Friday,

March 4, 2005

Part II

Department of 

Health and Human 

Services

Centers for Medicare & Medicaid Services 

42 CFR Part 414

Medicare Program; Competitive 

Acquisition of Outpatient Drugs and 

Biologicals Under Part B; Proposed Rule

10746 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 414

[CMS–1325–P] 

RIN 0938–AN58

Medicare Program; Competitive 

Acquisition of Outpatient Drugs and 

Biologicals Under Part B

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

SUMMARY: This proposed rule would 

implement provisions of the Medicare 

Prescription Drug, Improvement and 

Modernization Act of 2003 that require 

the implementation of a competitive 

acquisition program for certain 

Medicare Part B drugs not paid on a cost 

or prospective payment system basis. 

Beginning January 1, 2006, physicians 

will generally be given a choice between 

obtaining these drugs from vendors 

selected through a competitive bidding 

process or directly purchasing these 

drugs and being paid under the average 

sales price system. We are seeking 

comments on which of the proposed 

approaches we should use to implement 

the competitive acquisition program as 

well as the criteria and standards that 

should be applied in the selection and 

enrollment of vendors.

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on April 26, 2005.

ADDRESSES: In commenting, please refer 

to file code CMS–1325–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

three ways (no duplicates, please):

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http://

www.cms.hhs.gov/regulations/

ecomments. (Attachments should be in 

Microsoft Word, WordPerfect, or Excel; 

however, we prefer Microsoft Word.) 

2. By mail. You may mail written 

comments (one original and two copies) 

to the following address ONLY: Centers 

for Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–1325–P, P.O. 

Box 8010, Baltimore, MD 21244–8010. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period.

3. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786–

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Lia 

Prela, (410) 786–6508.

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–1325–P 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. CMS posts all electronic 

comments received before the close of 

the comment period on its public 

website as soon as possible after they 

have been received. Hard copy 

comments received timely will be 

available for public inspection as they 

are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

Information on the competitive 

acquisition program can be found on the 

CMS homepage. You can access this 

data by going to the following Web site: 

http://www.cms.hhs.gov/providers/

drugs/compbid. 

To assist readers in referencing 

sections contained in this preamble, we 

are providing the following table of 

contents.

Outline of Contents 

I. Background 

A. Covered Drugs and Biologicals 

1. Drugs Furnished Incident to a 

Physician’s Service 

2. Durable Medical Equipment (DME) 

Drugs 

3. Statutorily Covered Drugs and Other 

Drugs 

4. Types of Providers 

5. Drugs Paid on a Cost or Prospective 

Payment Basis 

B. History of the Current Payment System 

C. Revised Drug Payment Methodology 

D. Competitive Acquisition Program (CAP) 

II. Provisions of the Proposed Rule 

A. Policies for the CAP 

1. General Overview of the CAP 

2. Categories of Drugs To Be Included 

Under the CAP 3. Competitive 

Acquisition Areas 

B. Operational Aspects of the CAP 

1. Statutory Requirements Concerning 

Claims Processing 

2. Proposed Claims Processing Overview 

3. Dispute Resolution 

C. CAP Contracting Process 

1. Quality and Product Integrity Aspects 

2. Bidding Entity Qualifications 

3. CAP Bidding Process ‘‘Evaluation and 

Selection 

4. Contract Requirements 

5. Judicial Review 

D. Implementation of the CAP 

1. Physician Election Process 

2. Vendor or Physician Education 

3. Beneficiary Education 

III. Collection of Information Requirements 

IV. Response to Public Comments 

V. Regulatory Impact Analysis 

A. Anticipated Effects 

B. Impact of Establishment of a 

Competitive Acquisition Program 

C. Alternatives Considered 

D. Impact on Beneficiaries Regulations 

Text

In addition, because of the many 

organizations and terms to which we 

refer by acronym in this proposed rule, 

we are listing these acronyms and their 

corresponding terms in alphabetical 

order below. 

Alphabetical List of Acronyms 

Appearing in the Proposed Rule 

ASP—Average sales price. 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10747

AWP—Average wholesale price. 

BBA—Balanced Budget Act of 1997, 

Public Law 105–33. 

CAP—Competitive Acquisition 

Program. 

CFR—Code of Federal Regulations. 

CMS—Centers for Medicare & Medicaid 

Services (formerly Health Care 

Financing Administration). 

DAW—Dispense as written. 

DME—Durable medical equipment. 

DMERC—Durable medical equipment 

regional carrier. 

DOJ—Department of Justice. 

EAC—Estimated acquisition cost. 

ESRD—End-stage renal disease.

FAR—Federal Acquisition Regulation. 

FDA—Food and Drug Administration. 

GAO—Government Accountability 

Office. 

GPOs—Group Purchasing 

Organizations. 

GPO Access—Government Printing 

Office Access. 

HCPCS—Healthcare Common Procedure 

Coding System. 

HHS—Health and Human Services. 

HIC—Health Insurance Number. 

HIPAA—Health Insurance Portability 

and Accountability Act of 1996, 

Public Law 104–191. 

ICD–9—International Classification of 

Diseases—Ninth Edition. 

IVIG—Intravenous immune globulin. 

LCDs—Local coverage determinations. 

MMA—Medicare Prescription Drug, 

Improvement, and Modernization 

Act of 2003, Public Law 108–173. 

MSN—Medical summary notice. 

NDC—National Drug Code. 

OIG—Office of Inspector General. 

OPPS—Outpatient prospective payment 

system. 

PIN—Provider identification number. 

PSCs—Program Safeguard Contractors. 

RFA—Regulatory Flexibility Act 

(September 19, 1980, Public Law 

96–354). 

RFI—Request for information. 

RTI—Research Triangle Institute. 

UPIN—Unique provider identification 

number. 

WAC—Wholesale acquisition cost. 

I. Background 

A. Covered Drugs and Biologicals 

Medicare Part B currently covers a 

limited number of prescription drugs. 

For the purposes of this proposed rule, 

the term ‘‘drugs’’ will hereafter refer to 

both drugs and biologicals. Currently 

covered Medicare Part B drugs generally 

fall into three categories: drugs 

furnished incident to a physician’s 

service, drugs administered via a 

covered item of durable medical 

equipment (DME), and drugs covered by 

statute. 

1. Drugs Furnished Incident to a 

Physician’s Service 

These are injectable or intravenous 

drugs that are administered incident to 

a physician’s service (section 

1861(s)(2)(A) of the Social Security Act 

(the Act)). Under the ‘‘incident-to’’

provision, the physician must incur a 

cost for the drug, and must bill for it. 

The Medicare Prescription Drug, 

Improvement, and Modernization Act 

(MMA) of 2003 revised the ‘‘incidentto’’ provision, permitting payment of 

‘‘incident-to’’ drugs under the CAP even 

though the physician participating in 

the CAP would not, in fact, incur a cost 

for the drug or actually bill for the drug. 

The Act limits coverage to drugs that are 

not usually self-administered. Examples 

include injectable prostate cancer drugs 

(such as lupron acetate for depot 

suspension, goserelin acetate implant), 

injectable drugs used in connection 

with the treatment of cancer (such as 

epoetin alpha), intravenous drugs used 

to treat cancer (such as paclitaxel and 

docetaxel used to treat breast cancer), 

injectable anti-emetic drugs used to treat 

the nausea resulting from 

chemotherapy, infliximab used to treat 

rheumatoid arthritis, and rituximab 

used to treat non-Hodgkin’s lymphoma. 

2. Durable Medical Equipment (DME) 

Drugs 

These are drugs that are administered 

through a covered item of DME, such as 

a nebulizer or pump. Two of the most 

common drugs in this category are the 

inhalation drugs albuterol sulfate and 

ipratropium bromide. 

3. Statutorily Covered Drugs and Other 

Drugs 

Drugs specifically covered by statute 

include— immunosuppressive drugs; 

hemophilia blood clotting factor; certain 

oral anti-cancer drugs; oral anti-emetic 

drugs; pneumococcal, influenza and 

hepatitis B vaccines; antigens; 

erythropoietin for trained home dialysis 

patients; certain other drugs separately 

billed by end stage renal disease (ESRD) 

facilities (for example, iron dextran, 

vitamin D injections); and osteoporosis 

drugs. 

4. Types of Providers 

Types of providers and suppliers that 

are paid based on the current drug 

payment methodology for all or some of 

the Medicare covered drugs they furnish 

include: physicians, pharmacies, DME 

suppliers, hospital outpatient 

departments, and ESRD facilities. 

5. Drugs Paid on a Cost or Prospective 

Payment Basis 

Drugs paid on a cost or prospective 

payment basis that are outside of the 

scope of this proposed rule include—

drugs furnished during an inpatient 

hospital stay (except clotting factor); 

drugs paid under the outpatient 

prospective payment system (OPPS); 

drugs furnished by ESRD facilities 

whose payments are included in 

Medicare’s composite rate; and drugs 

furnished by critical access hospitals, 

skilled nursing facilities (unless outside 

of a covered stay), comprehensive 

outpatient rehabilitation facilities, rural 

health facilities, and federally qualified 

health centers. 

B. History of the Current Payment 

System 

In the June 5, 1991 physician fee 

schedule proposed rule (56 FR 25792), 

we proposed that the drug payment 

limit be based on 85 percent of the 

national average wholesale price (AWP) 

of the drug. For very high volume drugs, 

we proposed that the drug payment 

limits be based on the lesser of the 85 

percent of the AWP or the estimated 

acquisition cost (EAC) of the drugs. 

Based on comments received, the 1992 

physician fee schedule final rule 

established a payment limit based on 

the lower of 100 percent of AWP or the 

EAC. However, the EAC proved to be 

unworkable and was never 

implemented. Various legislative 

proposals were submitted to move away 

from payment based on 100 percent of 

AWP, including changing the 

percentage of AWP to a lower amount. 

In 1997, the Congress amended the Act 

to limit payment for drugs not paid on 

a cost or prospective payment basis to 

the lower of the actual charge or 95 

percent of AWP (section 1842(o)(1) of 

the Act as added by section 4556 of the 

Balanced Budget Act of 1997 (BBA 

1997) (Pub. L. 105–33)). 

Numerous reports by the General 

Accounting Office (GAO), and the Office 

of Inspector General (OIG), as well as 

data collected by the Department of 

Justice (DOJ), indicated that 95 percent 

of list AWP reflected in published 

compendia is significantly higher than 

the prices that drug manufacturers, 

wholesalers, physician supply houses, 

specialty pharmacies, and similar 

entities actually charge to physicians 

and other suppliers purchasing these 

drugs.

C. Revised Drug Payment Methodology 

Based on these numerous reports 

conducted by the OIG and the GAO as 

well as the data collected by the DOJ 

10748 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

that identified the well-documented 

flaws in the AWP drug payment system, 

significant changes were made to the 

manner in which Medicare Part B pays 

for covered drugs. 

The MMA revised the drug payment 

methodology creating a new pricing 

system based on a drug’s Average Sales 

Price (ASP). The MMA also provides for 

a program beginning in 2006 to give 

physicians a choice between—(1) 

obtaining these drugs from vendors 

selected through a competitive bidding 

process; or (2) directly purchasing these 

drugs and being paid under the ASP. 

Effective January 2005, Medicare pays 

for the majority of Part B covered drugs 

using a drug payment methodology 

based on the ASP. In accordance with 

section 1847A of the Act, manufacturers 

submit to us the ASP data for their 

products. These data include all the 

manufacturer’s sales of a drug to all 

purchasers in the United States in a 

calendar quarter (excluding certain sales 

exempted by statute) and the total 

number of units of the drug sold by the 

manufacturer in that same quarter, with 

limited exceptions. The sales price is 

net of discounts such as volume 

discounts, prompt pay discounts, cash 

discounts, free goods that are contingent 

on any purchase requirement, 

chargebacks, and rebates (other than 

rebates under section 1927 of the Act). 

The Medicare payment rate is based on 

106 percent of the ASP (or for single 

source drugs, 106 percent of wholesale 

acquisition cost (WAC), if lower), less 

applicable deductible and coinsurance. 

