§422.618 [Amended] 

 38. In paragraph (a), removing the cross-reference "§422.590(a)(1)" and adding 

in its place the cross-reference "§ 422.590(e)". 

§422.619 [Amended] 

 39. In paragraph (a), removing the cross-reference "§422.590(d)(2)" and adding 

in its place the cross-reference "§ 422.590(e)". 

40. Amend §422.641 by revising paragraphs (b) and (c) to read as follows: 

§422.641 Contract determinations.

* * * * * 

(b) A determination not to authorize a renewal of a contract with an MA 

organization in accordance with § 422.506(b). 

(c) A determination to terminate a contract with an MA organization in 

accordance with § 422.510(a). 

* * * * * 
 603 

41. Amend §422.644 by revising paragraphs (a), (b)(1), and (c)(1) to read as 

follows: 

§422.644 Notice of contract determination.

* * * * * 

(a) When CMS makes a contract determination under §422.641, it gives the MA 

organization written notice. 

(b) * * * 

(1) Reasons for the determination; and 

* * * * * 

(c) * * * 

(1) General rule. Except as provided in (c)(2) of this section, CMS mails notice 

to the MA organization 45 calendar days before the anticipated effective date of the 

termination. 

* * * * * 

42. Amend §422.660 by revising paragraphs (a)(2), (a)(3), and (b)(4) to read as 

follows: 

§ 422.660 Right to a hearing, burden of proof, standard of proof, and standards of 

review.

* * * * * 

(a) * * * 

(2) An MA organization whose contract has been terminated in accordance with 

§ 422.510. 
 604 

(3) An MA organization whose contract has not been renewed in accordance 

with § 422.506. 

(b) * * * 

(4) During a hearing to review the imposition of an intermediate sanction as 

described at § 422.750, the MA organization has the burden of proving by a 

preponderance of the evidence that CMS' determination was inconsistent with the 

requirements of § 422.752(a) and (b). 

* * * * * 

43. Amend §422.752 by adding paragraphs (a)(9) through (12) and revising 

paragraphs (c)(1) and (c)(2)(ii) to read as follows: 

§ 422.752 Basis for imposing intermediate sanctions and civil money penalties

(a) * * * 

(9) Except as provided under §423.34 of this chapter, enrolls an individual in any 

plan under this part without the prior consent of the individual or the designee of the 

individual. 

(10) Transfers an individual enrolled under this part from one plan to another 

without the prior consent of the individual or the designee of the individual or solely for 

the purpose of earning a commission. 

(11) Fails to comply with marketing restrictions described in subpart V or 

applicable implementing guidance. 

(12) Employs or contracts with any individual, agent, provider, supplier or entity 

who engages in the conduct described in paragraphs (a)(1) through (11) of this section. 
 605 

* * * * * 

(c) * * * 

(1) CMS. In addition to, or in place of, any intermediate sanctions, CMS may 

impose civil money penalties in the amounts specified in the following: 

(i) Section 422.760(b) for any of the determinations at § 422.510(a), except § 

422.510(a)(4)(i). 

(ii) Section 422.760(c) for any of the determinations at § 422.752(a) except § 

422.752(a)(5). 

(2) * * * 

(ii) Determinations made under § 422.510(a)(4)(i). 

44. Amend § 422.756 by revising paragraphs (a)(2), (b)(4), and (d) to read as 

follows: 

§ 422.756 Procedures for imposing intermediate sanctions and civil money 

penalties.

 (a) * * * 

(2) Opportunity to respond. CMS allows the MA organization 10 calendar days 

after receipt of the notice to provide a written rebuttal. CMS considers receipt of the 

notice as the day after the notice is sent by fax, e-mail, or submitted for overnight mail. 

(b) * * * 

(4) The MA organization must follow the right to a hearing procedure as 

specified in subpart N of this part. 

* * * * * 
 606 

(d) Non-renewal or termination by CMS. In addition to or as an alternative to the 

sanctions described in § 422.750, CMS may-- 

(1) Decline to authorize the renewal of an organization's contract in accordance 

with § 422.506(b); or 

(2) Terminate the contract in accordance with § 422.510. 

* * * * * 

45. Amend 422.760 by revising paragraph (a)(3) and the heading of paragraph 

(b) and adding paragraph (c) to read as follows: 

§ 422.760 Determinations regarding the amount of civil money penalties and 

assessment imposed by CMS. 

 (a) * * * 

(3) The adverse effect to enrollees which resulted or could have resulted from the 

conduct of MA organization; 

(b) Amount of penalty imposed by CMS. * * * 

* * * * * 

(c) Amount of penalty imposed by CMS or OIG. CMS or the OIG may impose 

civil money penalties in the following amounts for a determination made under 

§ 422.752(a): 

(1) Civil money penalties of not more than $25,000 for each determination made. 

 (2) With respect to a determination made under § 422.752(a)(4) or (a)(5)(i), not 

more than $100,000 for each such determination, except with respect to a determination 

made under§ 422.752(a)(5), an assessment of not more than the amount claimed by such 
 607 

plan or MA organization based upon the misrepresentation or falsified information 

involved. 

(3) Plus with respect to a determination made under § 422.752(a)(2), double the 

excess amount charged in violation of such paragraph (and the excess amount charged 

must be deducted from the penalty and returned to the individual concerned). 

(4) Plus with respect to a determination made under § 422.752(a)(4), $15,000 for 

each individual not enrolled as a result of the practice involved. 

46. Amend § 422.1016 by revising the first sentence of paragraph (b)(1) to read 

as follows: 

§ 422.1016 Filing of briefs with the Administrative Law Judge or Departmental 

Appeals Board, and opportunity for rebuttal.

* * * * * 

(b) * * * 

(1) The other party will have 20 calendar days from the date of mailing or in 

person filing to submit any rebuttal statement or additional evidence. * * * 

* * * * * 

47. Amend §422.1020 by revising paragraph (a)(2) to read as follows: 

§ 422.1020 Request for hearing.

(a) * * * 

(2) The MA organization or its legal representative or other authorized official 

must file the request, in writing, to the appropriate Departmental Appeals Board office, 

with a copy to CMS, within 60 calendar days after receipt of the notice of initial 
 608 

determination, to request a hearing before an ALJ to appeal any determination by CMS to 

impose a civil money penalty. 

* * * * * 

48. Amend § 422.2262 by adding paragraph (a)(2) to read as follows: 

§ 422.2262 Review and Distribution of marketing materials. 

(a) * * * 

(2) If CMS does not approve or disapprove marketing materials within the 

specified review timeframe, the materials will be deemed approved. Deemed approved 

means that the MA organization may use the material. 

* * * * * 

§422.2266 [Removed and Reserved] 

49. Section 422.2266 is removed and reserved. 

50. Amend §422.2274 by: 

A. Revising the introductory text. 

B. Redesignating paragraphs (a) through (f) as (b) through (g). 

C. Adding new paragraph (a). 

D. Revising newly redesignated paragraphs (b) through (d). 

E. Adding paragraph (h). 

The revisions and addition read as follows: 

§ 422.2274 Broker and agent requirements. 

If an MA organization uses agents and brokers to sell its Medicare plans, the following 

requirements in this section are applicable: 
 609 

(a) Definitions. For purposes of this section, the following definitions are applicable: 

Compensation (1) Includes monetary or non-monetary remuneration of any kind 

relating to the sale or renewal of a policy including, but not limited to-- 

(i) Commissions; 

(ii) Bonuses; 

(iii) Gifts; 

(iv) Prizes or Awards; or 

(v) Referral or Finder fees. 

(2) Does not include-- 

(i) Payment of fees to comply with State appointment laws, training, certification, 

and testing costs; 

(ii) Reimbursement for mileage to, and from, appointments with beneficiaries; or 

(iii) Reimbursement for actual costs associated with beneficiary sales 

appointments such as venue rent, snacks, and materials. 

 Like plan type means one of the following: 

 (1) PDP replaced with another PDP. 

 (2) MA or MA-PD replaced with another MA or MA-PD. 

 (3) Cost plan replaced with another cost plan. 

 Unlike plan type means one of the following: 

(1) PDP replaced with a MA-PD or a MA-PD replaced with a PDP. 

(2) PDP replaced with a cost plan or a cost plan replaced with a PDP. 
 610 

(3) MA-PD replaced with a cost plan or a cost plan replaced with a MA-PD. 

 Plan year means the year beginning January 1 and ending December 31. 

 Renewal year means all years following the initial enrollment year in a like plan 

type. 

 (b) Compensation rules. A MA organization must compensate independent 

brokers and agents, if compensation is paid, only according to the following rules in this 

section. 

 (1) Compensation amounts. (i) For an initial year enrollment of a Medicare 

beneficiary into an MA plan, the compensation must be at or below the fair market value 

of such services, published annually as a cut-off amount by CMS. 

 (ii) For renewal years, compensation may be up to 35 percent of the current fair 

market value cut-off amounts published annually by CMS. 

 (2) Aggregate compensation. (i) An entity must not provide aggregate 

compensation to its agents or brokers greater than the renewal compensation payable by 

the replacing plan on renewal policies if an existing policy is replaced with a like plan at 

any time. 

 (ii) An agent or broker must not receive aggregate compensation greater than the 

renewal compensation payable by the replacing plan on renewal policies if an existing 

policy is replaced with a like plan type at any time. 

(iii) The initial compensation is paid for replacements between unlike plan types. 

(3) Compensation payment and payment recovery. (i) Compensation may only be 

paid for the enrollee’s months of enrollment during a plan year. 
 611 

 (ii)(A) Subject to paragraph (b)(3)(iii) of this section, compensation payments 

may be made at one time for the entire current plan year or in installments throughout the 

year. 

 (B) Compensation may not be paid until January 1 of the compensation year and, 

if paid at all, must be paid in full by December 31 of the compensation year. 

 (iii) When a beneficiary disenrolls from an MA plan, compensation paid to agents 

and brokers must be recovered for those months of the plan year for which the 

beneficiary is not enrolled. For disenrollments occurring within the first 3 months, the 

entire compensation must be recovered when the disenrollment was the result of agent or 

broker behavior. 

(4) Compensation structure. (i) The MA organization must establish a 

compensation structure for new and replacement enrollments and renewals effective in a 

given plan year. Compensation structures must be in place by the beginning of the plan 

marketing period, October 1. 

(ii) Compensation structures must be available upon CMS request including for 

audits, investigations, and to resolve complaints. 

(c) Annual training. The MA organization must ensure that all agents and 

brokers selling Medicare products are trained annually on the following: 

(1) Medicare rules and regulations. 

(2) Details specific to the plan products they intend to sell. 

(d) Annual testing. It must ensure that all agents and brokers selling Medicare 

products are tested annually, to ensure the following: 
 612 

(1) Appropriate knowledge and understanding of Medicare rules and regulations. 

(2) Details specific to the plan products they intend to sell. 

* * * * * 

(h) Finder's (referral) fees. Finder’s (referral) fees paid to all agents and brokers- 

(1) May not exceed an amount CMS determines could reasonably be expected to 

affect enrollee behavior while not exceeding the value of the health-related service or 

activity itself; and 

(2) Must be included in the total compensation not to exceed the fair market 

value for that calendar year. 

Subpart Y-[Reserved]

 51. Part 422 is amended by adding reserved subpart Y. 

 52. Part 422 is amended by adding subpart Z to read as follows: 

Subpart Z--Part C Recovery Audit Contractor Appeals Process 

Sec. 

422.2600 Payment appeals. 

422.2605 Request for reconsideration. 

422.2610 Hearing official review. 

422.2615 Review by the Administrator. 

Subpart Z--Part C Recovery Audit Contractor Appeals Process 

§422.2600 Payment appeals. 

If the Part C RAC did not apply its stated payment methodology correctly, an MA 

organization may appeal the findings of the applied methodology. The payment 

methodology itself is not subject to appeal.

§422.2605 Request for reconsideration. 
 613 

(a) Time for filing a request. The request for reconsideration must be filed with 

the designated independent reviewer within 60 calendar days from the date of the demand 

letter received by the MA organization. 

(b) Content of request. (1) The request for reconsideration must be in writing 

and specify the findings or issues with which the MA organization disagrees. 

(2) The MA organization must include with its request all supporting 

documentary evidence it wishes the independent reviewer to consider. 

(i) This material must be submitted in the format requested by CMS. 

(ii) Documentation, evidence, or substantiation submitted after the filing of the 

reconsideration request will not be considered. 

(c) CMS rebuttal. CMS may file a rebuttal to the MA organization’s 

reconsideration request. 

(1) The rebuttal must be submitted within 30 calendar days of the review entity’s 

notification to CMS that it has received the MA organization’s reconsideration request. 

(2) CMS sends its rebuttal to the MA organization at the same time it is 

submitted to the independent reviewer. 

(d) Review entity. An independent reviewer conducts the reconsideration. The 

independent reviewer reviews the demand for repayment, the evidence and findings upon 

which it was based and any supporting documentation that the MA organization or CMS 

submitted in accordance with this section. 

(e) Notification of decision. The independent reviewer informs the CMS and the 

MA organization of its decision in writing. 
 614 

(f) Effect of decision. A reconsideration decision is final and binding unless the 

MA organization requests a hearing official review in accordance with § 422.2610. 

(g) Right to hearing official review. An MA organization that is dissatisfied with 

the independent reviewer’s reconsideration decision is entitled to a hearing official 

review as provided in § 422.2610. 

§422.2610 Hearing official review. 

(a) Time for filing a request. A MA organization must file with CMS a request 

for a hearing official review within 15 calendar days from the date of the independent 

reviewer’s issuance of a reconsideration determination. 

(b) Content of the request. (1) The request must be in writing and must specify 

the findings or issues in the reconsideration decision with which the MA organization 

disagrees and the reasons for the disagreements. 

(2) The MA organization must submit with its request all supporting 

documentation, evidence, and substantiation that it wants to be considered. 

(3) No new evidence may be submitted. 

(4) Documentation, evidence, or substantiation submitted after the filing of the 

request will not be considered. 

(c) CMS rebuttal. CMS may file a rebuttal to the MA organization’s hearing 

official review request. 

(1) The rebuttal must be submitted within 30 calendar days of the MA 

organization’s submission of its hearing official review request. 

(2) CMS sends its rebuttal to the MA organization at the same time it is 
 615 

submitted to the hearing official. 

(d) Conducting a review. A CMS-designated hearing official conducts the 

hearing on the record. 

(1) The hearing is not to be conducted live or via telephone unless the hearing 

official, in his or her sole discretion, requests a live or telephonic hearing. 

(2) In all cases, the hearing official’s review is limited to information that meets 

one or more of the following: 

(i) The Part C RAC used in making its determinations. 

(ii) The independent reviewer used in making its determinations. 

(iii) The MA organization submits with its hearing request. 

(iv) CMS submits in accordance with paragraph (c) of this section. 

(3) Neither the MA organization nor CMS may submit new evidence. 

 (e) Hearing official decision. The CMS hearing official decides the case within 

60 days and sends a written decision to the MA organization and CMS, explaining the 

basis for the decision. 

(f) Effect of hearing official decision. The hearing official’s decision is final and 

binding, unless the decision is reversed or modified by the CMS Administrator in 

accordance with § 422.2615. 

§422.2615 Review by the Administrator. 

(a) Request for review by Administrator. If an MA organization is dissatisfied 

with the hearing official’s decision, it may request that the CMS Administrator review 

the decision. 
 616 

(1) The request must be filed with the CMS Administrator within 15 calendar 

days of the date of the hearing official’s decision. 

(2) The request must provide evidence or reasons to substantiate the request. 

(b) Content of request. The MA organization must submit with its request all 

supporting documentation, evidence, and substantiation that it wants to be considered. 

(1) Documentation, evidence, or substantiation submitted after the filing of the 

request will not be considered. 

(2) Neither the MA organization, nor CMS may submit new evidence. 

(c) Discretionary review. After receiving a request for review, the CMS 

Administrator has the discretion to review the hearing official’s decision in accordance 

with paragraph (e) of this section or to decline to review said decision.

(d) Notification of decision whether to review. The Administrator notifies the 

MA organization within 45 days of receiving the MA organization’s hearing request of 

whether he or she intends to review the hearing official’s decision. 

(1) If the Administrator agrees to review the hearing official’s decision, CMS 

may file a rebuttal statement within 30 days of the Administrator’s notice to the plan that 

the request for review has been accepted. CMS sends its rebuttal statement to the plan at 

the same time it is submitted to the Administrator. 

(2) If the CMS Administrator declines to review the hearing official’s decision, 

the hearing official’s decision is final and binding. 

 (e) CMS Administrator's review. If the CMS Administrator agrees to review the 

hearing official’s decision, he or she determines, based upon this decision, the hearing 
 617 

record, and any arguments submitted by the MA organization or CMS in accordance with 

this section, whether the determination should be upheld, reversed, or modified. The 

Administrator furnishes a written decision, which is final and binding, to the MA 

organization and to CMS. 

PART 423—MEDICARE PROGRAM; MEDICARE PRESCRIPTION DRUG 

PROGRAM 

53. The authority citation for part 423 continues to read as follows: 

Authority: Secs. 1102, 1860D-1 through 1860D-42, and 1871 of the Social 

Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, and 1395hh). 

54. Amend § 423.1 by adding new references in numerical order to paragraph 

(a)(1) and by adding paragraph (a)(3) to read as follows: 

§ 423.1 Basis and scope. 

(a) * * *

(1) * * * 

1128J(d). Reporting and Returning of Overpayments. 

* * * * * 

1860D-14A. Medicare coverage gap discount program. 

* * * * * 

1860D-43. Condition for coverage of drugs under this part. 

* * * * * 

(3) Section 8 of the United States Code regarding aliens who are not qualified 

aliens ineligible for Federal public benefits. 
 618 

* * * * * 

55. Section 423.10 is added to subpart A to read as follows: 

§423.10 Prohibition on intervention in negotiations with manufacturers. 

(a) General rule. CMS promotes fair private market competition in the market 

for Part D drugs. 

(b) No interference in negotiations. (1) Except as necessary to enforce CMS 

requirements, CMS is not-- 

(i) A party to discussions between drug manufacturers and pharmacies or 

between prescription drug manufacturers and Part D sponsors; nor 

(ii) An arbiter of the meaning of or compliance with the terms and conditions of 

agreements reached between these parties. 

(2) Nothing in paragraph (b)(1) of this section limits CMS's authority to-- 

(i) Require documentation of and access to all agreements referenced in 

paragraph (b)(1)(ii) of this section; or 

(ii) Require inclusion of terms and conditions in such agreements when necessary 

to implement requirements under the Act. 

(c) No establishment of formulary drug product selection. CMS does not 

determine the specific drug products to be included on Part D sponsor formularies or any 

tier placement of such products, except as necessary to comply with § 423.120(b)(1)(v) 

or § 423.272(b)(2). 

 (d) No establishment of Part D drug price reimbursement methodologies. (1) 

CMS does not establish specific drug product pricing standards (as defined in 
 619 

§423.505(b)(21)) or the dollar amount of price concessions at any stage in the drug 

distribution channel for Part D drugs. 

 (2) Nothing in this section limits CMS authority to require full disclosure or 

uniform treatment and reporting of drug costs, prices, or price concessions consistent 

with rules established by CMS. 

56. Amend § 423.30 as follows: 

A. In paragraph (a)(1) introductory text, by removing the phrase "if he or she:" 

and adding in its place the phrase "if he or she does all of the following:". 

B. In paragraph (a)(1)(i), by removing "; and" and adding in its place ".". 

C. By adding paragraph (a)(1)(iii). 

The addition reads as follows: 

§ 423.30 Eligibility and enrollment. 

 (a) * * * 

 (1) * * * 

(iii) Is a United States citizen or qualified alien who is lawfully present in the 

United States as determined in 8 CFR 1.3. 

* * * * * 

§423.44 [Amended] 

57. Amend § 423.44 as follows: 

A. By adding paragraph (b)(2)(vi). 

B. In paragraph (d)(1)(vi), by removing the phrase "CMS may reinstate" and 

adding in its place the phrase "CMS (or its designee) may reinstate". 
 620 

C. By adding paragraph (d)(8). 

The additions read as follows: 

§ 423.44 Involuntary disenrollment from Part D coverage. 

* * * * * 

 (b) * * * 

 (2) * * * 

(vi) The individual loses qualified alien status or is no longer lawfully present in 

the United States. 

* * * * * 

(d) * * * 

(8) Loss of qualified alien status. Disenrollment is effective with the month 

following the last month of lawful presence or qualified alien status in the United States. 

* * * * * 

§423.100 [Amended] 

58. Amend §423.100 as follows: 

A. By revising the definition of “Daily cost-sharing rate”. 

B. By revising the definition of "Negotiated prices". 

C. By removing the definition of "Non-preferred pharmacy". 

D. In the definition of "Part D drug"-- 

i. By revising paragraph (1) introductory text. 

ii. By adding paragraph (1)(vii). 

iii. In paragraph (2) introductory text, by removing the phrase "Does not include-
 621 

-" and adding in its place the phrase "Does not include any of the following:" 

iv. In paragraph (2)(i), by removing "; and" and adding in its place ".". 

vi. By adding paragraph (2)(iii). 

E. By adding the definition of "Preferred cost sharing". 

F. By removing the definition of "Preferred pharmacy". 

The additions and revisions read as follows: 

§423.100 Definitions 

* * * * * 

Daily cost-sharing rate means, as applicable, the established— 

(1) Monthly copayment under the enrollee's Part D plan, divided by the number of 

days in the approved month’s supply for the drug dispensed and rounded to the nearest 

cent; or 

(2) Coinsurance percentage under the enrollee's Part D plan. 

* * * * * 

Negotiated prices means prices for covered Part D drugs that meet all of the 

following: 

(1) The Part D sponsor (or other intermediary contracting organization) and the 

network dispensing pharmacy or other network dispensing provider have negotiated as 

the amount such network entity will receive, in total, for a particular drug. 

(2) Are inclusive of all price concessions and any other fees charged to network 

pharmacies; and 

(3) Include any dispensing fees; but 
 622 

(4) May exclude additional contingent amounts, such as incentive fees, only if 

these amounts increase prices and cannot be predicted in advance. 