D. Competitive Acquisition Program 

(CAP) 

Section 303(d) of the MMA provides 

for an alternative payment methodology 

for most Part B covered drugs that are 

not paid on a cost or prospective 

payment basis. In particular, section 

303(d) of the MMA amends Title XVIII 

of the Act by adding a new section 

1847B, which establishes a competitive 

acquisition program for the acquisition 

of and payment for competitively 

biddable Part B covered drugs and 

biologicals furnished on or after January 

1, 2006. 

Beginning January 1, 2006, physicians 

will have a choice between—(1) 

obtaining these drugs from entities 

selected to participate in the CAP in a 

competitive bidding process ; or (2) 

acquiring and billing for competitively 

biddable Part B covered drugs under the 

ASP drug payment methodology. The 

provisions for acquiring and billing for 

drugs through this new system, as well 

as additional information about this 

new drug payment system, are 

described in this proposed rule. 

The competitive acquisition program 

may provide opportunities for Federal 

savings to the extent that aggregate bid 

prices are less than 106 percent of ASP. 

However, the CAP has other purposes 

than the potential to achieve savings. 

The competitive acquisition program 

provides opportunities for physicians 

who do not wish to be in the business 

of drug acquisition. Engaging in drug 

acquisition may require physicians to 

bear financial burdens such as 

employing working capital and bearing 

financial risk in the event of nonpayment for drugs. The CAP is 

designated to reduce this financial 

burden for physicians. In addition, 

physicians who furnish drugs often cite 

the burden of collecting coinsurance on 

drugs and that drug coinsurance can 

represent large amounts for a 

beneficiary and physician. The 

competitive acquisition program 

eliminates the need for physicians to 

collect coinsurance on CAP drugs from 

Medicare beneficiaries. 

II. Provisions of the Proposed Rule 

A. Policy for the CAP 

1. General Overview of the CAP 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Overview of the CAP’’ at the 

beginning of your comments.] 

Implementation 

To implement the CAP, we need to 

complete a number of activities prior to 

January 1, 2006, including—

designating or developing quality, 

service, and financial performance 

standards for vendors, creating a pricing 

methodology, designing and running a 

bidding process from solicitation 

through contract award, providing 

physicians with an opportunity to elect 

to participate and select a vendor; 

educating beneficiaries about the 

program; and other activities specified 

in section 1847B of the Act and 

described elsewhere in this proposed 

rule. 

The statute provides some flexibility 

in the development of the CAP by 

requiring an appropriate ‘‘phase-in’’ of 

the program and providing the Secretary 

with the discretion to select appropriate 

categories of drugs and appropriate 

geographic areas for the program. 

Section 1847B(a)(1)(B) of the Act states 

that for purposes of implementing the 

CAP, ‘‘the Secretary shall establish 

categories of competitively biddable 

drugs and biologicals. The Secretary 

shall phase in the program with respect 

to those categories beginning in 2006 in 

such manner as the Secretary 

determines to be appropriate.’’

Additionally, the statute states that the 

competitive acquisition areas for the 

CAP on which contracts are to be 

awarded (and vendors chosen) are 

‘‘appropriate geographic regions 

established by the Secretary’. 

Activities Prior to the Issuance of This 

Proposed Rule 

Subsequent to the enactment of the 

MMA, we initiated the following 

activities to enable us to implement the 

statutory provisions of section 1847B of 

the Act:

—We awarded a contract to Research 

Triangle Institute (RTI) to obtain 

information and develop alternatives 

regarding the implementation of a drug 

and biological competitive bidding 

program. As part of this contract, RTI 

consulted with groups representing 

beneficiaries, physicians and suppliers, 

drug suppliers, and drug manufacturers 

to obtain input on the implementation 

of this MMA provision.

—We conducted a Special Open Door 

Listening Session on April 1, 2004, to 

gather additional input, and to allow 

interested parties to hear and be heard 

by other members of the healthcare 

industry. 

—We established an electronic mailbox, 

MMA303DDrugBid@cms.hhs.gov, for 

interested parties to submit comments 

on the CAP program prior to the 

issuance of this proposed rule. 

—We issued a Request for Information 

(RFI) on December 13, 2004. The 

purpose of this RFI was to assess the 

public’s interest in bidding on 

contracts to supply drugs and 

biologicals for the CAP. In reply to the 

RFI, we received 15 responses 

expressing an interest to participate in 

the CAP. Most responders indicated a 

willingness to provide selected Part B 

drugs on a national basis. Responders 

also provided information regarding 

the types of drugs they would be most 

interested in providing within the 

selected jurisdictions. Four 

responders indicated a willingness to 

provide nearly all the drugs listed on 

the RFI. 

In the specialty areas of oncology, 

hematology, internal medicine, 

infectious disease, urology, 

rheumatology, and obstetrics/

gynecology, several responders 

indicated a willingness to provide the 

most costly and the most frequently 

used drugs in these areas. In addition, 

some responders indicated an interest in 

providing drugs or biologicals in the 

areas of oncology, hematology, 

pulmonary, and neurology. 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10749

Regulations 

We propose to codify the 

requirements and provisions for the 

CAP in regulations at 42 CFR Part 414, 

Subpart K. We propose to revise the 

heading for subpart K to read ‘‘Payment 

for Drugs and Biologicals under Part B’’. 

We also propose to amend existing 

sections and section headings, and add 

new definitions and sections to set forth 

the proposed requirements with respect 

to the CAP. Specifically, we are 

proposing to revise existing § 414.900, 

which sets forth the basis and scope for 

subpart K, to provide that the 

regulations in this subpart implement 

sections 1847A and 1847B of the Act. In 

the examples of drugs at § 414.900, we 

propose to revise paragraph (b)(ii) to 

clarify that the hepatitis vaccine referred 

to in this paragraph is the hepatitis ‘‘B’’

vaccine. Under this subpart, we propose 

to add new § 414.906 through § 414.920 

to address requirements with respect to 

payment under the CAP. We also are 

revising § 414.902 to add definitions 

pertaining to the new CAP addressed in 

new § 414.906 through § 414.920. 

2. Categories of Drugs To Be Included 

Under the CAP 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Categories of Drugs to be 

Included under the CAP’’ at the 

beginning of your comments.] 

Section 1847B of the Act describes a 

program that will permit physicians to 

elect to obtain drugs from contractors 

rather than purchasing and billing for 

those drugs themselves. The statute, 

therefore, most closely describes a 

system for the provision of and the 

payment for drugs provided incident to 

a physician’s service. For example, the 

mechanisms described in the statute 

include the following: 

• Only physicians are expressly given 

an opportunity to elect to participate in 

the CAP. 

• The second sentence of section 

1847B(a)(1)(A) of the Act explicitly 

indicates that section 1874B shall not 

apply in the case of a physician who 

elects section 1847A of the Act to apply. 

• Physicians who elect to obtain 

drugs under the CAP make an annual 

selection of the vendor through which 

drugs will be acquired and delivered to 

the physician under Part B. 

• Section 1847B(a)(3)(A) of the Act 

specifically applies the CAP to drugs 

and biologicals that are prescribed by a 

physician who has elected the CAP to 

apply. 

• Payment for drugs furnished under 

the CAP is conditioned upon drug 

administration. 

• The submission of information that 

will be used by the vendor for collection 

of cost sharing applies to physicians. 

• The primary site for delivery of 

drugs furnished under the CAP is the 

physician’s office. 

• The statute requires the Secretary to 

make available to physicians on an 

ongoing basis a list of CAP vendors. 

• The statute explicitly defines a 

‘‘selecting physician’’ to be one who has 

elected the CAP program to apply. 

Section 1847B(a)(1)(B) of the Act 

specifically requires the Secretary to 

establish categories of drugs that will be 

included in the CAP, and requires the 

Secretary to phase in the program with 

respect to these categories, as the 

Secretary determines to be appropriate. 

Section 1847B(a)(1)(D) of the Act further 

authorizes the Secretary to exclude 

competitively biddable drugs and 

biologicals from the competitive bidding 

system if the application of competitive 

bidding to such drugs and biologicals—

(1) Is not likely to result in significant 

savings; or 

(2) Is likely to have an adverse impact 

on access to such drugs and biologicals. 

Finally, the statute defines the term 

‘‘competitively biddable drugs and 

biologicals’’ for purposes of the CAP as 

‘‘a drug or biological described in 

section 1842(o)(1)(C) of the Act and 

furnished on or after January 1, 2006.’’

The drugs described in section 

1842(o)(1)(C) of the Act include most 

drugs paid under Medicare Part B and 

not otherwise paid under cost-based or 

prospective payment basis. Medicare 

Part B covered vaccines, drugs infused 

through a covered item of DME, and 

blood and blood products (not including 

clotting factor and intravenous immune 

globulin (IVIG)) are not included in the 

CAP because they are expressly 

excluded from section 1842(o)(1)(C) of 

the Act. 

The statutory definition of 

‘‘competitively biddable drugs’’

therefore includes drugs administered 

incident to a physician’s service (for 

example, drugs commonly furnished by 

oncologists), drugs administered 

through DME (for example, inhalation 

drugs) with the exception of DME 

infusion drugs, and some drugs usually 

dispensed by pharmacies (for example, 

oral immunosuppressive drugs). 

Although the statutory definition 

includes all these categories of drugs, as 

noted above, the specific mechanisms 

described under section 1847B of the 

Act relate to the provision of and the 

payment for drugs provided incident to 

a physician’s service. There may be an 

alternative reading of the statute, under 

which the CAP is properly restricted to 

drugs administered incident to a 

physician’s service. We welcome 

comments on this issue.

Using our authority to establish drug 

categories and to phase in the CAP as 

appropriate, we could include in the 

CAP all drugs administered by 

physicians, or, for an initial period, only 

drugs that are usually administered by 

one or more physician specialties (for 

example, oncology or rheumatology). 

The CAP could be phased in with 

respect to categories of drugs in any 

number of ways. A phase-in could, for 

example, begin with drugs that are 

usually administered by oncologists, 

and later be extended to include all 

drugs administered by physicians. 

Given our concerns about the clear 

direction of the statute that the election 

to participate in this program rests with 

physicians, we do not believe it is 

possible to include drugs other than 

those administered as incident to a 

physician’s service as part of this 

program. However, we also recognize 

that the statute provides a potentially 

broader definition of ‘‘competitively 

biddable drugs and biologicals’’ in 

section 1847B(a)(2)(A) of the Act. 

Therefore, we are soliciting comments 

on how an expansion of the drugs 

covered under this program might work, 

given that the option to participate 

clearly rests with the physician. 

We propose to set forth the definition 

for ‘‘competitively biddable drugs’’ and 

other terms relevant to the CAP in 

regulations under revised § 414.902. 

Below we discuss the merits of these 

options for the drug categories to be 

included within the CAP. We also 

discuss our proposed approach to 

phasing in the program with respect to 

drug categories. We invite comments on 

all these options and on all aspects of 

our proposal. We welcome alternative 

suggestions for our consideration for the 

final rule. 

Drugs Furnished Incident to a 

Physician’s Service 

Under this option, all drugs furnished 

incident to a physician’s service would 

be included in the CAP. The majority 

(more than 80 percent) of Medicare Part 

B drug expenditures are for drugs 

furnished incident to a physician’s 

service, such as chemotherapy drugs. 

Therefore, inclusion of all drugs 

furnished incident to a physician’s 

service would be important to provide 

an alternative to physicians who did not 

want to be in the drug purchasing 

business and did not want to have to 

collect coinsurance on drugs. It may 

also provide more opportunity for 

realizing savings to the program than 

some other options. 

10750 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

Phasing in CAP Drugs by Physician 

Specialty 

As we have discussed above, it may 

be advisable to phase in the program by 

implementing the CAP initially for a 

limited set of drugs that are typically 

administered by a single physician 

specialty, such as a set of drugs 

commonly furnished by oncologists. 

Drugs commonly furnished by 

additional specialties could be included 

over the next few years of the program. 

Drugs typically furnished by oncologists 

constitute a large portion of the Part B 

drug market. In fact, drugs that are 

typically furnished incident to an 

oncologist’s service represent the largest 

portion of expenditures for physicianadministered drugs under Medicare, 

followed by drugs typically furnished 

incident to a urologist’s service, a 

rheumatologist’s service, a 

gynecologist’s service, an infectious 

disease specialist’s service, and a 

primary care physician’s service. Drugs 

typically administered by other 

physician specialties represent smaller 

portions of physician-administered 

drugs. We therefore believe that the 

basic phase-in decision with respect to 

drugs administered in physician offices 

is whether to begin implementation of 

the program only with drugs typically 

administered by oncologists, or with 

some set of drugs that other specialties 

(for example, urology) tend to 

administer. We discuss each of these 

options below. 

Begin with Drugs Used by a Single 

Physician Specialty: Oncology 

Under this approach, we would 

initially implement the CAP for a 

limited set of drugs that are typically 

administered by oncologists. Drugs 

typically administered by other 

specialties would be included over the 

next few years of the program. 

The advantage of this approach is that 

during the phase-in we could focus our 

implementation efforts on one specialty 

with a more homogeneous set of 

concerns and issues. Also, by limiting 

the target drugs to those typically 

administered by oncologists, the 

required physician education process 

would be streamlined and potentially 

more effective. In addition, oncologists 

use a high proportion of the physicianadministered drugs that could be 

included under the CAP. By initiating a 

phase-in with drugs that are typically 

administered by oncologists, we could 

thus begin to realize much of the benefit 

that is possible under the CAP. 

Therefore, we believe that it would be 

reasonable to include drugs typically 

administered by oncologists in the early 

stages of implementing the CAP. 

A potential disadvantage of singling 

out drugs typically administered by one 

physician specialty for the initial stages 

of phasing in the CAP is that the scope 

of the CAP in the early years may be too 

narrow for us to effectively identify 

issues or concerns for specialties that 

typically administer drugs not initially 

included. In addition, the CAP would 

not initially provide an alternative for 

physicians in other specialties. We 

welcome comments from oncologists 

and others about the merits of beginning 

the phase-in of the CAP with drugs 

typically administered by oncologists.

Begin with Specialties That Use Fewer 

Part B-Covered Drugs 

An alternative phase-in approach 

would be to choose a limited set of 

drugs that are typically administered by 

one or more physician specialties that 

use Part B-drugs less intensively. 

Focusing on Part B drugs typically 

administered by physicians in these 

specialties would limit the scope of the 

initial implementation, and allow 

operational issues to be addressed more 

gradually. This more limited scope 

would allow us to identify lessons and 

issues before phasing in larger drug 

classes (such as drugs typically 

administered by oncologists) at a later 

time. The disadvantage of this approach, 

however, is that such a limited scope 

may also restrict the potential benefits 

of the CAP, especially potential savings 

to the Medicare program and potential 

benefits to physicians in other 

specialties who do not want to be in the 

drug procurement and drug coinsurance 

collection business and who would 

prefer to obtain drugs that they typically 

administer under the CAP. The 

restricted scope of this approach might 

not elicit a response from potential 

bidders if they believe that the potential 

market is too limited. 

In light of these considerations, we 

are considering several alternative 

approaches to phasing in the CAP with 

respect to drug categories. One 

alternative would be to phase in the 

CAP by initially including all drugs 

typically administered by oncologists 

within the program. We would begin 

with drugs typically administered by 

oncologists primarily because these 

drugs constitute such a major portion of 

the physician-administered drugs under 

Part B. Another option is to begin with 

some set of the drugs that are typically 

administered in physician offices by 

other specialties (for example, drugs 

typically administered by urologists). 

This option would mean that 

implementation of the CAP would have 

a more limited impact initially on the 

provision and payment for Part B drugs 

than beginning with drugs typically 

administered by oncologists or with all 

Part B drugs furnished incident to a 

physician’s service. A final option is to 

implement the CAP for all Part B drugs 

that are furnished incident to a 

physician’s service. We are not 

considering categories smaller than 

drugs typically administered by a 

physician specialty. For the oncology 

option, for example, we are not 

considering to include only the top 

three oncology drugs. All drugs 

typically administered by oncologists 

would be included under this option. 

We are actively considering all these 

options, but we are not proposing any 

particular option at this time. Rather, we 

encourage comments on all the options 

that we have discussed. We also 

welcome recommendations of other 

options for consideration, and will also 

consider other options presented by 

commenters for adoption in the final 

rule. We especially encourage 

comments from physicians concerning 

their preferences about how a phase-in 

should be designed and more generally 

how the categories of drugs under the 

CAP should be structured. For example, 

physicians may prefer relatively broad 

drug categories that encompass all the 

drugs that they commonly furnish, 

which presumably would allow those 

physicians to largely avoid purchasing 

drugs for their Medicare patients. Under 

this proposed approach one category of 

drugs might be all the drugs commonly 

furnished incident to an oncologist’s (or 

other specialist’s) service. Other 

narrower ways of structuring the 

categories are also possible. After 

further analysis and consideration of the 

comments, we may adopt one of the 

options described above, or an option 

brought to our attention through the 

comment process, in the final rule. 

It is important to note that, if we 

choose to phase in the CAP by 

restricting the program initially to drugs 

typically administered by members of 

one specialty, all physicians who 

administer the drugs selected would 

still be eligible to elect to obtain these 

drugs through the CAP and to select a 

vendor of these drugs. For example, if 

we choose to phase in the program 

initially with drugs typically 

administered by oncologists, 

participation in the CAP would not be 

restricted to oncologists: nononcologists who prescribe these drugs 

would still be eligible to elect the CAP 

and to select a vendor from which to 

obtain these drugs. 

It is also important to note that the 

categories that are established for 

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physicians to select will be the same 

categories that would be open for bids 

by potential vendors. For example, if a 

category embracing all drugs typically 

administered by oncologists is 

established, vendors would bid on all 

the HCPCS codes contained in the 

category and an oncologist who elects to 

participate in the CAP would be electing 

to acquire that category from the vendor. 

Vendors would not be able to submit 

bids on only some of the HCPCS codes 

in the category, and physicians would 

not be able to elect to acquire only some 

of the HCPCS codes in that category 

from the vendor. Table 1 below 

illustrates a potential category.

TABLE 1.—MOST COMMONLY USED HCPCS BY ONCOLOGISTS DEFINED BY SPECIALTY CODE 90 

[Using 2003 Medicare Claims Data, Allowed Services Greater Than 100 and Allowed Charges (Adjusted for 2005) Greater Than $10,000] 

HCPC Description HCPC Description 

J0207 ...... Amifostine. J9040 ..... Bleomycin sulfate injection. 

J0637 ...... Caspofungin acetate. J9045 ..... Carboplatin injection. 

J0640 ...... Leucovorin calcium injection. J9050 ..... Carmus bischl nitro inj. 

J0696 ...... Ceftriaxone sodium injection. J9060 ..... Cisplatin 10 mg injection. 

J0800 ...... Corticotropin injection. J9062 ..... Cisplatin 50 mg injection. 

J0880 ...... Darbepoetin alfa injection. J9065 ..... Inj cladribine per 1 mg. 

J0895 ...... Deferoxamine mesylate inj. J9090 ..... Cyclophosphamide 500 mg inj. 

J1190 ...... Dexrazoxane HCl injection. J9096 ..... Cyclophosphamide lyophilized. 

J1260 ...... Dolasetron mesylate. J9160 ..... Denileukin diftitox, 300 mcg. 

J1440 ...... Filgrastim 300 mcg injection. J9170 ..... Docetaxel. 

J1441 ...... Filgrastim 480 mcg injection. J9178 ..... Inj, epirubicin hcl, 2 mg. 

J1450 ...... Fluconazole. J9181 ..... Etoposide 10 mg inj. 

J1626 ...... Granisetron HCl injection. J9182 ..... Etoposide 100 mg inj. 

J1642 ...... Inj heparin sodium per 10 u. J9185 ..... Fludarabine phosphate inj. 

J1645 ...... Dalteparin sodium. J9190 ..... Fluorouracil injection. 

J1650 ...... Inj enoxaparin sodium. J9201 ..... Gemcitabine HCl. 

J1655 ...... Tinzaparin sodium injection. J9202 ..... Goserelin acetate implant. 

J1745 ...... Infliximab injection. J9206 ..... Irinotecan injection. 

J1750 ...... Iron dextran. J9208 ..... Ifosfomide injection. 

J1756 ...... Iron sucrose injection. J9209 ..... Mesna injection. 

J2353 ...... Octreotide injection, depot. J9213 ..... Interferon alfa-2a inj. 

J2355 ...... Oprelvekin injection. J9214 ..... Interferon alfa-2b inj. 

J2405 ...... Ondansetron hcl injection. J3305 ..... Inj trimetrexate glucoronate. 

J2430 ...... Pamidronate disodium/30 mg. J9217 ..... Leuprolide acetate suspension. 

J2505 ...... Injection, pegfilgrastim 6 mg. J9265 ..... Paclitaxel injection. 

J2820 ...... Sargramostim injection. J9280 ..... Mitomycin 5 mg inj. 

J2997 ...... Alteplase recombinant. J9293 ..... Mitoxantrone hydrochl/5 mg. 

J3370 ...... Vancomycin hcl injection. J9310 ..... Rituximab cancer treatment. 

J3487 ...... Zoledronic acid. J9340 ..... Thiotepa injection. 

J9000 ...... Doxorubic hcl 10 mg vl chemo. J9350 ..... Topotecan. 

J9001 ...... Doxorubicin hcl liposome inj. J9355 ..... Trastuzumab. 

J9010 ...... Alemtuzumab injection. J9390 ..... Vinorelbine tartrate/10 mg. 

J9015 ...... Aldesleukin/single use vial. Q0136 .... Non esrd epoetin alpha inj. 

J9017 ...... Arsenic trioxide. Q3025 .... IM inj interferon beta 1-a. 

J9031 ...... Bcg live intravesical vac. 

In addition, it is important to keep in 

mind that HCPCS codes describe 

products represented by multiple 

National Drug Codes (NDC). For 

example, the drug cyclophosphamide is 

manufactured by a number of different 

pharmaceutical companies and has 

multiple NDC codes. 

As discussed in proposed 

§ 414.908(d), we are proposing that 

vendors will not be required to provide 

every National Drug Code associated 

with a HCPCS code. Section 1847B(b)(1) 

of the Act states that ‘‘in the case of a 

multiple source drug, the Secretary shall 

conduct such competition among 

entities for the acquisition of at least one 

competitively biddable drug and 

biological within each billing and 

payment code within each category for 

each competitive acquisition area.’’

However, we are also proposing that 

vendors will be required to provide 

potential physician participants in the 

competitive acquisition program the 

specific NDCs within each HCPCS code 

that they will be able to provide to the 

physician. Potential vendors would also 

need to provide this same information 

to us as part of the bidding application. 

In addition, we are proposing that this 

information will be provided to 

physicians who request it no later than 

the beginning of the election period 

during which the physician chooses 

whether to participate in the CAP and, 

if so, selects a vendor. We anticipate 

that the first physician election process 

will occur in the fall of 2005. 

Finally, we would like to emphasize 

that, in framing these options, we are 

relying solely on the Secretary’s 

statutory authority under section 

1847B(a)(1)(B) of the Act to establish 

categories of drugs that will be included 

in the CAP, and to phase in the program 

with respect to these categories. We do 

not propose to rely at this time on the 

Secretary’s authority under section 

1847B(a)(1)(D) of the Act to exclude 

competitively biddable drugs and 

biologicals from the CAP on the grounds 

that including those drugs and 

biologicals would not result in 

significant savings or would have an 

adverse impact on access to those drugs 

and biologicals. At this time, we have 

made no findings that including certain 

drugs in the CAP would not result in 

significant savings or would have an 

adverse impact on access to those drugs. 

We propose to set forth the 

circumstances for which we may 

exclude competitively biddable drugs 

and biologicals (including categories of 

10752 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

drugs) from the CAP at proposed 

§ 414.906(b) of our regulations.

3. Competitive Acquisition Areas 

Definition of Competitive Acquisition 

Areas 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Competitive Acquisitions 

Areas’’ at the beginning of your 

comments.) 