(5) May not be rebated back to the Part D sponsor (or other intermediary 

contracting organization) in full or in part. 

* * * * * 

Part D drug * * *

(1) Unless excluded under paragraph (2) of this definition, any of the following, 

or any FDA-approved combinations of the following, if used for a medically accepted 

indication (as defined in section 1860D-2(e)(4) of the Act). 

* * * * * 

(vii) A combination product approved and regulated by the FDA as a drug, 

vaccine, or biologic (or any approved combinations of these) described in paragraphs (i), 

(ii), (iii), or (v) of the Part D drug definition. 

(2) Does not include any of the following: 

* * * * * 

(iii) Medical foods, defined as a food that is formulated to be consumed or 

administered enterally under the supervision of a physician and which is intended for the 

specific dietary management of a disease or condition for which distinctive nutritional 

requirements, based on recognized scientific principles, are established by medical 

evaluation, and that are not regulated as drugs under section 505 of the Federal Food, 

Drug, and Cosmetic Act. 

* * * * * 
 623 

Preferred cost sharing means lower cost sharing for certain covered Part D drugs 

at certain network pharmacies offered in accordance with the requirements of 

§423.120(a)(9). 

* * * * * 

59. Amend 423.120 by: 

A. Revising paragraphs (a)(3), (8), and (9). 

B. Redesignating paragraphs (b)(1)(iv) through (x) as (b)(1)(v) through (xi), 

respectively. 

C. Adding a new paragraph (b)(1)(iv). 

D. Revising paragraphs (b)(2)(v), (vi)(B), and (C). 

E. Adding new paragraphs (b)(2)(vi)(D) through (G) and (3)(vi). 

F. Redesignating paragraphs (c)(5)(i) through (v) as paragraphs (c)(5)(i)(A) 

through (E), respectively. 

G. Adding paragraph (c)(5)(i) introductory text. 

H. In newly resdesignated paragraphs (c)(5)(i)(A) and (B), removing the crossreference "(c)(5)(iii) of this section" and adding in its place the cross-reference 

"(c)(5)(i)(C) of this section" 

I. In newly resdesignated paragraph (c)(5)(i)(D), removing the cross-reference 

"(c)(5)(ii) and (iii) of this section" and adding in its place the cross-reference "(c)(5)(i)(B) 

and (C) of this section". 

J. Adding a new paragraph (c)(5)(ii). 

K. Adding paragraph (c)(6). 
 624 

The revisions and additions read as follows: 

§ 423.120 Access to covered Part D drugs. 

* * * * * 

(a) * * * 

(3) Access to non-retail pharmacies. A part D sponsor’s contracted pharmacy 

network may be supplemented by non-retail pharmacies, including pharmacies offering 

home delivery via mail order and institutional pharmacies, provided the requirements of 

paragraph (a)(1) of this section are met. Sponsors that contract with mail order 

pharmacies, and pharmacies offering home delivery via mail order, must ensure that the 

pharmacies meet the following fulfillment standards: 

 (i) For prescriptions adjudicated and filled without requiring additional review, 

the time of shipment must not be more than 3 business days from order receipt by the 

mail order pharmacy. 

 (ii) For prescriptions requiring additional review before shipping, the time of 

shipment must not be more than 5 business days from order receipt by the mail order 

pharmacy. 

* * * * * 

(8) Pharmacy network contracting requirements. In establishing its contracted 

pharmacy network, a Part D sponsor offering qualified prescription drug coverage must 

comply with all of the following requirements: 

(i) Must offer and publicly post standard terms and conditions for network 

participation for each type of pharmacy in the network, subject to paragraphs (a)(8)(ii) 
 625 

and (iii) of this section. 

(ii) May not require a pharmacy to accept insurance risk as a condition of 

participation in the Part D sponsor’s contracted pharmacy network. 

(iii) Must offer payment terms for every level of cost sharing offered under the 

sponsor’s plans consistent with CMS limitations on the number and type of cost sharing 

levels (preferred, standard, extended day), and for every type of similarly situated retail 

pharmacy. 

(iv) Must contract with any willing pharmacy able to meet one set of the terms 

and conditions offered by that plan for that type of pharmacy.

 (9) Preferred cost-sharing in network pharmacies. A Part D sponsor offering a 

Part D plan that provides coverage other than defined standard coverage may reduce 

copayments or coinsurance for covered Part D drugs obtained through a subset of 

network pharmacies, as long as such preferred cost sharing is offered in accordance with 

the requirements of §423.120(a)(8) and for Part D drugs with consistently lower 

negotiated prices than the same Part D drugs when obtained in the rest of the pharmacy 

network. 

* * * * * 

 (b) * * * 

 (1) * * * 

(iv) Clearly articulates and documents processes to determine that the 

requirements under paragraphs (b)(1)(i) through (iii) of this section have been met, 

including the determination by an objective party of whether disclosed financial interests 
 626 

are conflicts of interest and the management of any recusals due to such conflicts. 

* * * * * 

(2) * * * 

(v) Effective contract year 2015, except as provided in paragraph (b)(2)(vi) of 

this section, a Part D sponsor’s formulary must include without restriction at point of sale 

all Part D drugs in a category or class that CMS has determined for a typical individual 

with a disease or condition treated by the drugs in the category or class meets the all of 

the following criteria: 

(A) Hospitalization, persistent or significant disability or incapacity, or death will 

likely result if initial administration (including self-administration) of a drug in the 

category or class does not occur within 7 days of the date the prescription for the drug 

was presented to the pharmacy to be filled. 

(B) More specific CMS formulary requirements will not suffice to meet the 

universe of clinical drug-and-disease-specific applications due to the diversity of disease 

or condition manifestations and associated specificity or variability of drug therapies 

necessary to treat such manifestations. 

(vi) * * * 

(B) Drug products that are primarily covered under Medicare Part A or B. 

(C) Part D Compounds as described in § 423.120(d). 

(D) Fixed combination dosage form prescription drugs other than antiretrovirals, 

including co-packaged drug products, as defined by 21 CFR 300.50. 

(E) Certain types of Part D drugs, including the following: 
 627 

(1) Multisource brands of the identical molecular structure. 

 (2) Extended-release products when the immediate-release product is included. 

 (3) Products that have the same active ingredient or moiety. 

 (4) Dosage forms that do not provide a unique route of administration (for 

example, tablets and capsules versus tablets and transdermals). 

 (F) Point-of-sale utilization management safety edits consistent with the FDA 

approved label. 

 (G) Prior authorization requirements used to verify a drug is being used for a 

medically accepted indication (as defined in § 423.100) or to verify a drug is not covered 

under Medicare Parts A or B as prescribed and dispensed or administered. 

(3) * * * 

(vi) A Part D sponsor must charge cost sharing for a temporary supply of drugs 

provided under its transition process such that the following conditions are met: 

(A) For low-income subsidy (LIS) enrollees, a sponsor must not charge higher 

cost sharing for transition supplies than the statutory maximum copayment amounts. 

(B) For non-LIS enrollees, a sponsor must charge-- 

(1) The same cost sharing for non-formulary Part D drugs provided during the 

transition that would apply for non-formulary drugs approved through a formulary 

exception in accordance with §423.578(b); and 

 (2) The same cost sharing for formulary drugs subject to utilization management 

edits provided during the transition that would apply once the utilization management 

criteria are met. 
 628 

* * * * * 

 (c) * * * 

 (5)(i) Before January 1, 2015-- 

* * * * * 

(ii) Beginning January 1, 2015-- 

(A) A Part D sponsor must deny or must require its PBM to deny a pharmacy 

claim for a Part D drug if an active and valid physician or eligible professional (as 

defined in section 1848(k)(3)(B)(i) or (ii) of the Act) National Provider Identifier is not 

contained on the claim. 

(B) A Part D sponsor must deny or require its PBM to deny a pharmacy claim for 

a Part D drug if the physician or eligible professional -- 

(1) Is not enrolled in the Medicare program in an approved status; and 

(2) Does not have a valid opt-out affidavit on file with an A/B MAC. 

(C) To receive payment for a drug, a beneficiary’s request for reimbursement 

from a Part D sponsor must be for a Part D drug that was dispensed in accordance with a 

prescription written by a physician or, when permitted under applicable State law, other 

eligible professional (as defined in section 1848(k)(3)(B)(i) or (ii) of the Act) who-- 

(1) Is identified by his or her legal name in the request; and 

(2)(i) Is enrolled in Medicare in an approved status; or 

(ii) Has a valid opt-out affidavit on file with an A/B MAC. 

* * * * * 
 629 

(6)(i) In order for a Part D sponsor to submit to CMS a prescription drug event 

record, the PDE must pertain to a claim for a Part D drug that was dispensed in 

accordance with a prescription written by a physician or, when permitted under 

applicable State law, an eligible professional (as defined in section 1848(k)(3)(B)(i) or 

(ii) of the Act) who is either of the following: 

 (A) Is enrolled in Medicare in an approved status. 

 (B) Has a valid opt-out affidavit on file with an A/B MAC. 

 (ii) To receive payment for a drug, a beneficiary's request for reimbursement 

from a Part D sponsor must be for a Part D drug that was dispensed in accordance with a 

prescription written by a physician or, when permitted, other eligible professional (as 

defined in section 1848(k)(3)(B)(i) or (ii) of the Act) who-- 

 (A)(1) Is identified by his or her legal name in the request; and 

 (2) Is enrolled in Medicare in an approved status; or 

 (B) Has a valid opt-out affidavit on file with an A/B MAC. 

 (iii) A Part D sponsor must deny or must require its PBM to deny the 

following: 

 (A) A pharmacy claim for a drug, if the claim does not meet the requirements 

of paragraph (c)(6)(i) of this section. 

 (B) A request for reimbursement from a Medicare beneficiary for a drug, if the 

request does not meet the requirements of paragraph (c)(6)(ii) of this section. 

* * * * * 

60. Section 423.126 is added to read as follows: 
 630 

§423.126 Special access rules during disasters or emergencies. 

(a) Special access rules during disasters or emergencies. A Part D sponsor must 

relax “refill-too-soon” (RTS) edits to allow an enrollee to obtain one early refill of each 

covered Part D drug he or she is taking in the event of an anticipated or actual disaster or 

emergency, as evidenced by a declaration of a disaster or emergency issued by an 

appropriate Federal, State, or local official, and it is reasonable to conclude that such 

disaster or emergency or preparation therefore would make it difficult for beneficiaries to 

obtain refills of their medications because the disaster or emergency or anticipation 

thereof has affected, or will affect, their ability to have timely access to their usual 

pharmacies. 

(b) Duration of relaxed edits. A Part D sponsor must continue to relax the RTS 

edits as described in paragraph (a) of this section until the 30 days after the date of the 

triggering emergency or disaster declaration. 

61. Amend §423.128 by revising paragraph (a)(3) and adding paragraph (g) to 

read as follows: 

§423.128 Dissemination of Part D information. 

* * * * * 

(a) * * * 

 (3) At the time of enrollment, and at least annually thereafter by December 31 for 

the following contract year. 

* * * * * 

(g) Changes in rules. If a Part D sponsor intends to change its rules for a Part D 
 631 

plan, it must do all of the following: 

(1) Submit the changes for CMS review under the procedures of Subpart V of 

this part. 

(2) For changes that take effect on January 1, notify all enrollees at least 15 days 

before the beginning of the Annual Coordinated Election Period as defined in section 

1860D-1(b)(1)(B) of the Act. 

 (3) Provide notice of all other changes in accordance with notice requirements as 

specified in Part 423. 

 62. Amend §423.153 by revising paragraphs (b)(4), (d)(1)(v), and (d)(2)(i) 

through (iii) to read as follows: 

§ 423.153 Drug utilization management, quality assurance, and medication therapy 

management programs (MTMPs) 

* * * * * 

(b) * * * 

(4)(i) Daily cost sharing rate. Subject to paragraph (b)(4)(ii) of this section, 

establishes a daily cost-sharing rate (as defined in § 423.100) and applies it to a 

prescription presented to a network pharmacy for a covered Part D drug that is dispensed 

for a supply less than 30 days, if the drug is in the form of a solid oral dose and may be 

dispensed for a supply less than 30 days under applicable law. 

(ii) Exceptions. The requirements of paragraph (b)(4)(i) of this section do not apply 

to either of the following: 

(A) Solid oral doses of antibiotics. 
 632 

(B) Solid oral doses that are dispensed in their original container as indicated in the 

Food and Drug Administration Prescribing Information or are customarily dispensed in 

their original packaging to assist patients with compliance. 

(iii) Cost-sharing—(A) Copayments. In the case of a drug that would incur a 

copayment, the Part D sponsor must apply cost-sharing as calculated by multiplying the 

applicable daily cost-sharing rate by the days’ supply actually dispensed when the 

beneficiary receives less than a 30 days’ supply. 

 (B) Coinsurance. In the case of a drug that would incur a coinsurance 

percentage, the Part D sponsor must apply the coinsurance percentage for the drug to the 

days’ supply actually dispensed. 

* * * * * 

(d) * * *

(1) * * *

(v) Must do both of the following: 

(A) Have an outreach strategy designed to effectively engage at-risk beneficiaries 

enrolled in the plan. 

(B) Enroll targeted beneficiaries using an opt-out method of enrollment only. 

* * * * * 

(2) * * *

(i) Have two or more chronic diseases. At least one of the chronic diseases must 

be one from the following list of core chronic diseases: 

(A) Cardiovascular disease 
 633 

(B) Diabetes. 

(C) Dyslipidemia. 

(D) Respiratory disease. 

(E) Bone disease-arthritis. 

(F) Mental health. 

(G) Alzheimer’s disease. 

(H) End-stage renal disease. 

(ii) Are taking two or more covered Part D drugs. 

(iii) Are likely to incur annual costs for covered Part D drugs that are 

commensurate with the drug spending of beneficiaries with two or more chronic diseases 

that take two covered Part D drugs. 

* * * * * 

62. Amend §423.154 by: 

A. Revising paragraphs (a)(2) and (c). 

B. Removing paragraph (e). 

D. Redesignating paragraph (f) as (e). 

E. Adding a new paragraph (f). 

The revisions and addition read as follows: 

§ 423.154 Appropriate dispensing of prescription drugs in long-term care facilities 

under PDPs and MA-PD plans. 

(a) * * *

(2) Collect and report information, in a form and manner specified by CMS, on the 
 634 

dispensing methodology used for each dispensing event described by paragraph (a)(1) of 

this section. 

* * * * * 

(c) Waivers. CMS waives the requirements under paragraph (a) of this section for 

any of the following: 

(1) Pharmacies when they service intermediate care facilities for the mentally 

retarded (ICFs/IID) and institutes for mental disease (IMDs) as defined in § 435.1010 of 

this chapter. 

(2) I/T/U pharmacies (as defined in § 423.100). 

(3)(i) Institutional pharmacies that-- 

(A) Subject to paragraph (c)(3)(iii) of this section, exclusively use a dispensing 

technique that returns all unused medications to stock for reuse; 

(B) Issues full credit of the ingredient costs of unused medication to the Part D 

sponsor; and 

(C) For drugs that cannot be returned to stock for reuse under applicable law use 

a dispensing methodology that results in the delivery of no more than a 14 days’ supply 

of a drug at a time. 

(ii) The waiver in paragraph (c)(3)(i) of this section does not apply to a pharmacy 

organization that is contracted to use this dispensing technique at some of its pharmacies, 

but only to the qualifying pharmacies themselves. 

* * * * * 

(f) Prohibition on proration of dispensing fees. A Part D sponsor must not, or 
 635 

must require its intermediary contracting organization not to, do the following: 

(1) Not penalize long-term care facilities’ choice of more efficient uniform 

dispensing techniques described in paragraph (a)(1)(ii) of this section by prorating 

dispensing fees based on days’ supply or quantity dispensed. 

 (2) Ensure that any difference in payment methodology among long-term care 

pharmacies incentivizes more efficient dispensing techniques. 

64. Amend § 423.265 as follows: 

A. By redesignating paragraph (b)(3) as (b)(4). 

B. By adding a new paragraph (b)(3). 

C. In newly redesignated paragraph (b)(4), by adding a paragraph heading. 

The additions read as follows: 

§ 423.265 Submission of bids and related information. 

* * * * * 

(b) * * *

 (3) Number of bids. Starting with bids submitted during 2015 for plans to be 

offered during coverage year 2016, CMS will not accept more than two bids for a 

coverage year from a stand-alone PDP sponsor in each PDP region. 

 (4) Declining a bid. * * * 

* * * * * 

65. Section 423.294 is added to subpart F to read as follows: 

§423.294 Collections of premiums and cost sharing. 
 636 

(a) Refunds of incorrect collections—(1) Definitions. As used in this section the 

following definitions are applicable: 

 Amounts incorrectly collected. (i) Means amounts that exceed the monthly 

beneficiary Part D premium limits under §423.286 or exceed permissible cost-sharing 

amounts as specified §423.104(d) through (f); and 

(ii) Includes amounts collected from an enrollee who was believed to be entitled 

to Medicare benefits but was later found not to be entitled. 

Other amounts due means amounts due for covered Part D drugs that were— 

(i) Accessed at an out-of-network pharmacy in accordance with the requirements at 

§423.124; or 

(ii) Initially denied but, upon appeal, found to be covered Part D drugs the enrollee 

was entitled to have provided by the Part D plan. 

(2) General rule. A Part D plan must refund all amounts incorrectly collected from 

its Medicare enrollees, or from others on behalf of the enrollees, and to pay any other 

amounts due the enrollees or others on their behalf within the timeframe specified at 

§423.466(a). 

(3) Refund methods—(i) Lump-sum payment. The Part D plan must use lump-sum 

payments for the following: 

(A) Amounts incorrectly collected that were not collected as premiums. 

(B) Other amounts due. 

(C) All amounts due if the Part D plan is going out of business or terminating its 

Part D contract for a prescription drug plan(s). 
 637 

(ii) Premium adjustment, lump-sum payment, or both. If the amounts incorrectly 

collected were in the form of premiums, or included premiums as well as other charges, 

the Part D plan may refund by adjustment of future premiums or by a combination of 

premium adjustment and lump-sum payments. 

(iii) Refund when enrollee has died or cannot be located. If an enrollee has died or 

cannot be located after reasonable effort, the Part D plan must make the refund in 

accordance with State law. 

(4) If the Part D plan does not make the refund required under this section within 

the timeframe specified at § 423.466(a), the Part D plan may receive compliance notices 

from CMS or, depending on the significance of the non-compliance, be the subject of an 

intermediate sanction (for example, suspension of marketing and enrollment activities) in 

accordance with part 423, subpart O. 

(b) Retroactive collection of cost-sharing amounts—(1) General rule. A Part D 

plan must make a reasonable effort to collect cost sharing from a beneficiary or to bill 

cost sharing to another appropriate party. 

(2) Timeframe. Recovery efforts must be initiated in accordance with the 

timeframe specified at §423.466(a). 

(c) Reduction or waiver of premiums and cost sharing—(1) General rule. Part D 

plans, directly, or indirectly through related entities as defined at §423.501, are 

prohibited from reducing or waiving the collection of enrollee premiums or cost sharing 

or both. 
 638 

 (2) Failure to collect premiums and cost sharing. Failure to collect premiums, 

collect cost sharing at the time the service is provided, or attempt to collect cost sharing 

from a beneficiary or to bill cost sharing to another appropriate party after the fact, is in 

violation of the uniform benefit provisions set forth in § 423.104(b). 

 66. Amend §423.308 by revising the definition of "Actually paid" to read as 

follows: 

§ 423.308 Definitions and terminology. 

* * * * * 

Actually paid means that the costs must be actually incurred by the Part D 

sponsor and must be net of any direct or indirect remuneration (including discounts, 

incentive payments, charge backs or rebates, cash discounts, free goods contingent on a 

purchase agreement, up-front payments, 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 other than pharmacies (including manufacturers, enrollees, or any other 

person) that would serve to decrease (or increase) the costs incurred under the Part D 

plan. 

 (1) Direct and indirect remuneration includes discounts, incentive payments, 

chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, 

up-front payments, goods in kind, free or reduced-price services, grants, or other price 

concessions or similar benefits from manufacturers or similar entities obtained by an 

intermediary contracting organization with which the Part D plan sponsor has contracted, 

regardless of whether the intermediary contracting organization retains all or a portion of 
 639 

the direct and indirect remuneration or passes the entire direct and indirect remuneration 

to the Part D plan sponsor and regardless of the terms of the contract between the plan 

sponsor and the intermediary contracting organization. 

 (2) Direct and indirect remuneration may include additional payments to 

pharmacies, such as for incentive payments, but may not include any other price 

concessions from pharmacies. 

* * * * * 

 67. Amend § 423.322 by revising paragraph (b) to read as follows: 

§ 423.322 Requirement for disclosure of information. 

* * * * * 

(b) Restrictions on use of information. (1) 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 for the purposes of, and to the 

extent necessary-- 

(i) In carrying out this subpart, including, but not limited to, determination of 

payments, and payment-related oversight and program integrity activities. 

(ii) In conducting oversight, evaluation, and enforcement under Title XVIII of 

the Act. 

(2) The United States Attorney General and the Comptroller General of the 

United States may use the information disclosed or obtained in accordance with the 

provisions of this subpart for purposes of, and to the extent necessary in, carrying out 

health oversight activities. 
 640 

(3) The restrictions described in paragraphs (b)(1) and (2) of this section do not 

limit either of the following: 

(i) OIG's authority to fulfill the Inspector General's responsibilities in accordance 

with applicable Federal law. 

 (ii) CMS' ability to use data regarding drug claims in accordance with section 

1848(m) of the Act. 

§423.329 [Amended] 

 68. Amend §423.329 (d)(1), by removing the phrase "the amount described in 

§423.782." and adding in its place the phrase "the difference between the Part D costsharing for a non-low-income subsidy eligible beneficiary under the Part D plan and the 

statutory cost-sharing for a low-income subsidy eligible beneficiary." 