Section 1847B(a)(1)(A)(i) of the Act 

provides that, under the competitive 

acquisition program (CAP), competitive 

acquisition areas are established for 

contract award purposes. Section 

1847B(a)(2)(C) of the Act further defines 

the term ‘‘competitive acquisition area,’’

for purposes of the CAP, as ‘‘an 

appropriate geographic region 

established by the Secretary.’’ Section 

1847B(b)(1) of the Act also requires that 

the Secretary conduct a competition 

among entities for the acquisition of at 

least one competitively biddable drug 

and biological within each billing and 

payment code within each category of 

competitively biddable drugs for each 

competitive acquisition area. Finally, 

section 1847B(b)(3) of the Act states that 

the Secretary may limit (but not below 

two) the number of qualified entities 

that are awarded contracts for any 

competitively biddable drug category 

and competitive acquisition area. 

Under this statutory scheme, 

competitive acquisition areas (that is, 

the geographic areas the contractor 

would be responsible for serving) have 

an important role in the CAP. These 

areas constitute the geographic 

boundaries within which entities will 

compete for contracts to provide 

competitively biddable drugs. The 

definition of these areas will therefore 

be a crucial factor in determining—the 

number of entities that bid for contracts; 

the number of entities that are 

ultimately awarded these contracts; the 

level of savings from the successful 

bids; and the efficiency with which the 

system delivers competitively biddable 

drugs to physicians. At the same time, 

the statute grants the Secretary broad 

discretion in defining competitive 

acquisition areas under the CAP. We 

believe that several factors must be 

considered in defining competitive 

acquisition areas for competitively 

biddable drugs and biologicals. In 

particular, the designation of 

competitive acquisition areas are to take 

into account how promptly physicians 

need drugs provided to their practices if 

distribution capacity varies 

geographically. In addition, aspects of 

vendors and their distribution systems, 

such as current geographic service areas; 

density of distribution centers, distances 

drugs and biologicals are typically 

shipped, and costs associated with 

shipping and handling; the 

relationships between vendors and their 

suppliers (manufacturers, wholesalers, 

etc.); and state licensing laws that may 

preclude vendors from operating in a 

State are to be taken in account. These 

factors can affect the price of supplying 

drugs to different regions as well as the 

size of the market in which vendors are 

allowed or able to operate. 

Section 1847B(a)(1)(B) of the Act 

specifically requires the Secretary to 

phase in the CAP with respect to the 

categories of drugs and biologicals in 

the program, in such a manner as the 

Secretary determines to be appropriate. 

We believe that this provision, 

particularly in conjunction with the 

statutory definition of ‘‘competitive 

acquisition area’’ (‘‘an appropriate

geographic region established by the 

Secretary’’) (emphasis added), provides 

broad authority for the Secretary to 

phase in the CAP with respect to the 

geographical areas in which the program 

will be implemented. Below we discuss 

several options for defining 

‘‘competitive acquisition areas’’ for 

purposes of the CAP. Each of these 

definitions could be adopted initially in 

a manner that allows for the program to 

be phased in geographically. For 

example, defining ‘‘competitive 

acquisition areas’’ in terms of regions or 

in terms of States is compatible with 

phasing in the program by 

implementing it initially in one or more, 

but not all, regions or States. Under this 

phase-in plan, the program would 

eventually be expanded to all regions or 

States. Conversely, the program could 

be phased in by initially employing a 

national competitive acquisition area. 

This would limit participation in the 

program initially to those vendors that 

could compete to bid and supply drugs 

nationally, to the exclusion of the 

vendors that could bid and supply drugs 

on a regional or State basis. Under this 

phase-in plan, the definition of 

competitive acquisition area would 

ultimately be established on the basis of 

regions, States, or some other smaller 

geographic area, which might expand 

the number of vendors that could bid to 

participate in the program.

We have identified several basic 

options for defining the competitive 

acquisition areas required under the 

CAP. The basic options for defining 

these areas include—establishing a 

national competitive acquisition area; 

establishing regional competitive 

acquisition areas; and establishing 

statewide competitive acquisition areas. 

We invite comment on these possible 

approaches. 

National Competitive Acquisition Area 

Under this option, the competitive 

acquisition program would require 

participating vendors to offer 

competitively biddable drugs and 

biologicals to physicians in any State 

within the United States, as well as the 

District of Columbia, Puerto Rico, and 

the U.S. territories. In other words, there 

would be only a single national 

competitive acquisition area. Bidders 

that seek to compete in a national 

competitive acquisition area would 

need a national network of distribution 

points that could serve physicians in a 

timely manner with products that are 

properly stored and shipped. In 

addition, drug vendors would need to 

be appropriately licensed in all 50 

States, the District of Columbia, Puerto 

Rico, and the U.S. territories in order to 

comply with FDA rules. 

Establishing a single national 

competitive acquisition area may have 

several advantages. First, in a single 

national area, the number of Medicare 

beneficiaries and physicians is 

sufficiently large to encourage vendors 

to participate to gain market share. This 

option may also impose less 

administrative burden on potential 

bidders than other options, because all 

applicants would be applying for 

contracts to cover the same region. The 

administrative burden on CMS might 

also be less: the fewer the number of 

acquisition areas, the fewer bids that 

must be submitted and evaluated. 

However, smaller regional drug 

distributors would be less likely to 

participate in the CAP under this 

option, because they may not be able to 

serve the entire country. This would 

reduce competition in the bidding 

process. 

Regional Competitive Acquisition Areas 

Under this general category, there are 

several possible options. One option is 

that we could establish multi-State 

acquisition areas based on existing 

markets. Under this option, we could 

define acquisition areas based on 

existing markets of regional distributors 

and specialty pharmacies. As an 

alternative regional approach, we could 

define four large competitive acquisition 

areas, which would limit the 

administrative burden of 

implementation. With just four 

acquisition areas, it may be less likely 

that there would be an insufficient 

number of vendors in any one area. We 

could also determine competitive 

acquisition areas that coincide with the 

prescription drug plan regions 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10753

established under section 1860D–11 of 

the Act (http://www.cms.hhs.gov/

medicarereform/mmaregions/) for more 

information. 

Establishing sub-national regions 

could be a natural first step in a 

geographic phase-in of the program. As 

discussed above, for example, we could 

implement the CAP in only a few areas 

at first. Overcoming challenges in the 

first phase would be important in 

gaining wide physician and vendor 

participation and successful 

implementation on a large scale. If we 

chose this approach, we would consider 

factors such as the number of potential 

bidders, the capacity of existing 

distribution networks, and the 

distribution of physician specialties in 

selecting a limited geographic area for 

the first competitive acquisition bidding 

process. This approach would also 

allow regional distributors to participate 

more easily in the CAP, thereby 

potentially increasing competition in 

the bidding process.

However, this approach may impose 

additional administrative burden on 

national vendors since they may need to 

submit multiple bids to cover the entire 

country. 

Competitive Acquisition Areas Based on 

Single States 

Under this option, we would define 

CAP areas based on State boundaries, 

the District of Columbia, Puerto Rico, 

and the territories. This option has the 

advantage of using clearly defined 

geopolitical borders as the basis for 

acquisition areas. As we have noted, 

current licensing for specialty 

pharmacies and vendors operates at the 

State level. Also, establishing Statebased regions could support a 

geographic phase-in of the program, and 

we could implement the CAP in only 

some States at first. (As in the case of 

a possible phase-in of a region-based 

approach, we would consider factors 

such as the number of potential bidders, 

the capacity of existing distribution 

networks, and the distribution of 

physician specialties in selecting one or 

more States for the first competitive 

acquisition bidding process.) 

Overcoming challenges in the first 

phase would be important in gaining 

wide physician and vendor 

participation and successful 

implementation on a large scale. This 

approach would also allow State-based 

regional distributors to more easily 

participate in CAP, thereby potentially 

increasing competition in the bidding 

process. 

We encourage comments on all the 

options that we have discussed. We also 

welcome recommendations of other 

options for consideration. We believe 

that defining competitive acquisition 

areas, at least initially, on the basis of 

a level no smaller than the States is the 

most feasible approach. To our 

knowledge, there are few, distributors of 

drugs administered incident to 

physician services that operate on a 

scale smaller than a State level. 

However, we welcome comments on 

this issue, and all other aspects of this 

discussion. We are still considering all 

the options described above, and will 

also consider other options presented by 

commenters. After further analysis and 

consideration of the comments, in the 

final rule, we may adopt one of the 

options described above, or an option 

brought to our attention through the 

comment process. 

B. Operational Aspects of the CAP 

1. Statutory Requirements Concerning 

Claims Processing 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Statutory Requirements 

Concerning Claims Processing’’ at the 

beginning of your comments.] 

Section 1847B(a)(3)(A) of the Act sets 

forth specific requirements that have a 

direct impact on the administrative and 

operational parameters for instituting a 

CAP. This section of the statute requires 

the following: (1) Vendors participating 

in the Part B Drug Competitive 

Acquisition Program bill the Medicare 

program for the drug or biological 

supplied, and collect any applicable 

deductibles and coinsurance from the 

Medicare beneficiary. (For purposes of 

this preamble the term ‘‘vendor’’ means 

the term ‘‘contractor’’ as referred to in 

the statute.) (2) Any applicable 

deductible and coinsurance may not be 

collected unless the drug was 

administered to the beneficiary. (For 

purposes of this preamble the term 

‘‘drug’’ refers to drugs and biologicals) 

(3) Medicare can make payments only to 

the vendor and these payments are 

conditioned upon the administration of 

the drug. 

In addition, the Secretary is required 

to provide for a process for adjustments 

to payments in those cases when 

payment was made for the drugs, but 

they were not actually administered to 

the beneficiary. The Secretary is also 

required to provide a process by which 

physicians submit information to 

vendors for purposes of the collection of 

applicable deductible or coinsurance. 

Payment may not be made for 

competitively biddable drugs supplied 

to a physician who has elected to 

participate in CAP unless the vendor 

supplying the drugs has a contract to 

provide them in that geographic area 

and the physician receiving them has 

elected the vendor to supply that 

category of drug in that geographic area. 

Section 1847B(b)(4)(E) of the Act 

requires that the vendor only supply 

drugs directly to the selecting 

physicians and not directly to 

individuals, except under circumstances 

and settings where the individual 

currently receives drugs in his or her 

home or another non-physician office 

setting, as provided by the Secretary. In 

addition, the vendor may not provide 

drugs to a physician participating in the 

CAP, unless the physician submits a 

written order or prescription, and any 

other data specified by the Secretary, to 

the vendor. However, the statute also 

makes it clear that the physician is not 

required to submit an order 

(prescription) for individual treatments 

of a drug or biological, and that the 

statute is not intended to change a 

physician’s flexibility to choose whether 

to write a prescription for a single 

treatment or a course of treatments. In 

certain sections of this proposed rule, 

we have used the term prescription and 

the term order interchangeably. Section 

1847B of the Act uses the term 

‘‘prescription’’ but does not define it. 

For purposes of the CAP, we propose to 

interpret the term to include a written 

order submitted to the vendor. We note 

that section 1847B(b)(4)(E) of the Act, in 

requiring that vendors deliver drugs 

only upon receipt of a ‘‘prescription,’’

expressly indicates that the statute does 

not ‘‘require a physician to submit a 

prescription for each individual 

treatment’’ or ‘‘change a physician’s 

flexibility in terms of writing a 

prescription for drugs or biologicals for 

a single treatment or a course of 

treatment.’’ It is not our intention to 

restrict the physician’s flexibility when 

ordering drugs from a CAP vendor, or to 

require that a physician participating in 

CAP would order drugs differently from 

a CAP vendor than he or she would a 

non-CAP vendor. (For purposes of this 

preamble the term ‘‘order’’ and 

‘‘prescription’’ are used 

interchangeably.) 

Section 1847B(b)(5) of the Act 

requires the Secretary to establish rules 

under which drugs acquired under the 

CAP may be used to resupply 

inventories of these drugs administered 

by physicians. This process will apply 

only if the physician can demonstrate 

all of the following to the Secretary: the 

drugs are required immediately, the 

physician could not have anticipated 

the need for the drugs, the vendor could 

not have delivered the drugs in a timely 

manner, and the drugs were 

administered in an emergency situation. 

10754 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

2. Proposed Claims Processing 

Overview 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Claims Processing Overview’’

at the beginning of your comments.] 