 69. Section 423.346 is amended by revising paragraphs (a) through (c) to read as 

follows: 

§ 423.346 Reopening. 

 (a) CMS may reopen an initial 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) one time within 5 years after the date of the notice of the initial determination 

to the Part D sponsors. 
 641 

 (b) CMS may reopen the Coverage Gap Discount Reconciliation (as described at 

§ 423.2320 (b), one time within 5 years after the date of the notice of the Coverage Gap 

Discount Reconciliation to the Part D sponsors. 

 (c) CMS does not reopen as a result of a change in legal interpretation or 

administrative ruling upon which the final determination was made. 

* * * * * 

 70. Amend § 423.350 as follows: 

 A. In paragraph (a)(1)(iii), by removing “; or” and adding in its place ".". 

 B. In paragraph (a)(1)(iv), by removing “).” adding in its place “.”. 

 C. By adding paragraph (a)(1)(v). 

 D. By revising paragraph (a)(2). 

 E. By adding paragraph (b)(1)(iv). 

§ 423.350 Payment appeals. 

 (a) * * *

 (1) * * *

 (v) The reconciled coverage gap discount payment under § 423.2320(b). 

 (2) Payment information not subject to appeal. Payment information submitted 

to CMS under § 423.322 and reconciled under § 423.343 or submitted and reconciled 

under § 423.2320(b) is final and may not be appealed nor may the appeals process be 

used to submit new information after the submission of information necessary to 

determine retroactive adjustments and reconciliations. 

 (b) * * *
 642 

 (1) * * *

 (iv) For the Coverage Gap Discount Program, the date of the final reconciled 

payment under § 423.2320(b). 

* * * * * 

 71. Section 423.360 is added to subpart G to read as follows:

§ 423.360 Reporting and returning of overpayments. 

 (a) Definitions. For the purposes of this section the following definitions are 

applicable: 

Applicable reconciliation means the later of either the annual deadline for 

submitting-- 

 (i) PDE data for the annual Part D payment reconciliations referred to in 

§ 423.343(c) and (d); or 

 (ii) Direct and indirect remuneration data. 

Funds for purposes of this section, means any payment that a Part D sponsor has 

received that is based on data submitted by the Part D sponsor to CMS for payment 

purposes, including data submitted under § 423.329(b)(3), § 423.336(c)(1), § 423.343, 

and data provided for purposes of supporting allowable costs as defined in § 423.308 

which includes data submitted to CMS regarding direct or indirect remuneration. 

 Overpayment means funds that a Part D sponsor has received or retained under 

title XVIII of the Act to which the Part D sponsor, after applicable reconciliation, is not 

entitled under such title. 
 643 

 (b) General rule. If a Part D sponsor has identified that it has received an 

overpayment, the Part D sponsor must report and return that overpayment in the form and 

manner set forth in this section. 

 (c) Identified overpayment. A Part D sponsor has identified an overpayment if it 

has actual knowledge of the existence of the overpayment or acts in reckless disregard or 

deliberate ignorance of the existence of the overpayment. A Part D sponsor must 

exercise reasonable diligence to determine the accuracy of information it receives that an 

overpayment may exist. 

 (d) Reporting and returning of an overpayment. A Part D sponsor must report 

and return any overpayment it received no later than 60 days after the date on which it 

identified it received an overpayment. 

 (1) Reporting. A Part D sponsor must notify CMS of the amount and reason for 

the overpayment, using the notification process determined by CMS. 

 (2) Returning. A Part D sponsor must return identified overpayments in a 

manner specified by CMS. 

 (3) Enforcement. Any overpayment retained by a Part D sponsor after the 60-day 

deadline for reporting and returning is an obligation under 31 USC 3729(b)(3). 

 (e) Look-back period. A Part D sponsor must report and return any overpayment 

identified within the 6 most recent completed payment years. Overpayments resulting 

from fraud would not be subject to this limitation. 

72. Amend § 423.464 as follows: 
 644 

A. In paragraph (f)(2)(i) introductory text, by removing the phrase "a Part D plan 

must--" and adding in its place "a Part D plan must do all of the following:". 

B. In paragraph (f)(2)(i)(A), by removing “; and” and adding in its place ".". 

C. By adding paragraph (f)(2)(i)(C). 

The addition reads as follows: 

§ 423.464 Coordination of benefits with other providers of prescription drug 

coverage. 

* * * * * 

 (f) * * *

 (2) * * *

 (i) * * *

 (C) Report, accept and apply benefit accumulator data in a timeframe and manner 

determined by CMS. 

* * * * * 

§423.466 [Amended] 

 73. Amend §423.466(b) by removing the phrase "a period not to exceed 3 years" 

and adding in its place the phrase "a period of 3 years". 

 74. Amend § 423.501 by a adding a definition for “prescription drug pricing 

standard” to read as follows: 

§423.501 Definitions. 

* * * * * 

 Prescription drug pricing standard means any methodology or formula for varying 
 645 

the pricing of a drug or drugs during the term of a pharmacy reimbursement contract that 

is based on the cost of a drug, which includes, but is not limited to, drug pricing 

references and amounts based on any of the following: 

 (1) Average wholesale price. 

 (2) Wholesale average cost. 

 (3) Average manufacturer price. 

 (4) Average sales price. 

 (5) Maximum allowable cost. 

 (6) Other cost, whether publicly available or not. 

* * * * * 

75. Amend § 423.503 by revising paragraph (a)(1) and adding paragraphs (a)(3), 

(c)(4), and (d) to read as follows: 

§ 423.503 Evaluation and determination procedures for applications to be 

determined qualified to act as a sponsor. 

(a) * * *

(1) With the exception of evaluations conducted under paragraph (b) of this 

section, CMS evaluates an entity’s application solely on the basis of information 

contained in the application itself and any additional information that CMS obtains 

through on-site visits and an essential operations test. 

* * * * * 

 (3) CMS may not approve an application when it would result in the applicant’s 

parent organization, directly or through its subsidiaries, holding more than one PDP 
 646 

sponsor contract in the PDP Region for which the applicant is seeking qualification as a 

PDP sponsor. A parent organization is an entity that exercises a controlling interest in 

the applicant. 

* * * * * 

(c) * * * 

(4) Nullification of approval of application. If CMS discovers through any 

means that an applicant is not qualified to contract based on information gained 

subsequent to application approval (for example, failure of an essential operations test, 

absence of required employees), CMS gives the applicant written notice indicating that 

the approval issued under § 423.503(c)(1) is nullified and the applicant no longer 

qualifies to contract as a Part D plan sponsor. 

(i) This determination is not subject to the appeals provisions in subpart N of this 

part. 

(ii) This provision only applies to applicants that have not previously entered into 

a Part D contract with CMS and neither it, nor another subsidiary of the applicant’s 

parent organization, is offering Part D benefits during the current year. 

 (d) Withdrawal of application and bid in a previous year. An applicant that 

withdraws its application and corresponding bid after the release of the low income 

subsidy benchmark is not eligible to be approved as a Part D plan sponsor for the 2 

succeeding annual contracting cycles. 

76. Amend § 423.504 as follows: 

A. By adding paragraphs (b)(4)(vi)(C)(4) and (b)(8) through (10). 
 647 

B. In paragraph (d)(2) introductory text, by removing the phrase "has the right to-

-" and adding in its place the phrase "has the right to timely do all of the following:". 

C. In paragraph (d)(2)(i), by removing ";" and adding in its place a ".". 

D. In paragraph (d)(2)(ii), by removing "; and" and adding in its place a ".". 

E. By adding paragraph (d)(2)(iv). 

The additions read as follows: 

§ 423.504 General provisions. 

* * * * * 

(b) * * * 

 (4) * * * 

 (vi) * * * 

 (C) * * * 

 (4) A Part D plan sponsor must require all of its first tier, downstream and related 

entities to take the CMS training and accept the certificate of completion of the CMS 

training as satisfaction of this requirement. Part D plan sponsors are prohibited from 

developing and implementing their own training or providing supplemental training 

materials to fulfill this requirement. 

* * * * * 

(8) If neither the applicant, nor its parent or another subsidiary of the same 

parent, holds a Part D sponsor contract that has been in effect for at least 1 year at the 

time it submits an application, the applicant must have arrangements in place such that 

the applicant and its contracted first tier, downstream, or related entities, in combination, 
 648 

have at least 1 full-benefit year of experience within the 2 years preceding the application 

submission performing at a minimum all of the following functions in support of the 

operation of another Part D contract: 

(i) Authorization, adjudication, and processing of prescription drug claims at the 

point of sale. 

(ii) Administration and tracking of enrollees' drug benefits in real time, including 

automated coordination of benefits with other payers. 

(iii) Operation of an enrollee appeals and grievance process. 

(9) For organizations applying to offer stand-alone prescription drug plans, the 

organization, its parent, or a subsidiary of the organization or its parent, must have either 

of the following: 

(i) For 2 continuous years immediately prior to submitting an application, 

actively offered health insurance or health benefits coverage, including prescription drug 

coverage, as a risk-bearing entity in at least one State. 

(ii) For 5 continuous years immediately prior to submitting an application, 

actively managed prescription drug benefits for an organization that offers health 

insurance or health benefits coverage, including at a minimum, all of the services listed in 

paragraph (b)(8) of this section. 

(10) Effective contract year 2015, pass an essential operations test prior to the 

start of the benefit year. This provision only applies to new sponsors that have not 

previously entered into a Part D contract with CMS when neither it, nor another 

subsidiary of the applicant’s parent organization, is offering Part D benefits during the 
 649 

current year. 

* * * * * 

(d) * * *

(2) * * *

(iv) CMS may require that the Part D Plan sponsor hire an independent auditor to 

conduct full or partial program audits or to provide CMS with information to determine if 

deficiencies found during an audit or inspection have been corrected and are not likely to 

recur. The independent auditor must work in accordance with CMS specifications and 

must be willing to attest that a complete and full independent review has been performed. 

* * * * * 

77. Amend §423.505 as follows: 

A. By revising paragraphs (b)(18) and (21). 

B. By adding paragraphs (b)(27) and (28). 

C. In paragraph (f)(3)(v), by removing "," and adding in its place ".". 

D. In paragraph (f)(3)(vi), by removing "; and" and adding in its place ".". 

E. By adding paragraph (f)(3)(viii). 

F. In paragraph (i)(2)(i), by removing the phrase "audit, evaluate and inspect" 

and adding in its place "audit, evaluate, collect, and inspect". 

G. By redesignating paragraph (i)(2)(ii) as paragraph (i)(2)(iii). 

H. By adding a new paragraph (i)(2)(ii). 

 I. By revising paragraph (i)(3)(viii). 

J. By adding paragraph (k)(7). 
 650 

K. By adding a paragraph (m) subject heading. 

L. By revising paragraphs (m)(1)(iii) introductory text, (m)(1)(iii)(A) and (B), . 

M. By removing paragraph (m)(1)(iii)(C). 

N. By redesignating (m)(1)(iii)(D) as as paragraph (m)(1)(iii)(C). 

O. By revising newly redesignated m)(1)(iii)(C)(1) and (3). 

P. By revising paragraph (m)(3). 

Q. By adding paragraph (p). 

The revisions and additions read as follows: 

§ 423.505 Contract provisions. 

* * * * * 

(b) * * *

(18) To agree to have standard contracts that meet the requirements described in 

§ 423.120(a)(8) with reasonable and relevant terms and conditions of participation for 

each type of pharmacy in its network whereby any willing pharmacy may access all 

relevant contract(s) to participate as a network pharmacy. 

* * * 

(21)(i) Update any prescription drug pricing standard (as defined in §423.501) 

based on the cost of the drug used for reimbursement of network pharmacies by the Part 

D sponsor on January 1 of each contract year and not less frequently than once every 7 

days thereafter; 

(ii) Indicate the source used for making any such updates; and 

(iii) Disclose all individual drug prices to be updated to the applicable pharmacies 
 651 

in advance of their use for reimbursement of claims, if the source for any prescription 

drug pricing standard is not publicly available. 

* * * * * 

 (27) A Part D sponsor is required to administer a Part D Benefit that provides 

good quality health care demonstrated by scores of three or higher on CMS performance 

standards for patient outcomes, intermediate outcomes, process, patient experience, and 

patient access to care. 

 (28) Effective contract year 2015, pass an essential operations test prior to the 

start of the benefit year. This provision only applies to new sponsors that have not 

previously entered into a Part D contract with CMS and neither it, nor another subsidiary 

of the applicant’s parent organization, is offering Part D benefits during the current year. 

* * * * * 

(f) * * * 

(3) * * *

 (viii) Supporting program integrity purposes, including coordination with the 

States. 

* * * * * 

(i)* * * 

 (2)* * * 

 (ii) HHS, the Comptroller General or their designees have the right to audit, 

evaluate, collect, and inspect any records under (i)(2)(i) directly from any first tier, 

downstream, or related entity. 
 652 

 * * * * * 

(3) * * *

(viii) If applicable, provisions addressing the drug pricing standard requirements 

of §423.505(b)(21). 

* * * * * 

 (k) * * * 

 (7) Certification of accuracy of data for overpayments. The CEO, CFO, or COO 

must certify (based on best knowledge, information, and belief) that the information 

provided for purposes of reporting and returning of overpayments under §423.360 is 

accurate, complete, and truthful. 

* * * * * 

(m) Release of data. 

(1) * * *

(iii) Subject, in certain cases, to encryption of beneficiary identifiers and 

aggregation of cost data to protect beneficiary confidentiality and commercially sensitive 

data of Part D sponsors, in accordance with all of the following principles: 

(A) Subject to the restrictions in this paragraph, all elements on the claim are 

available to HHS, other executive branch agencies, and the States. 

(B) Cost data elements on the claim generally are aggregated for releases to other 

executive branch agencies, States, and external entities. Upon request, CMS excludes 

sales tax from the aggregation at the individual level if necessary for the project. 

 (C) * * *
 653 

(1) Beneficiary identifier elements on the claim generally are encrypted for 

release, except in limited circumstances, such as the following: 

(i) If needed, in the case of release to other HHS entities, Congressional oversight 

agencies, non-HHS executive agencies and the States. 

(ii) If needed to link to another dataset, in the case of release to external entities. 

Public disclosure of research results will not include beneficiary identifying information. 

* * * * * 

(3)(i) CMS must make available to Congressional support agencies (the 

Congressional Budget Office, the Government Accountability Office, the Medicare 

Payment Advisory Commission, and the Congressional Research Service when it is 

acting on behalf of a Congressional committee in accordance with 2 U.S.C. 166(d)(1)),

all information collected under paragraph (f)(3) of this section for the purposes of 

conducting congressional oversight, monitoring, making recommendations, and analysis 

of the Medicare program. 

(ii) The Congressional Research Service is considered an external entity when it 

is not acting on behalf of a Congressional committee in accordance with 2 U.S.C. 

166(d)(1) for the purposes of paragraph (m)(1) of this section. 

* * * * * 

(p) Business continuity. (1) The Part D sponsor agrees to develop, maintain, and 

implement a business continuity plan containing policies and procedures to ensure the 

continuation of business operations during disruptions to business operations which 

would include natural or man-made disasters, system failures, emergencies, and other 
 654 

similar circumstances and the threat of such occurrences. To meet the requirement, the 

business continuity plan must, at a minimum, include the following: 

(i) Risk assessment. Identify threats and vulnerabilities that might affect 

business operations. 

(ii) Mitigation strategy. Design strategies to mitigate hazards. Identify essential 

functions in addition to those specified in paragraph (p)(2) of this section and prioritize 

the order in which to restore all other functions to normal operations. At a minimum, 

each Part D sponsor must do the following: 

(A) Identify specific events that will activate the business continuity plan. 

(B) Develop a contingency plan to maintain, during any business disruption, the 

availability and, as applicable, confidentiality of communication systems and essential 

records in all forms (including electronic and paper copies). The contingency plan must 

do the following: 

(1) Ensure that during any business disruption the following systems will operate 

continuously or, should they fail, be restored to operational capacity on a timely basis: 

(i) Information technology IT systems including those supporting claims 

processing at point of service. 

(ii) Provider and enrollee communication systems including telephone, website, 

and e-mail. 

(2) With respect to electronic protected health information, comply with the 

contingency plan requirements of the Health Insurance Portability and Accountability 

Act of 1996 Security Regulations at 45 CFR 160 and 164, Subparts A and C. 
 655 

(C) Establish a chain of command. 

(D) Establish a business communication plan that includes emergency 

capabilities and procedures to contact and communicate with the following: 

(1) Employees. 

(2) First tier, downstream, and related entities. 

(3) Other third parties (including pharmacies, providers, suppliers, and 

government and emergency management officials). 

(E) Establish employee and facility management plans to ensure that essential 

operations and job responsibilities can be assumed by other employees or moved to 

alternate sites as necessary or both. 

(F) Establish a restoration plan including procedures to transition to normal 

operations. 

(G) Comply with all applicable Federal, State, and local laws. 

(iii) Testing and revision. On at least an annual basis, test and update the 

business operations continuity plan to ensure the following: 

(A) That it can be implemented in emergency situations. 

(B) That employees understand how it is to be executed. 

(iv) Training. On at least an annual basis, educate all new and existing 

employees about the business continuity plan and their own respective roles. 

(v) Records. (A) Develop and maintain records documenting the elements of the 

business continuity plan described in paragraph (p)(1)(i) through (p)(1)(iv) of this 

section. 
 656 

(B) Make the information specified in paragraph (p)(1)(v)(A) of this section 

available to CMS upon request. 

(2) Restoration of essential functions. Every Part D sponsor must restore 

essential functions within 24 hours after any of the essential functions fail or otherwise 

stop functioning as usual. In addition to any essential functions that the Part D sponsor 

identifies under paragraph (p)(1)(ii) of this section, for purposes of this paragraph (p)(2) 

of this section essential functions include at a minimum, the following: 

(i) Benefit authorization (if not waived), adjudication, and processing of 

prescription drug claims at the point of sale. 

(ii) Administration and tracking of enrollees' drug benefits in real time, including 

automated coordination of benefits with other payers. 

(iii) Provision of pharmacy technical assistance. 

(iv) Operation of an enrollee exceptions and appeals process including coverage 

determinations. 

 (v) Operation of call center customer services. 

78. Amend § 423.509 as follows: 

A. By redesignating paragraphs (a)(4) through (a)(14) as paragraphs (a)(4)(i) 

through (a)(4)(xi). 

B. By adding paragraph (a)(4) introductory text. 

C. In newly redesignated paragraphs (a)(4)(ii), (iv), (v) introductory text, (vi), 

and (vii), by removing the term "fails" and adding in its place the term "failed". 

D. In newly redesignated paragraphs (a)(4)(iii), (viii), and (ix), by removing the 
 657 

term "fails" and adding in its place the term "failed". 

E. By revising newly redesignated paragraphs (a)(4)(x) and (xi). 

F. By adding paragraph (a)(4)(xii). 

G. By revising paragraphs (b)(1)(i) through (iv) and (b)(2)(i)(C). 

H. In paragraph (b)(2)(ii), by removing the phrase "MA organization" and adding 

in its place the phrase "Part D plan sponsor". 

I. In paragraph (c)(2)(iii), by removing the cross-reference "(a)(4) of this section" 

and adding in its place the cross-reference "(a)(4)(i) of this section". 

J. In paragraph (d), by removing the cross-reference "§423.642" and adding in its 

place the cross-reference "subpart N of this part". 

The additions and revisions read as follows: 

§ 423.509 Termination of a contract by CMS. 

(a)* * *

(4) CMS may make a determination under paragraph (a)(1), (2) or (3) of this 

section if the Part D Plan sponsor has had one or more of the following occur: 

* * * * * 

 (x) Achieves a Part D summary plan rating of less than 3 stars for 3 consecutive 

contract years. Plan ratings issued by CMS before September 1, 2012 are not included in 

the calculation of the 3–year period. 

(xi)(A) Has failed to report MLR data in a timely and accurate manner in 

accordance with §423.2460; or 

(B) That any MLR data required by this subpart is found to be materially 
 658 

incorrect or fraudulent. 

(xii) Failure of an essential operations test before the start of the benefit year by 

an organization that has entered into a Part D contract with CMS when neither it, nor 

another subsidiary of the organization’s parent organization, is offering Part D benefits 

during the current year. 

* * * * * 

 (b) * * * 

(1) * * * 

(i) CMS notifies the Part D plan sponsor in writing at least 45 calendar days 

before the intended date of the termination. 

(ii) The Part D plan sponsor notifies its Medicare enrollees of the termination by 

mail at least 30 calendar days before the effective date of the termination. 

(iii) The Part D plan sponsor notifies the general public of the termination at least 

30 calendar days before the effective date of the termination by releasing a press 

statement to news media serving the affected community or county and posting the press 

statement prominently on the organization’s website. 

 (iv) CMS notifies the general public of the termination no later than 30 calendar 

days after notifying the plan of CMS's decision to terminate the Part D plan sponsor's 

contract by releasing a press statement. 

(2) * * * 

(i) * * * 

(C) The contract is being terminated based on the grounds specified in 
 659 

paragraphs (a)(4)(i) and (xii) of this section. 

* * * * * 

§ 423.562 [Amended]

79. Amend § 423.562(a)(3) by removing the phrase "request an exception if they 

disagree with the information provided by the pharmacist." and adding in its place the 

phrase "request an exception.". 

§ 423.642 [Amended]

80. Amend § 423.642(c)(1) by removing the phrase "90 calendar days" and 

adding in its place "45 calendar days". 

§423.650 [Amended] 

81. Amend §423.650 as follows: 

A. In paragraph (a)(2), by removing the term "under" and adding in its place the 

phrase "in accordance with". 

B. In paragraph (a)(4), by removing the cross-reference "§423.752(a) and (b)" 

and adding in its place the cross-reference "§423.752(a) and (b)". 

82. Amend §423.752 as follows: 

A. By adding paragraphs (a)(7) through (10). 

B. By revising paragraph (c)(1). 

C. In paragraph (c)(2)(ii), by removing the phrase "pursuant to 423.509(a)(4)" 

and adding in its place the phrase "pursuant to §422.510(a)(4)(i)". 