To comply with the statutory 

requirements described above, we 

propose to implement a claims 

processing system that will enable 

selected vendors to bill the Medicare 

program directly, and to bill the 

Medicare beneficiary and/or his or her 

third party insurance after verification 

that the drug has been administered. We 

propose to set forth the requirements for 

payment under the CAP at proposed 

§ 414.906 of our regulations. For the 

initial implementation of the CAP, we 

plan to designate one Medicare fee-forservice claims processing carrier to 

process all drug vendor’s Medicare 

claims. (In this preamble this entity will 

be referred to as the designated carrier.) 

Physicians who elect to participate in 

the program will continue to bill their 

local Medicare fee-for-service claims 

processing carrier for physicians’

services.

This proposed rule uses the term 

‘‘carrier’’ to describe an entity that 

processes Medicare benefit claims and 

performs related functions under Part B. 

These entities may service a particular 

type of provider, or they may service all 

Part B suppliers within a specified 

geographic area. 

The designated carrier and the 

physician’s local carrier would each be 

charged with keeping track of the 

physician’s vendor selection and 

making sure that the physician is 

administering drugs provided by the 

vendor with whom he or she has elected 

to participate. This process also would 

involve our central claims processing 

system. The following diagram 

describes the procedures for claims 

processing under the CAP.

At this time we are proposing to 

incorporate only drugs incident to a 

physician’s service into the CAP. As 

noted earlier in section II.B.2. of this 

preamble, we are seeking comment on a 

broader definition of ‘‘competitively 

biddable drugs’’. As described below, 

consistent with the statute, we propose 

that when a physician who has elected 

to participate in the CAP prepares an 

order for a drug to be administered to 

a Medicare beneficiary, the physician 

would provide basic information about 

the beneficiary and the beneficiary’s 

third party insurance to the drug 

vendor. 

As we specify at proposed 

§ 414.906(a)(4) of our regulations, we are 

proposing that CAP vendors would 

deliver drugs directly to physicians in 

their offices. Although the statute allows 

CMS to provide for the shipment of 

drugs to other settings under certain 

conditions, we are not proposing to 

implement the CAP in alternative 

settings at this time. 

The vendor would use order form 

information to bill the beneficiary and/

or his or her third party insurance for 

applicable deductible and coinsurance 

after drug administration has been 

verified by the Medicare carrier. 

The claims processing methodology 

we propose to implement would verify 

drug administration to the beneficiary 

by means of a prescription number that 

would be placed on the physician claim 

for drug administration and the drug 

vendor claim for the drug. Our claims 

processing system would use the 

prescription number to match the two 

claims and authorize payment to the 

vendor. 

We propose that the physician could 

place an order for a beneficiary’s entire 

course of treatment at one time 

however; the vendor may split the order 

into appropriately spaced shipments. 

The vendor would create a separate 

prescription number for each shipment 

and the physician would track each 

prescription number separately and 

place the appropriate prescription 

number(s) on each drug administration 

claim. The physician would also have 

the ability to modify the course of 

treatment and submit a separate order as 

necessary. 

The drug vendor would generate the 

prescription number when it prepares 

the drug for shipping. The drug and 

prescription number would be shipped 

to the physician and would be 

maintained until the date of drug 

administration. At the time the drug was 

administered to the beneficiary, the 

physician or his or her staff would place 

the prescription number for each drug 

administered on the claim form. 

Similarly, when the vendor billed 

Medicare for the drug it shipped to the 

physician, it would place the relevant 

prescription number on the claim form. 

The electronic version of the Medicare 

carrier claim form has space for a series


EP04MR05.000</GPH>
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of prescription numbers, which CMS 

has not utilized previously for Part B 

drugs. 

As part of implementing the CAP 

program, we would require that vendors 

and physicians who elect to participate 

in CAP have the capability of submitting 

these prescription numbers to us in 

their claims processing systems. If 

physicians and potential vendors are 

not already billing other payors using 

prescription numbers, they would need 

to work with their internal information 

systems staff or practice management 

software vendors to make the necessary 

changes to submit these data elements 

to Medicare in a manner consistent with 

HIPAA transaction guidelines for 

capturing prescription numbers.

Our claims processing methodology 

would use the prescription number to 

match the two claims and authorize 

payment to the vendor. Under our 

proposed approach, payment to the 

vendor would be dependent upon the 

filing of the drug administration claims 

by the physician, and the physician’s 

claim being approved for payment by 

the CMS claims processing system. We 

are seeking public comment on whether 

there are demonstrable, compelling 

reasons why CMS should consider 

making a partial payment to the vendor 

in cases where the drug administration 

claim is not received by the CMS claims 

processing system within 28 calendar 

days of the anticipated date of 

administration. We are also seeking 

public comment on what the 

appropriate percentage of the partial 

payment should be. 

Although we are not proposing to 

make a partial payment at this time, the 

following section describes how we 

would propose that the partial payment 

methodology would work, if we decide 

to implement this option. After the 

designated carrier makes the partial 

payment, the CMS claims processing 

system would continue to attempt to 

match the physician claim and the 

vendor claim for 90 days. We would not 

pay interest on interim payments. If a 

match of the two claims occurred, the 

vendor would receive Medicare 

payment for the remaining amount of 

money due on the claim. If no match 

between the two claims was made 

within 90 days, recovery of the amount 

already paid by Medicare would occur 

using normal Medicare overpayment 

recovery processes. 

As required by the statute, the vendor 

would not be allowed to bill the 

beneficiary and/or his or her third party 

insurance for any applicable deductible 

and coinsurance until the Medicare 

carrier had verified that the physician 

has administered the drug to the 

beneficiary, and final payment is made 

by the Medicare program. Proof that the 

drug was administered to the 

beneficiary would be established by the 

physician’s claim being matched with 

the drug vendor’s claim in the Medicare 

central claims processing system. After 

the two claims are matched the claims 

processing system would notify the 

designated carrier to issue final payment 

to the vendor. The obligation to pay 

interest on a clean claim would not arise 

until drug administration had been 

verified by the Medicare claims 

processing system. We propose that 

issuance of final payment by the 

Medicare program would serve as 

notification to the vendor that drug 

administration had been verified and 

that the vendor could proceed with 

billing the beneficiary or his or her third 

party insurance. 

We propose that in accordance with 

section 1847B(b)(5) of the Act, in 

emergency situations drugs acquired 

under the CAP could be used to 

resupply inventories of drugs 

administered by physicians. We propose 

that this process would apply if the 

physician could demonstrate all of the 

following to the local carrier: (1) The 

drugs were required immediately. (2) 

The physician could not have 

anticipated the need for the drugs. (3) 

The vendor could not have delivered 

the drugs in a timely manner. (4) The 

drugs were administered in an 

emergency situation. 

As discussed in section C.2.a. of the 

preamble, we are seeking public 

comment on how to define timeframes 

for timely delivery, and for emergency 

delivery. 

We propose that in emergency 

situations that met the criteria outlined 

above, the physician would treat the 

Medicare beneficiary with a drug from 

his or her own stock. After 

administering the drug to the 

beneficiary, the physician would 

prepare an order, identifying the drug as 

an emergency replacement. When the 

drug was received from the vendor the 

physician would return the drug to his 

stock. Both the physician and the 

vendor would bill normally for the drug 

or its administration as applicable. We 

seek comment on the additional criteria 

we will use to define the replacement 

process. 

We also propose to allow the 

physician to obtain a drug under the 

ASP methodology in ‘‘furnish as 

written’’ cases when medical necessity 

requires that a specific formulation of a 

drug be furnished to the patient. This 

situation closely parallels dispense as 

written (DAW) prescription orders. In 

cases when the vendor has not been 

contracted to furnish a specific 

formulation of a drug or a product 

defined by the product’s NDC number, 

and the specified product is medically 

necessary, the physician could purchase 

the product for the beneficiary from a 

source other than the CAP vendor and 

bill Medicare for it using the ASP 

methodology. We would establish this 

method of alternative payment for a 

competitively biddable drug under 

proposed § 414.906(c)(2) of our 

regulations. 

We propose that physicians who elect 

to participate in the CAP would 

continue to bill their local carrier for 

drug administration. In addition, we are 

proposing that for those drugs that are 

not included in the CAP, and for drug 

categories that the physician does not 

select, the physician would continue to 

bill and be paid under the ASP 

methodology. We are seeking public 

comment on whether physicians must 

obtain all categories of drugs that a 

particular CAP vendor provides from 

the vendor, or whether the physician 

should be allowed to choose the 

categories drugs he wishes to obtain 

from the vendor.

Some physicians have expressed 

concern that participation in the CAP 

would be administratively burdensome, 

for example, involve clerical and 

inventory resources. We do not believe 

that the clerical and inventory resources 

associated with participation in the CAP 

exceed the clerical and inventory 

resources associated with buying and 

billing drugs under the ASP system. The 

payment for clerical and inventory 

resources associated with buying and 

billing for drugs under the ASP system 

is bundled into the drug administration 

payment under the physician fee 

schedule. Taking these factors into 

account we are not proposing to make 

a separate payment to physicians for the 

clerical and inventory resources 

associated with participation in the CAP 

program. 

In addition, we propose to require 

prompt claim filing on the part of 

physicians who elect to participate in 

the CAP in order to facilitate the match 

between the physician claim and the 

drug vendor claim so that drug 

administration can be verified. Statistics 

obtained from Medicare claims filing 

data indicate that more than 75 percent 

of physician’s claims are currently filed 

within 14 days of the date of service. We 

propose that in their CAP election 

agreements, physicians who choose to 

participate in CAP would be required to 

agree to bill their claims within 14 

calendar days of the date the drug was 

administered to the beneficiary, unless 

extenuating circumstances prevented 

10756 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

them from filing the claim. We seek 

public comment on how we should 

define the extenuating circumstances. 

All drug vendors would submit their 

claims to the designated carrier who 

would be designated to receive them. 

After a physician saw a Medicare 

beneficiary and ordered a CAP drug, the 

physician would check that he or she 

was planning to use the drug consistent 

with any local coverage determination 

policies (LCDs), just as he or she would 

do now if obtaining a drug under the 

current payment methodology. The 

physician would prepare a drug order 

and forward it to the drug vendor. 

The order transmitted between the 

physician and the drug vendor may 

occur in a variety of HIPAA-compliant 

formats, such as by telephone with a 

follow-up written order. We propose 

that the physician would transmit the 

following information to the CAP drug 

vendor from whom he or she has elected 

to receive drugs. Abbreviated 

information could be sent for repeat 

patients. 

• Date of order 

• Beneficiary name 

• Physician identifying information 

Name, practice location, group 

practice information (if applicable), PIN 

and UPIN 

• Drug name 

• Strength 

• Quantity ordered 

• Dose 

• Frequency/instructions 

• Anticipated date of administration 

• Beneficiary Medicare information/

Health insurance (HIC) number 

• Supplementary Insurance info (if 

applicable) 

• Medicaid info (if applicable) 

• Shipping address 

• Additional Patient Info: date of 

birth, allergies, Ht/Wt/ICD–9, etc. 

We are interested in receiving 

comments on the information we are 

proposing to require as well as any 

additional information that might be 

necessary.

In emergency replacement situations, 

the physician would also make a 

notation on the order that the drug was 

a replacement for a drug already 

administered to the beneficiary. This 

notation may involve the use of a 

modifier to a HCPCS code, or another 

standardized means of incorporating the 

information into a claim. The vendor 

would prepare the drug order, assign the 

unique transaction identification (or 

prescription) number and ship the 

replacement product to the physician. 

Standard CAP billing and claim 

processing procedures would follow. 

We anticipate that the physician’s 

carrier would, at times, conduct a post 

payment review of emergency drug 

replacement in order to determine 

whether physicians were complying 

with conditions for emergency drug 

replacement. 

We propose that in ‘‘furnish as 

written’’ situations, when the physician 

has determined that it is medically 

necessary to use another brand of 

product within the HCPCS or a product 

with an NDC that is not being furnished 

by the vendor that the physician would 

be allowed to bill for the drug under 

ASP, even though he or she had elected 

to participate in the CAP. We propose 

that the physician would obtain the 

specific product through normal 

distribution channels and bill the 

product using the ASP methodology. 

The physician would be instructed to 

place a ‘‘furnish as written’’ modifier on 

his or her claim form and bill his or her 

Medicare carrier for the drug and the 

administration fee. The modifier would 

alert the carrier to allow the physician 

to bill under ASP in this case. We 

anticipate that the physician’s carrier 

would, at times, conduct a post payment 

review of the use of the ‘‘furnish as 

written’’ modifier. If the carrier 

determined that the physician had not 

complied with furnish as written 

requirements and that a specific NDC or 

brand name drug was not medically 

necessary, the carrier could deny the 

claim for the drug and the 

administration fee. 

After the physician submitted an 

order for the drug, the drug vendor 

would receive it and check the 

physician’s CAP eligibility from a list 

provided by the designated carrier and 

would verify the beneficiary’s Medicare 

eligibility with the designated carrier. 

After those checks were completed, 

the vendor would generate a 

prescription number that would include 

the vendor’s assigned identification 

number and the drug HCPCS code. The 

vendor would assemble the order and 

prepare it for shipping. The vendor 

would ship the drug to the physician 

using a delivery method specified by its 

contract with CMS. 

We anticipate that the physician’s 

office staff would receive the CAP 

drug(s) and store them until the time of 

administration. Although the statute 

discusses a patient-specific drug 

ordering process, it does not address the 

methods that may be used to store and 

inventory drugs in an office or clinic 

setting, or the potential burden 

associated with storing a patient’s CAP 

drugs separately from other drugs. We 

believe that less burdensome 

alternatives to keeping separate 

inventories exist; however, any 

alternatives would be required to 

maintain program integrity and product 

integrity and to minimize the risk of 

diversion, and medication errors. We do 

not believe that separate physical 

storage of CAP drugs is required. 

However, we are proposing that 

physicians participating in the CAP 

would be required to maintain a 

separate electronic or paper inventory 

for each CAP drug obtained. We seek 

public comment on additional 

requirements that we should impose on 

maintaining CAP inventory. 

If for some reason the drug could not 

be administered to the beneficiary on 

the expected date of administration, we 

propose that the physician would notify 

the vendor and reach an agreement on 

how to handle the unused drug, 

consistent with applicable State and 

Federal law. The notification would also 

serve to inform the vendor not to submit 

a claim for the drug. If the vendor and 

the physician agreed that the drug could 

be maintained in the physician’s 

inventory for administration to another 

Medicare beneficiary at a later time, the 

physician would generate a new order 

form at that time. Included in the order 

would be a notation that the drug was 

being obtained from the physician’s 

inventory of the vendor’s drugs and that 

the vendor need not ship the drug. 

We note that billing beneficiaries for 

applicable deductible and coinsurance 

would not be allowed at the time the 

drug is administered at the physician’s 

office as is the current customary 

practice outside of the CAP. The statute 

requires that the vendor bill Medicare 

and the beneficiary, and that the 

beneficiary may not be billed until after 

the drug has been administered to the 

beneficiary. As discussed earlier, we are 

proposing that the vendor be allowed to 

bill the beneficiary and/or his or her 

third party insurance after drug 

administration has been verified by 

matching the physician claim with the 

vendor claim using the prescription 

number, and final payment is made by 

the Medicare program. 

After administering the drug, the 

physician would submit a claim to his 

or her local carrier for drug 

administration. We propose that the 

claim would include the drug 

administration fee, the HCPCS code for 

the drug administered, the prescription 

number for each drug administered, and 

the date of service. 

The local carrier would adjudicate the 

claim and check that the physician was 

billing for appropriate drugs from the 

selected drug vendor, and that the claim 

was compliant with all local coverage 

determinations (LCDs). If the 

physician’s claim failed LCD edits, the 

local carrier would deny the claim and 

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would notify the central CMS claims 

processing system that the drug 

vendor’s claim for the drug should not 

be paid. 

If the claim passes all edits, the local 

carrier would forward it to the CMS 

central claims processing system for 

additional editing and approval for 

payment. 

After shipping the drug to the 

physician, we propose that the drug 

vendor would file a claim for the drug 

with the designated carrier no sooner 

than the expected date of 

administration. The claim form would 

contain the prescription number for 

each drug administered to the 

beneficiary on one calendar date, the 

unique provider identification number 

(UPIN) for the physician to whom the 

drug was supplied, and the expected 

date of service.

The designated carrier would submit 

the claim to the central claims 

processing system after the claim had 

passed all edits. 

The central claims processing system 

would match the physician claim with 

the vendor claim using the prescription 

number. If the physician claim for 

administering the drug had not been 

received in the central claims 

processing system but the vendor claim 

had received initial approval for 

payment, the claims processing system 

may pay the vendor a percentage of the 

claim payment amount. (Note: At this 

time, we are not proposing to 

implement a partial claims payment. 

However, as described earlier in this 

section, we are seeking comments on 

compelling reasons for making such a 

payment. The following section 

describes the process that we would 

follow if a partial payment methodology 

were implemented.) 

If CMS decides to make an initial 

payment to the vendor, the vendor 

would be paid for the remaining amount 

of the claim when the physician’s claim 

was matched with the vendor claim in 

the claims processing system. We note 

that CMS would not pay interest on 

partial payments. 

If the physician’s claim was not 

received within 90 days, or the claim 

was not approved for payment, the 

initial partial payment made to the 

vendor would be recouped using CMS 

overpayment recovery processes. 

As noted previously, after the 

Medicare program makes the final 

payment, the vendor would be allowed 

to bill the beneficiary or the 

beneficiary’s third party insurance, or 

both. 

The following diagram demonstrates 

the proposed delivery system:

3. Dispute Resolution 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Dispute Resolution’’ at the 

beginning of your comments.] 

Section 1847B of the Act is generally 

silent with regard to the treatment of 

disputes surrounding the delivery of 

drugs and the denial of drug claims. 

Section 1847B(b)(2)(A)(ii)(II) of the Act 

does contain a reference to a grievance 

process which is included among the 

quality and service requirements 

expected of vendors. 

We have given substantial 

consideration to the applicability of the 

Medicare Part B administrative appeals 

process found at 42 CFR 405.801 et seq.

We believe the traditional Part B 

appeals process continues to be the 

appropriate dispute resolution process 

for beneficiaries and physicians seeking 

review of drug administration claims 

that have been denied by the local 

carrier for any of the reasons described


EP04MR05.001</GPH>
10758 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

in § 405.803(a). Those reasons include 

the following: (1) Services were not a 

covered benefit; (2) Deductible was not 

met; (3) No evidence of acceptable 

payment; (4) Charges for services were 

unreasonable; and (5) Services 

furnished were not reasonable and 

necessary. 

We see several reasons why disputes 

raised by the vendor regarding the 

nonpayment of a drug claim by the 

designated carrier cannot be adjudicated 

by application of the traditional Part B 

appeals process. First, the designated 

carrier’s denial is based on the lack of 

a unique prescription ID number match 

in the central claims processing system. 

This reason does not meet any of the 

appeal criteria in § 405.803(a). Second, 

given the ministerial aspect of the 

designated carrier’s prescription number 

matching task, an informal process 

focused on getting the underlying 

physician drug administration claim 

properly filed and adjudicated is a more 

effective remedy. Finally, we believe 

application of the progressive 

alternative dispute resolution process 

described below represents a better use 

of program administration resources. 

We encourage physicians, 

beneficiaries and vendors to use 

informal communication to resolve 

service-related administration issues 

that occur in a delivery and payment 

system of this complexity. However, we 

recognize a certain percentage of these 

disputes will require the intervention of 

a neutral third party. Our proposed 

dispute resolution process is set forth in 

regulations at proposed § 414.916. 

a. Resolution of Vendor’s Claim 

Denial. The physician has exclusive 

control of the claim filed with the local 

carrier for drug administration services.

The vendor will not be a party to the 

appeal a physician may file if his or her 

drug administration claim is denied. 

The vendor’s drug claim may be denied 

by the designated carrier if there is no 

unique prescription number match in 

the central claims processing system. 

The vendor cannot bill Medicare for the 

cost of a drug and cannot bill the 

beneficiary for the appropriate 

deductible or coinsurance. 

The vendor may track its business 

with the individual physicians who 

order drugs. When a vendor is not paid 

and the total dollar amount of the 

vendor’s loss exceeds an acceptable 

threshold, then the vendor may ask the 

designated carrier to counsel the 

physician on his or her obligation under 

the CAP election agreement to file a 

clean claim and pursue an 

administrative appeal in accordance 

with his or her CAP participation 

agreement. The particulars of the 

participating CAP physician’s CAP 

election agreement are outlined in 

§ 414.908(a)(3) of our regulations. We 

seek comment on the appropriate 

amount for the vendor’s loss threshold. 

If problems persist, we propose the 

vendor may ask the designated carrier to 

review the situation and potentially 

recommend a suspension of the 

physician’s CAP participation 

agreement. The designated carrier will 

gather and review the relevant facts, and 

make a recommendation to CMS on 

whether the physician has been filing 

his or her CAP administration claims in 

accordance with the requirements for 

CAP participation. We would review the 

recommendation of the designated 

carrier and, if necessary, gather 

additional information before deciding 

whether to revoke the physician’s 

election to participate in the CAP for a 

period not to exceed the end of the 

following CAP election cycle. 

The physician may appeal our initial 

decision through the process articulated 

in proposed § 414.916. 

b. Resolution of Physicians’ Drug 

Quality and Service Complaints. Issues 

connected with drug quality will be 

given a top priority. Both the vendor 

and the designated carrier will be 

required to have qualified staff available 

to address drug quality complaints upon 

their receipt. The physician’s first point 

of contact for quality related issues will 

be the vendor. If the issue is not 

resolved to the physician’s satisfaction 

through the vendor’s grievance process, 

the physician may escalate the matter to 

the designated carrier immediately. 

We recognize the physician’s need for 

a process to treat vendor service issues 

as well. Service issues may include 

timeliness of delivery and quantity of 

the drug ordered. We propose that a 

physician be allowed to request 

intervention from the designated carrier. 

We propose the designated carrier will 

attempt to develop solutions that will 

satisfy both parties. The designated 

carrier will create a quarterly 

compendium of the issues and solutions 

to share with us. 

c. Resolution of Beneficiary Billing 

Issues. The beneficiary would receive a 

medical summary notice (MSN) from 

the local carrier indicating whether the 

physician’s drug administration claim 

has been paid or denied. If the drug 

administration claim has been denied, 

the MSN will reflect a message 

instructing the beneficiary no 

deductible or coinsurance may be 

collected for the drug. If the beneficiary 

receives a bill for coinsurance from the 

vendor, the beneficiary may participate 

in the vendor’s grievance process to 

request correction of the vendor’s file. If 

the beneficiary is dissatisfied with the 

result of the vendor’s grievance process, 

the beneficiary may request intervention 

from the designated carrier. The 

designated carrier will first investigate 

the facts and then facilitate correction to 

the appropriate claim record and 

beneficiary file. If the vendor requires 

targeted education on the subject of 

beneficiary billing the designated carrier 

will initiate that effort.

C. CAP Contracting Process 

1. Quality and Product Integrity Aspects 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Contracting Process-Quality 

and Product Integrity Aspects’’ at the 

beginning of your comments.] 

Sections 1847B(b)(2), 1847B(b)(3), and 

1847B(b)(4) of the Act address the issue 

of quality under the competitive 

acquisition process at both the product 

and vendor level. We propose to use the 

evaluation process to ensure that these 

quality aspects are met. 

a. Information to Assess and Ensure 

Quality. Sections 1847B(b)(2)and 

1847B(b)(3) of the Act specifically 

require that potential CAP vendors meet 

financial and quality of care 

requirements aimed at assuring the 

stability and safety of the CAP program. 

Section 1847B(b)(2)(A) of the Act 

requires that vendors have sufficient 

capacity to acquire and deliver drugs in 

a timely manner within the geographic 

area, to deliver drugs in emergency 

situations, and to ship drugs at least 5 

days each week. This section also 

requires that vendors meet quality, 

service, financial performance, and 

solvency standards, which include 

having procedures for dispute 

resolution with physicians and 

beneficiaries regarding product 

shipment, and having an appeals 

process for the resolution of disputes. 