The additions and revision read as follows: 

§423.752 Basis for imposing intermediate sanctions and civil money penalties 
 660 

* * * * * 

(a) * * *

(7) Except as provided under §423.34, enrolls an individual in any plan under 

this part without the prior consent of the individual or the designee of the individual. 

(8) Transfers an individual enrolled under this part from one plan to another 

without the prior consent of the individual or the designee of the individual or solely for 

the purpose of earning a commission. 

(9) Fails to comply with marketing restrictions described in subpart V or 

applicable implementing guidance. 

(10) Employs or contracts with any individual, agent, provider, supplier or entity 

who engages in the conduct described in paragraphs (a)(1) through (9) of this section. 

* * * * * 

(c) * * *

(1) CMS. In addition to, or in place of, any intermediate sanctions, CMS may 

impose civil money penalties in the amounts specified in either of the following: 

(i) Section 423.760(b) for any of the determinations at §423.509(a), except 

§ 423.509(a)(4)(i). 

(ii) Section 423.760(c) for any of the determinations in paragraph (a) of this 

section except §422.752(a)(5). 

* * * * * 

83. Amend §423.756 as follows: 

A. In paragraph (a)(2), by removing the phrase "days from receipt" and adding in 
 661 

its place "days after receipt". 

B. In paragraph (b)(4), by removing the cross-reference "§423.650 through 

§423.662 of this part." and adding in its place "Subpart N of this part.". 

C. In paragraph (c)(3)(ii) introductory text, by removing the phrase "In instances 

where marketing or enrollment or both intermediate sanctions have been imposed," and 

adding in its place the phrase "In instances where intermediate sanctions have been 

imposed,". 

D. Adding paragraph (c)(3)(ii)(C). 

E. Revising paragraph (d). 

The addition and revision read as follows: 

§ 423.756 Procedures for imposing intermediate sanctions and civil money 

penalties. 

* * * * *

 (c) * * * 

(3) * * * 

(ii) * * *

(C) During the limited time period, sanctioned Part D plan sponsors under the 

benchmark that would normally participate in the annual and monthly auto enrollment 

process for enrollees receiving the low income subsidy will not be allowed to receive or 

process these types of enrollments. 

(d) Non-renewal or termination by CMS. In addition to or as an alternative to the 

sanctions described in §423.750, CMS may decline to authorize the renewal of an 
 662 

organization's contract in accordance with §423.507(b), or terminate the contract in 

accordance with §423.509. 

* * * * * 

84. Amend §423.760 as follows: 

A. In paragraph (a) introductory text, by removing the phrase "under 

423.752(c)(1), CMS will consider as appropriate:" and adding in its place the phrase 

"under §423.752(c)(1), CMS considers the following as appropriate:". 

B. In paragraphs (a)(1) and (2), by removing ";" and adding in its place ".". 

C. Revising paragraph (a)(3). 

D. In paragraph (a)(4) by removing ";" and adding in its place ".". 

E. In paragraph (a)(5), by removing "; and" and adding in its place ".". 

F. Adding paragraph (c). 

The revision and addition read as follows:

§ 423.760 Determinations regarding the amount of civil money penalties and 

assessment imposed by CMS. 

 (a) * * * 

(3) The adverse effect to enrollees which resulted or could have resulted from the 

conduct of the Part D sponsor. 

* * * * * 

(c) Amount of penalty imposed by CMS or OIG. CMS or the OIG may impose 

civil money penalties in the following amounts for a determination made under 

§423.752(a): 
 663 

(1) Civil money penalties of not more than $25,000 for each determination made. 

(2) With respect to a determination made under §423.752(a)(4) or 

423.752(a)(5)(i), not more than $100,000 for each such determination except with respect 

to a determination made under §423.752(a)(5), an assessment of not more than the 

amount claimed by such plan or PDP sponsor based upon the misrepresentation or 

falsified information involved. 

(3) Plus with respect to a determination made under §423.752(a)(2), double the 

excess amount charged in violation of such paragraph (and the excess amount charged 

must be deducted from the penalty and returned to the individual concerned). 

(4) Plus with respect to a determination made under §423.752(a)(4), $15,000 for 

each individual not enrolled as a result of the practice involved. 

 85. Amend § 423.882 by revising the definition of "Actually paid" to read as 

follows: 

§423.882 Definitions. 

* * * * * 

Actually paid means that the costs must be actually incurred by the qualified retiree 

prescription drug plan and must be net of any direct or indirect remuneration (including 

discounts, charge backs or rebates, cash discounts, free goods contingent on a purchase 

agreement, up-front payments, goods in kind, free or reduced-price services, grants, or 

other price concessions or similar benefits offered to some or all purchasers) from any 

manufacturer or similar entity that would serve to decrease the costs incurred under the 

qualified retiree prescription drug plan. 
 664 

* * * * * 

86. Amend §423.1016 by revising the first sentence in paragraph (b)(1) to read as 

follows: 

§ 423.1016 Filing of briefs with the Administrative Law Judge or Departmental 

Appeals Board, and opportunity for rebuttal.

* * * * * 

(b) * * * 

(1) The other party will have 20 calendar days from the date of mailing or in 

person filing to submit any rebuttal statement or additional evidence. * * *

* * * * * 

87. Amend § 423.1020 by revising paragraph (a)(2) to read as follows: 

§ 423.1020 Request for hearing.

(a) * * * 

(2) The Part D sponsor or its legal representative or other authorized official must 

file the request, in writing, to the appropriate Departmental Appeals Board office, with a 

copy to CMS, within 60 calendar days after receipt of the notice of initial determination, 

to request a hearing before an ALJ to appeal any determination by CMS to impose a civil 

money penalty. 

* * * * * 

88. Amend §423.2262 by adding paragraph (a)(2) to read as follows: 

§423.2262 Review and distribution of marketing materials. 

(a) * * *
 665 

(2) If CMS does not approve or does not disapprove marketing materials within 

the specified review timeframe, the materials are deemed approved and the Part D 

sponsor may use the material. 

* * * * 

§423.2266 [Removed and Reserved] 

89. Section 423.2266 is removed and reserved. 

 90. Amend § 423.2274 by: 

A. Revising the introductory text. 

B. Redesignating paragraphs (a) through (f) as (b) through (g). 

C. Adding new paragraph (a). 

D. Revising newly redesignated paragraphs (b) through (d). 

E. Adding paragraph (h). 

The revisions and additions read as follows: 

§ 423.2274 Broker and agent requirements. 

If a Part D sponsor uses agents and brokers to sell its Part D plans, the following 

requirements in this section are applicable. 

 (a) Definitions. For purposes of this section, the following definitions are 

applicable: 

Compensation (1) Includes monetary or non-monetary remuneration of any kind 

relating to the sale or renewal of a policy including, but not limited to-- 

(i) Commissions; 

(ii) Bonuses; 
 666 

(iii) Gifts; 

(iv) Prizes or Awards; or 

(v) Referral or Finder fees. 

(2) Does not include-- 

(i) Payment of fees to comply with State appointment laws, training, certification, 

and testing costs; 

(ii) Reimbursement for mileage to, and from, appointments with beneficiaries; or 

(iii) Reimbursement for actual costs associated with beneficiary sales 

appointments such as venue rent, snacks, and materials. 

 Like plan type means one of the following: 

 (1) PDP replaced with another PDP. 

 (2) MA or MA-PD replaced with another MA or MA-PD. 

 (3) Cost plan replaced with another cost plan. 

 Unlike plan type means one of the following: 

(1) PDP replaced with a MA-PD or a MA-PD replaced with a PDP 

(2) PDP replaced with a cost plan or a cost plan replaced with a PDP 

(3) MA-PD replaced with a cost plan or a cost plan replaced with a MA-PD 

 Plan year means the year beginning January 1 and ending December 31. 

 Renewal year means all years following the initial enrollment year in a like plan 

type. 
 667 

 (b) Compensation rules. An Part D sponsor must compensate independent 

brokers and agents, if compensation is paid, only according to the following rules in this 

section. 

 (1) Compensation amounts. (i) For an initial year enrollment of a Medicare 

beneficiary into a Part D plan, the compensation must be at or below the fair market 

value of such services, published annually as a cut-off amount by CMS. 

 (ii) For renewal years, compensation may be up to 35 percent of the current fair 

market value cut-off amounts published annually by CMS. 

 (2) Aggregate compensation. (i) An entity must not provide aggregate 

compensation to its agents or brokers greater than the renewal compensation payable by 

the replacing plan on renewal policies if an existing policy is replaced with a like plan at 

any time. 

 (ii) An agent or broker must not receive aggregate compensation greater than the 

renewal compensation payable by the replacing plan on renewal policies if an existing 

policy is replaced with a like plan type at any time. 

 (iii) The initial compensation is paid for replacements between unlike plan types. 

 (3) Compensation payment and payment recovery. (i) Compensation may only 

be paid for the enrollee’s months of enrollment during a plan year. 

 (ii)(A) Subject to paragraph (b)(3)(iii) of this section, compensation payments 

may be made at one time for the entire current plan year or in installments throughout the 

year. 
 668 

 (B) Compensation may not be paid until January 1 of the compensation year and, 

if paid at all, must be paid in full by December 31 of the compensation year. 

 (iii) When a beneficiary disenrolls from an MA plan, compensation paid to agents 

and brokers must be recovered for those months of the plan year for which the 

beneficiary is not enrolled. For disenrollments occurring within the first 3 months, the 

entire compensation must be recovered when the disenrollment was the result of agent or 

broker behavior. 

(4) Compensation structure. (i) A Part D sponsor must establish a compensation 

structure for new and replacement enrollments and renewals effective in a given plan 

year. Compensation structures must be in place by the beginning of the plan marketing 

period, October 1. 

(ii) Compensation structures must be available upon CMS request including for 

audits, investigations, and to resolve complaints. 

(c) Annual training. The Part D sponsor must ensure that all agents and brokers 

selling Medicare products are trained annually on the following: 

(1) Medicare rules and regulations. 

(2) Details specific to the plan products they intend to sell. 

(d) Annual testing. The Part D sponsor must ensure that all agents and brokers 

selling Medicare products are tested annually, to ensure the following: 

(1) Appropriate knowledge and understanding of Medicare rules and regulations. 

(2) Details specific to the plan products they intend to sell. 

* * * * * 
 669 

(h) Finder's (referral) fees. Finder’s (referral) fees paid to all agents and brokers-

(1) May not exceed an amount CMS determines could reasonably be expected to 

affect enrollee behavior while not exceeding the value of the health-related 

service or activity itself; and 

(2) Must be included in the total compensation not to exceed the fair market 

value for that calendar year. 

91. Amend§ 423.2320 by adding paragraph (c) to read as follows: 

§ 423.2320 Payment processes for Part D sponsors. 

* * * * * 

(c) In the event that a manufacturer declares bankruptcy, as described in Title 11 

of the United States Code and, as a result of the bankruptcy, does not pay the quarterly 

invoices described in § 423.2315(b)(10) by the time of the Coverage Gap Discount 

Reconciliation described in paragraph (b) of this section, CMS adjusts the Coverage Gap 

Discount Reconciliation amount of each of the affected Part D sponsors to account for 

the total unpaid quarterly invoiced amount owed to each of the Part D sponsors in the 

contract year being reconciled. 

92. Amend § 423.2325 by adding paragraph (h) to read as follows: 

§ 423.2325 Provision of applicable discounts. 

* * * * * 

 (h) Treatment of employer group waiver plans. (1) Beginning 2014, Part D 

sponsors offering employer group waiver plans must provide applicable discounts to 
 670 

employer group waiver plan enrollees as determined consistent with the defined standard 

benefit. 

 (2)(i) Part D sponsors offering employer group waiver plans must report to each 

employer or union group client projected and actual aggregate manufacturer payments 

attributable to the EGWPs enrollees, at least annually or upon request. 

 (ii) CMS may request documentation that notice as described in paragraph 

(h)(2)(i) of this section has been provided by the Part D sponsor and received by the 

employer or union group. 

Subpart Y [Reserved] 

 93. Part 423 is amended by adding reserved subpart Y. 

 94. Part 423 is amended by adding subpart Z to read as follows: 

Subpart Z--Recovery Audit Contractor Part C Appeals Process 

Sec. 

423.2600 Payment appeals. 

423.2605 Request for reconsideration. 

423.2610 Hearing official review. 

423.2615 Review by the Administrator. 

Subpart Z--Recovery Audit Contractor Part C Appeals Process 

§ 423.2600 Payment appeals. 

If the Part D RAC did not apply its stated payment methodology correctly, a Part 

D plan sponsor may appeal the findings of the applied methodology. The payment 

methodology itself is not subject to appeal. 

§ 423.2605 Request for reconsideration. 

(a) Time for filing a request. The request for reconsideration must be filed with 
 671 

the designated independent reviewer within 60 calendar days from the date of the demand 

letter received by the Part D plan sponsor. 

(b) Content of request. (1) The request for reconsideration must be in writing 

and specify the findings or issues with which the Part D plan sponsor disagrees. 

(2) The Part D plan sponsor must include with its request all supporting 

documentary evidence it wishes the independent reviewer to consider. 

(i) This material must be submitted in the format requested by CMS. 

(ii) Documentation, evidence, or substantiation submitted after the filing of the 

reconsideration request will not be considered. 

(c) CMS Rebuttal. CMS may file a rebuttal to the Part D plan sponsor’s 

reconsideration request. 

(1) The rebuttal must be submitted within 30 calendar days of the review entity’s 

notification to CMS that it has received the Part D plan sponsor’s reconsideration 

request. 

(2) CMS sends its rebuttal to the Part D plan sponsor at the same time it is 

submitted to the independent reviewer. 

(d) Review entity. An independent reviewer conducts the reconsideration. The 

independent reviewer reviews the demand for repayment, the evidence and findings upon 

which it was based, and any evidence that the Part D plan sponsor or CMS submitted in 

accordance with this section. 

(e) Notification of decision. The independent reviewer informs CMS and the 

Part D plan sponsor of its decision in writing. 
 672 

(f) Effect of decision. A reconsideration decision is final and binding unless the 

Part D plan sponsor requests a hearing official review in accordance with §423.2610. 

(g) Right to hearing official review. A Part D plan sponsor that is dissatisfied 

with the independent reviewer’s reconsideration decision is entitled to a hearing official 

review as provided in §423.2610. 

§ 423.2610 Hearing official review. 

(a) Time for filing a request. A Part D plan sponsor must file with CMS a 

request for a hearing official review within 15 calendar days from the date of the 

independent reviewer’s issuance of a determination. 

(b) Content of the request. (1) The request must be in writing and must provide 

evidence or reasons or both to substantiate the request. 

(2) The Part D plan sponsor must submit with its request all supporting 

documentation, evidence, and substantiation that it wants to be considered. 

(3) No new evidence may be submitted. 

(4) Documentation, evidence, or substantiation submitted after the filing of the 

request will not be considered. 

(c) CMS rebuttal. CMS may file a rebuttal to the Part D plan sponsor’s hearing 

official review request. 

(1) The rebuttal must be submitted within 30 calendar days of the Part D plan 

sponsor’s submission of its hearing official review request. 

(2) CMS sends its rebuttal to the Part D plan sponsor at the same time it is 

submitted to the hearing official. 
 673 

(d) Conducting a review. A CMS-designated hearing official conducts the 

hearing on the record. 

(1) The hearing is not to be conducted live or via telephone unless the hearing 

official, in his or her sole discretion, requests a live or telephonic hearing. 

(2) In all cases, the hearing official’s review is limited to information that meets 

one or more of the following: 

(i) The Part D RAC used in making its determinations. 

(ii) The independent reviewer used in making its determinations. 

(iii) The Part D plan sponsor submits with its hearing request. 

(iv) CMS submits in accordance with paragraph (c) of this section. 

(3) Neither the Part D plan sponsor nor CMS may submit new evidence. 

 (e) Hearing official decision. The CMS hearing official decides the case within 

60 days and sends a written decision to the Part D plan sponsor and CMS, explaining the 

basis for the decision. 

(f) Effect of hearing official decision. The hearing official’s decision is final and 

binding, unless the decision is reversed or modified by the CMS Administrator in 

accordance with §423.2610. 

§ 423.2615 Review by the Administrator. 

(a) Request for review by Administrator. If a Part D plan sponsor is dissatisfied 

with the hearing official’s decision, it may request that the CMS Administrator review 

the decision. 

(1) The request must be filed with the CMS Administrator within 15 calendar 
 674 

days of the date of the hearing official’s decision. 

(2) The request must provide evidence or reasons to substantiate the request. 

(b) Content of request. The Part D plan sponsor must submit with its request all 

supporting documentation, evidence, and substantiation that it wants to be considered. 

(1) Documentation, evidence, or substantiation submitted after the filing of the 

request will not be considered. 

(2) Neither the Part D plan sponsor nor CMS may submit new evidence.

(c) Discretionary review. After receiving a request for review, the CMS 

Administrator has the discretion to review the hearing official’s decision in accordance 

with paragraph (e) of this section or to decline to review said decision. 

(d) Notification of decision whether to review. The CMS Administrator notifies 

the Part D plan sponsor within 45 days of receiving the Part D plan sponsor’s hearing 

request of whether he or she intends to review the hearing official’s decision. If the 

Administrator agrees to review the hearing official’s decision, CMS may file a rebuttal 

statement within 30 days of the Administrator’s notice to the plan sponsor that the 

request for review has been accepted. CMS sends its rebuttal statement to the plan 

sponsor at the same time it is submitted to the Administrator. If the CMS Administrator 

declines to review the hearing official’s decision, the hearing official’s decision is final 

and binding. 

 (e) Administrator review. If the CMS Administrator agrees to review the hearing 

official’s decision, he or she determines, based upon this decision, the hearing record, 

and any arguments submitted by the Part D plan sponsor or CMS in accordance with this 
 675 

section, whether the determination should be upheld, reversed, or modified. The CMS 

Administrator furnishes a written decision, which is final and binding, to the Part D plan 

sponsor and to CMS. 

PART 424--CONDITIONS FOR MEDICARE PAYMENT 

95. The authority citation for part 424 continues to read as follows: 

AUTHORITY: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 

1395hh). 

 96. Amend § 424.530 by adding paragraph (a)(11) to read as follows: 

§ 424.530 Denial of enrollment in the Medicare program. 

(a) * * * 

(11) Prescribing authority. (i) A physician or eligible professional’s Drug 

Enforcement Administration (DEA) Certificate of Registration to dispense a controlled 

substance is currently suspended or revoked; or 

(ii) The applicable licensing or administrative body for any State in which a 

physician or eligible professional practices has suspended or revoked the physician or 

eligible professional’s ability to prescribe drugs, and such suspension or revocation is in 

effect on the date physician or eligible professional submits his or her enrollment 

application to the Medicare contractor. 

* * * * * 

 97. Amend § 424.535 by revising the section heading and adding paragraphs 

(a)(13) and (14) to read as follows: 

§ 424.535 Revocation of enrollment in the Medicare program. 
 676 

(a) * * * 

 (13) Prescribing authority. (i) The physician or eligible professional’s Drug 

Enforcement Administration (DEA) Certificate of Registration is suspended or revoked; 

or 

(ii) The applicable licensing or administrative body for any state in which the 

physician or eligible professional practices suspends or revokes the physician or eligible 

professional’s ability to prescribe drugs. 

 (14) Improper prescribing practices. CMS determines that the physician or 

eligible professional has a pattern or practice of prescribing Part D drugs that falls into 

one of the following categories: 

 (i) The pattern or practice is abusive and represents a threat to the health and 

safety of Medicare beneficiaries. In making this determination, CMS considers the 

following factors: 

(A) Whether there are diagnoses to support the indications for which the drugs 

were prescribed. 

(B) Whether there are instances when the necessary evaluation of the patient for 

whom the drug was prescribed could not have occurred (for example, the patient was 

deceased or out of state at the time of the alleged office visit). 

(C) Whether the physician or eligible professional has prescribed controlled 

substances in excessive dosages that are linked to patient overdoses. 

 (D) The number and type(s) of disciplinary actions taken against the physician or 

 eligible professional by the licensing body or medical board for the State or States in 
 677 

which he or she practices, and the reason(s) for the action(s). 

(E) Whether the physician or eligible professional has any history of "final 

adverse actions" (as that term is defined in § 424.502). 

(F) The number and type(s) of malpractice suits that have been filed against the 

physician or eligible professional related to prescribing that have resulted in a final 

judgment against the physician or eligible professional or in which the physician or 

non-physician practitioner has paid a settlement to the plaintiff(s) (to the extent this can 

be determined). 

(G) Whether any State Medicaid program or any other public or private health 

insurance program has restricted, suspended, revoked, or terminated the physician or 

eligible professional’s ability to prescribe medications, and the reason(s) for any such 

restriction, suspension, revocation, or termination. 

(H) Any other relevant information provided to CMS. 

(ii) The pattern or practice of prescribing fails to meet Medicare requirements. 

In making this determination, CMS considers the following factors: 

(A) Whether the physician or eligible professional has a pattern or practice of 

prescribing without valid prescribing authority. 

(B) Whether the physician or eligible professional has a pattern or practice of 

prescribing for controlled substances outside the scope of the prescriber’s DEA 

registration. 

 (C) Whether the physician or eligible professional has a pattern or practice of 

prescribing drugs for indications that were not medically accepted—that is, for 
 678 

indications neither approved by the FDA nor medically accepted under section 1860D2€(4) of the Act— and whether there is evidence that the physician or eligible 

professional acted in reckless disregard for the health and safety of the patient. 

* * * * * 

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare--Hospital 

Insurance; and Program No. 93.774, Medicare--Supplementary Medical Insurance 

Program) 

Dated: October 21, 2013

 ______________________________ 

 Marilyn Tavenner, 

 Administrator, 

 Centers for Medicare & Medicaid Services.

Dated: December 11, 2013

 ___________________________ 

 Kathleen Sebelius,

 Secretary

 Department of Health and Human Services. 

BILLING CODE 4120-01-P 

[FR Doc. 2013-31497 Filed 01/06/2014 at 4:15 pm; Publication Date: 01/10/2014]