We propose that CMS be allowed to 

suspend or terminate a vendor’s 

contract if the vendor falls out of 

compliance with any of these quality 

requirements. Section 1847B(b)(2)(B) of 

the Act states that the Secretary may 

refuse to award a contract, and may 

terminate a contract if the entity’s 

license to distribute drugs (including 

controlled substances) has been 

suspended, or revoked, or if the entity 

is excluded from participation under 

section 1128 of the Act. We note this 

requirement is enforced through the 

routine provider enrollment form 

monitoring process. Finally, section 

1847B(b)(3)(C) of the Act states that the 

ability to ensure product integrity must 

be included in the criteria for awarding 

vendor contracts. 

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At a minimum, we seek to define a set 

of overall financial and quality 

standards that would ensure that 

reputable, and experienced vendors are 

chosen to participate in the CAP. These 

features are important for a number of 

reasons. Physicians would be reluctant 

to participate in the CAP if they have 

little confidence that CAP vendors 

would be reliable and provide quality 

CAP products. Also, given the 

importance of the drugs and biologicals 

currently covered under Medicare Part 

B to beneficiaries, CAP vendors would 

be required to provide quality products 

in a timely manner. 

Section 1847B(b)(4)(C) of the Act 

specifies that any contractor selected for 

this program ‘‘shall (i) acquire all drugs 

and biological products it distributes 

directly from the manufacturer or from 

a distributor that has acquired the 

products directly from the 

manufacturer; and (ii) comply with any 

product integrity safeguards as may be 

determined to be appropriate by the 

Secretary.’’ We propose to include this 

requirement in the contracts signed 

between CMS and vendors providing 

drugs or biologicals under this section. 

However, we invite comment on what 

records or other evidence that bidders 

would be required to furnish and 

approved vendors would be required to 

maintain during the contract period. 

b. Product Integrity. Section 

1847B(b)(3)(C) of the Act states that the 

Secretary must consider the ability of 

the applicant to ensure product 

integrity. We propose that the 

evaluation include, but not be limited 

to, the applicants’ ability to assure that 

products are not adulterated, 

misbranded, spoiled, contaminated, 

expired, or counterfeit. This means that 

at a minimum, all drugs and biologics 

utilized in this program must be 

licensed under section 351 of the Public 

Health Service Act or approved under 

section 505 of the Federal Food, Drug, 

and Cosmetic Act. Vendors would also 

be required to comply with sections 501 

and 502 of the Federal Food, Drug, and 

Cosmetic Act concerning adulteration 

and misbranding. 

Additionally, applicants would be 

required to employ trained personnel, 

have appropriate physical facilities, and 

utilize adequate security measures to 

assure that processing, handling, 

storage, and shipment of drugs and 

biologicals are adequate to maintain 

product integrity. Because Federal 

statutory and regulatory requirements 

are designed to meet the standards in 

the paragraph above, we propose to 

require that all applicants comply with 

State licensing requirements and be in 

full compliance with any State or 

Federal requirements for wholesale 

distributors of drugs or biologics in 

States where they furnish drugs for the 

CAP. 

Although we are not proposing to 

require applicants to employ measures 

beyond those required for licensure and 

regulatory compliance, we do believe 

those are a minimum standard, and we 

will request that applicants discuss any 

additional measures they have taken to 

assure product integrity. For a more 

complete discussion of measures 

available for wholesale distributors to 

deter and detect counterfeit drugs, we 

ask applicants to review the report on 

counterfeit drugs issued by the Food 

and Drug Administration (FDA) on 

February 18, 2004. This report, 

‘‘Combating Counterfeit Drugs,’’ is 

available on the FDA Web site at

http://www.fda.gov/counterfeit. At this 

time, we propose that applicants 

describe measures taken to ensure drug 

product integrity on the vendor 

application form. 

Examples of additional measures that 

pose minimal burden, but greatly 

enhance the ability to detect 

adulterated, misbranded or counterfeit 

drugs that wholesale distributors have 

taken to assure product integrity include 

the following:

—Complying with the ‘‘Recommended 

Guidelines for Pharmaceutical 

Distribution System Integrity’’

developed by the Healthcare 

Distribution Management Association, 

available at 

www.healthcaredistribution.org.

Among other things, these guidelines 

contain recommended measures for 

due diligence to ensure the integrity 

and legitimacy of supply chain 

business partners including the 

performance, by a wholesale 

distributor, of extensive corporate and 

personnel background checks as well 

as a physical facility inspection of 

another wholesale distributor prior to 

entering into a business relationship.

—Cooperating with Federal and State 

authorities in their investigations of 

suspected counterfeit drugs. 

—Establishing mechanisms to obtain 

timely information about suspected 

counterfeits in the marketplace and to 

educate their employees on how to 

identify them. 

—Notifying appropriate State and 

Federal authorities within 5 business 

days of any suspected counterfeit 

products discovered by the 

wholesaler. 

c. Financial Performance and 

Solvency Standards. Section 

1847B(b)(2) of the Act discusses the 

financial performance and solvency 

standards we must develop for entities 

that seek to become vendors. We 

propose to fold integrity and internal 

control aspects of fiscal responsibility 

into this analysis. 

While licensure by the State to 

distribute drugs may assess some degree 

of financial responsibility, we believe 

the focus and depth of financial 

capability evaluations associated with 

licensure may vary across States. We 

seek to assess bidders’ financial 

solvency in a consistent manner that 

will demonstrate appropriate scrutiny 

without creating unnecessary burden on 

the bidders. We propose using criteria 

from the Federal Acquisition Regulation 

(FAR) Section 9.104 and following 

standards for ‘‘responsible contractors’’

as a baseline standard. The FAR 

standards also contain nonfinancial 

components that address areas such as 

integrity, performance, and ethics. We 

seek to add standards that would 

demonstrate the following:

—Overall Capitalization and Financial 

Capability. We propose that bidders 

furnish a copy of their most recent 

year’s audited financial statements. 

Specific items, such as net worth, 

could be used in the evaluation 

process. We seek comment on the 

potential validity of specific financial 

indicators for this process and 

whether or not specific thresholds 

would be applicable. We also seek 

comment on this overall requirement 

from potential bidders, such as group 

purchasing organizations (GPOs), who 

do not routinely take possession of 

drug products. 

—Working Capital. We propose to 

review the audited financial 

statements to determine if the bidder 

has adequate working capital to meet 

contractual obligations. Ratios of 

current assets to current liabilities, 

total liabilities to net worth, and cash 

or cash equivalents to current 

liabilities are commonly used to 

assess financial capability (see the 

form at FAR 53.301–1407). Given the 

3-year contract duration, we seek 

comments regarding the 

appropriateness of these tests, and 

thresholds to apply for the ratios. 

—Record of Integrity. We propose that 

the bidders supply us with applicable 

information on whether any of the 

bidder’s Board of Directors, 

employees, affiliated companies, or 

subcontractors—

• Know they are under investigation 

by any State, Federal, or Local 

Government agency related to a fraud 

issue; and 

• Have escrowed money in 

anticipation of, or entered into a 

10760 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

settlement agreement or corporate 

integrity agreement with any State or 

Federal Government agency related to a 

fraud issue. 

We would also request bidders to 

provide a conflict of interest mitigation 

plan to address financial relationships 

the bidder may have with manufacturers 

of drugs or biologicals in the CAP. 

—Internal Control. We propose to 

review information relating to the 

establishment and effectiveness of the 

bidder’s internal control system 

designed to provide reasonable 

assurance financial and compliance 

objectives. Examples of information that 

we may review as evidence of the 

design and effectiveness of a bidder’s 

internal control system include previous 

Statement on Auditing Standards 70 

review results, independent third party 

reviews of the system, or other related 

information as we deem appropriate.

We propose to set forth these 

requirements in regulations at proposed 

§ 414.908. 

Deemed Compliance 

Some vendor applicants may already 

be subject to financial oversight by one 

or more State or Federal regulators. The 

vendor’s current financial reporting may 

satisfy one or more of the above 

requirements. We propose to request 

documentation of this parallel oversight 

together with contact information for 

the regulator. We would contact the 

regulator to inquire as to the vendor’s 

status and we may deem certain 

portions of the above requirements 

‘‘met’’ at our discretion. 

2. Bidding Entity Qualifications 

a. Quality and Financial 

Information—Vendor Application.

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Bidding Entity Qualifications’’

at the beginning of your comments.] 

The vendor would be responsible for 

completing and meeting all criteria on 

both the Vendor Application Form and 

the Provider/Supplier Enrollment 

Application (Form CMS 855B) (for this 

purpose, vendors will be considered 

suppliers) by the established deadlines 

in order to be considered as a potential 

vendor under the CAP. For example, if 

a vendor has been excluded from 

participation in a Federal health 

program, or has been convicted of a 

fraud-related crime, the vendor must 

record that on the form 855B. CMS 

would treat these admissions from 

vendors in the same manner as it does 

for other suppliers. Both the Vendor 

Application Form and the Provider/

Supplier Enrollment Application (Form 

CMS 855B) would be available on the 

CMS Web site at the following address: 

http://www.cms.hhs.gov/providers/

drugs/). Both forms are needed to cover 

all required vendor qualifications. 

However, the forms cannot be 

completed online. They must be 

printed, completed and mailed to CMS. 

We would require that the vendor be 

prepared to offer complete information 

in four major areas and also to complete 

a certification statement. The vendor’s 

business experience would be required 

to be within the United States. Also 

required on the Vendor Application 

Form would be a complete list of drugs 

that the vendor would intend to bid by 

National Drug Code (NDC) number. 

Management and Operations 

We propose to require that the vendor 

attest that adequate administrative 

arrangements are in place to ensure 

effective operations, such as but not 

limited to, policies that assure that 

business is conducted in the best 

interest of the customer, maintenance of 

fidelity bonds, and insurance policies to 

cover losses. General identifying 

information would also be required 

such as business name, address, 

taxpayer identification number, contacts 

representing the organization, and a 

description of the organization’s 

structure. In addition, each 

subcontractor, subsidiary, or business 

affiliate that is used by the vendor under 

the CAP would be required to provide 

the same information. 

Experience and Capabilities 

The vendor would be required to 

maintain the operation of a grievance 

process so that physician, beneficiary, 

and beneficiary caregiver complaints 

can be addressed. We expect vendors to 

provide a prompt response to any 

inquiry as outlined in the vendor 

application form. We would require that 

vendors maintain business hours on 

weekdays and weekends with staff 

available to provide customer assistance 

for the disabled, including the hearing 

impaired, and to Spanish speaking 

inquirers. Vendors would also be 

required to provide toll free emergency 

assistance when the call center is 

closed. Customer service is a primary 

consideration, especially the ability to 

respond on an emergency basis to 

physicians. In addition, we would 

require that a working telephone 

customer service number be submitted 

and will be verified during the bid 

evaluation process. 

Section 1847B (b)(2)(A)(i)(II) of the 

Act gives some guidance regarding 

timeframes for routine and emergency 

shipment, however, the statute does not 

provide specific definitions of these 

timeframes. Therefore, we are seeking 

public comment on how to define 

timely delivery for routine and 

emergency drug shipments. For the 

purposes of this discussion, we propose 

that the delivery time period would 

begin when a drug order is received by 

the vendor and would end at the time 

of delivery to the physician’s office or 

other intended setting. We propose that 

routine shipments of drugs furnished 

under the CAP would occur within a 

one to two business day time period. 

However, the duration of the delivery 

time period must not exceed the drug’s 

stability in appropriate shipping 

containers and packaging. We seek 

comments on the feasibility of requiring 

a shorter duration for routine delivery of 

CAP drugs. We also propose that 

emergency drug orders be furnished on 

the next day for orders received by the 

vendor before 3 p.m. (vendor’s local 

time), however, we seek comments on 

the feasibility of providing same-day 

deliveries for orders received for 

emergency situations.

We propose to require that vendors 

maintain a formal mechanism for 

responding to complaints from 

physicians, beneficiaries, and their 

caregivers (if applicable). We propose 

that evidence of this mechanism, in the 

form of any complaint resolution 

manuals, agendas, and minutes from 

complaint resolution committee 

meetings, or other evidence would be 

submitted as part of the bid application. 

In addition to providing an audited 

financial statement as an attachment, we 

propose that the vendor be required to 

present a standardized summary of 

financial information on the collection 

form. We would require the vendor to 

have been in the business of furnishing 

Part B injectable drugs for at least 3 

years. We seek comment on this 

standard, especially on whether the 

requirement of 3 tax reporting years of 

experience would prevent newer 

vendors with sufficient experience and 

resources from being included in the 

program. The vendor would be prepared 

to offer and substantiate the drug 

volume managed (dollars and units) for 

the immediate previous calendar year. 

Also, the vendor would be asked to 

provide specific personnel statistics 

such as the number of staff assigned to 

various activities, and its policy-making 

organizational structure within the 

United States, including a discussion of 

the membership of this body and to 

whom it reports. 

Finally, by virtue of the fact that 

selected vendors would be enrolled 

Medicare suppliers, a vendor would be 

a health care provider and would be a 

covered entity under the HIPAA 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10761

Administrative Simplification Rules, to 

the extent that it conducts any of the 

standard HIPAA transactions 

electronically. As a covered entity, 

vendors would be required to comply 

with the Administrative Simplification 

rules, including the Privacy Rule. 

Licensure 

The vendor would be required to 

maintain an appropriate license in each 

State in which the drug vendor seeks to 

operate under the CAP. We would also 

require that the vendor certify that any 

subcontractor or subsidiary also 

maintains a license that complies with 

State regulations in every applicable 

State. 

Business Integrity 

The vendor is responsible for 

identifying and disclosing business 

relationships and conflicts of interest as 

well as potential conflicts of interest 

with other organizations. Also, the 

vendor is required to answer questions 

and provide information about fraud 

investigations, settlement agreements, 

and Federal government exclusions. 

Certification 

We propose that the vendor be 

prepared to certify that all the 

information in the Vendor Application 

Form is true, accurate, and complete 

and to certify to any other requirements 

as specified by CMS. Failure to provide 

correct and updated information when 

it becomes available, if it affects the 

information provided on the Vendor 

Application Form may be cause for 

termination of the vendor’s contract 

under the CAP. 

b. Specific Information Relating to 

Prevention of Fraud and Abuse.

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Contracting Process-Quality 

and Product Integrity Aspects’’ at the 

beginning of your comments.] 

Section 1847B(b)(4)(D)(ii) of the Act 

requires that the drug vendor comply 

with all applicable provisions relating to 

the prevention of fraud and abuse. This 

includes compliance with applicable 

guidelines of the Department of Justice 

(DOJ) and the Inspector General of the 

Department of Health and Human 

Services (OIG). In accordance with this 

statutory authority, we propose that 

each CAP vendor develop and maintain 

a compliance plan to control program 

fraud, waste, and abuse, that includes at 

a minimum, the requirements proposed 

at § 414.914(c) of our regulations. These 

requirements already apply to many of 

the entities participating in the 

Medicare program, such as prescription 

drug plans administering the 

prescription drug benefit and Medicare 

Advantage organizations. In addition, 

the OIG has recommended these 

minimum elements in published 

guidance. 

A compliance plan should contain 

policies and procedures that control 

program fraud, waste and abuse. In 

developing written policies, procedures, 

and standards of conduct for detecting 

and preventing waste, fraud and abuse, 

CAP vendors should consult a variety of 

sources including applicable statutes 

and regulations and compliance 

guidance issued by CMS, its contractors, 

Program Safeguard Contractors (PSCs), 

and the OIG. Publications that may 

provide relevant information include 

the OIG’s Program Compliance 

Guidance for Pharmaceutical 

Manufacturers, (68 FR 23731) and OIG’s 

voluntary Provider Self-Disclosure 

Protocol, (63 FR 58399). We propose 

that CAP vendors also consider industry 

best practices in developing their 

compliance plans.

We propose that vendors establish 

effective training and education 

programs related to waste, fraud, and 

abuse that address pertinent laws 

related to fraud and abuse including the 

Anti-Kickback law and the False Claims 

Act. In addition, we propose that CAP 

vendors and contracted entities be 

trained on detecting and preventing 

common fraudulent schemes in the 

pharmaceutical industry, as identified 

by CMS, the OIG, and/or the DOJ. Some 

examples of common fraudulent or 

abusive problems within the 

pharmaceutical industry include—

Lack of integrity of data used to 

establish payment amounts; 

Kickbacks and other illegal 

remuneration; and 

Lack of compliance with laws 

regulating drug samples. 

To ensure successful internal 

monitoring and auditing of waste, fraud, 

and abuse under Part B, we propose that 

CAP vendors should regularly monitor 

and audit their processes and 

procedures to assure that they are in fact 

taking the steps necessary to comply 

with all Federal and State regulations 

and to mitigate the potential for waste, 

fraud, and abuse within their 

organizations. Industry best practices 

related to fraud, waste, and abuse 

detection include the use of proactive 

data analysis and or other analytical 

processes to detect and address 

potential fraud. Establishing procedures 

to ensure prompt responses to potential 

fraud violations is an important element 

in an effective fraud and abuse plan. 

CAP vendors would be responsible for 

monitoring and identifying potentially 

fraudulent or abusive activity. For 

assistance in identifying what 

constitutes abusive or fraudulent 

activity, CAP vendors may consult a 

variety of sources including media 

reports, DOJ litigation history, OIG 

published guidance and CMS policy 

manuals. After a CAP vendor has 

determined that any misconduct has 

violated or may violate criminal, civil or 

administrative law, the CAP drug 

vendor should report the existence of 

the misconduct to OIG or other 

appropriate government authority 

within a reasonable period, but no later 

than 60 days after the determination 

that a violation may have occurred. Selfreporting of fraud and abuse is a critical 

element to an effective compliance plan, 

and CAP vendors are strongly 

encouraged to alert CMS, the PSCs, the 

OIG, or law enforcement of any 

potential fraud or misconduct relating to 

the CAP. We investigate all cases 

referred as potentially fraudulent and 

then refer them to the appropriate law 

enforcement agency as warranted. 

Likewise, we expect that the CAP 

vendors fully cooperate in any 

investigation that we or our law 

enforcement partners pursue related to 

fraud identified in a particular drug 

vendor’s organization. 

We are aware that there are many 

possible approaches to developing an 

effective compliance plan to implement 

a successful waste, fraud, and abuse 

program. Therefore, we are seeking 

comments on the scope and 

implementation of an effective 

compliance plan. 

c. Conflicts of Interest. Section 

1847B(b)(4)(D)(i)of the Act requires that 

drug vendors participating in the CAP 

comply with a code of conduct, 

specified or recognized by the Secretary. 

The statute authorizes CMS to establish 

codes of conduct related to conflicts of 

interest in bidding and performance for 

drug vendors. 

A code of conduct should function 

much like a constitution, that is, it 

should be a document that details the 

fundamental principals, values, and 

framework for action within an 

organization. We propose that the code 

of conduct for CAP vendors articulate 

the vendor’s expectations of 

commitment to compliance by 

management, employees, and agents, 

and summarize the broad ethical and 

legal principles under which the 

company must operate. 

Avoiding conflicts of interest or the 

appearance of such conflicts is critical 

to the operations of CAP. In accordance 

with our statutory authority under the 

Act, we propose to require that each 

CAP vendor establish and follow a code 

of conduct that addresses their policies 

10762 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

and procedures for identifying and 

resolving any conflict of interest. A 

conflict of interest may occur where a 

drug vendor, its representative, or 

contractor provides a product or service 

for a Medicare provider or beneficiary 

and the drug vendor, representative or 

contractor has a relationship with 

another person, entity, product or 

service that impairs or appears to impair 

the drug vendor’s or contractor’s 

objectivity to provide the Medicare 

covered product or service. Situations 

that compromise or appear to 

compromise a drug vendor’s ability to 

avoid self-dealing when providing a 

Medicare product or service create a 

conflict of interest and must be 

resolved. Drug vendors should take 

steps to identify and mitigate any 

conflict of interest that may arise in the 

provision of a product or service for a 

Medicare provider or beneficiary. 

We propose that the code of conduct 

communicates the need for all 

management, board of directors, 

employees, and agents to comply with 

the CAP vendor’s code of conduct and 

policies and procedures for addressing 

and resolving conflicts of interest. We 

propose that the code of conduct reflects 

the CAP vendor’s commitment to detect 

and resolve any conflict of interest. We 

propose further that the code of conduct 

establish procedures for determining 

whether or not a conflict exists, and if 

so, how the conflict will be resolved. 

We propose that the code of conduct 

address issues such as whether or not 

the offer or acceptance of some 

remuneration to or from a vendor, 

physician, beneficiary, or manufacturer 

would diminish, or appear to diminish, 

the objectivity of professional judgment; 

or whether or not certain transactions 

raise patient safety or quality of care 

concerns. 

In addition, throughout the 

solicitation of CAP contracts, we 

propose that drug vendors comply with 

the requirements of the FAR 

organizational conflict of interest 

guidance, found under 48 CFR Subpart 

9.5, and the requirements and standards 

contained in each individual contract 

awarded to perform functions under 

section 1847B of the Act. Consistent 

with FAR 9.507–2, in making awards to 

drug vendors, we propose that each 

contract contain a conflict of interest 

clause specific to the CAP vendor for 

inclusion in the contract. 

We are proposing fairly general 

conflict of interest requirements because 

we believe that individual contracts 

may be a better venue to address 

specific conflicts of interest. However, 

we solicit and welcome comments 

regarding what may or may not 

constitute a conflict of interest in the 

CAP program and how such conflicts 

might be identified and mitigated.

We propose to set forth our conflict of 

interest policies and procedures in 

regulations at proposed § 414.912. 

3. CAP Bidding Process—Evaluation 

and Selection 

a. Evaluating Bid Prices by the 

Composite Bid Price.

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Cap Bidding ProcessEvaluation and Selection’’ at the 

beginning of your comments.] 

In selecting vendors, the statute 

requires consideration of both price and 

non-price (for example, quality of 

service and financial qualifications) 

aspects of the bid. Once we have 

adopted technical and financial criteria 

for selecting CAP vendors, and bids 

have been submitted, the bids must be 

evaluated to determine which bidders 

will be awarded contracts to furnish 

drugs under the CAP. In the final rule, 

our ultimate choice of an appropriate 

evaluation process will take into 

account the final policies concerning 

the drug categories that will be bid, the 

geographic areas chosen for the 

program, and comments on our 

proposed evaluation process. In this 

proposed rule, we are proposing a basic 

approach to the evaluation and bidding 

selection process. We encourage 

comments on this proposal, and 

recommendations for alternative 

approaches. In the discussion of our 

proposal for the bidding process as set 

forth in § 414.910, and the various other 

options that we have identified, we 

assume that we are conducting 

competitive bidding for some number of 

distinct drug categories. We also assume 

that bidders with relatively large 

(including national) distribution 

networks might also want to submit bids 

for multiple acquisition areas 

(depending upon the area definitions 

that we adopt in the final rule). These 

bidders will be permitted to submit the 

same bid price for all areas in which 

they wish to compete, or to submit 

completely separate bid prices for each 

acquisition area. The procedure for 

evaluating the price component of bids 

(and setting payment rates) would be 

the same regardless of the exact method 

for defining categories of HCPCS drugs 

that is adopted in the final rule. Section 

1847B(c)(6) of the Act requires that the 

submitted bid price include all costs 

related to the delivery of the drug to the 

selecting physician, and the costs of 

dispensing (including shipping) of the 

drug and management fees. Costs 

related to the administration of the drug 

or wastage, spillage, or spoilage may not 

be included in the submitted bid. We 

proposed to specify these requirements 

at proposed § 414.910 of the bidding 

process. 

The purpose of requiring vendors to 

bid for all drugs in a category would be 

to determine a set of vendors that can 

supply the range of drugs in that 

category at an appropriate overall cost. 

Because bidders have different 

expectations of the discounts they can 

negotiate for drugs, one vendor may be 

able to bid a lower price for one drug, 

but may expect a lesser discount on 

another. We have therefore sought to 

identify a selection process that, in the 

aggregate, can provide drugs at 

reasonable cost to the program while 

maintaining the required quality 

standards. 

We are therefore proposing to employ 

a ‘‘composite bid,’’ constructed from the 

bid prices for the individual drugs in 

the CAP category, in the process of 

selected bidders for the CAP. The 

composite bid would be constructed by 

weighing each HCPCS bid by the 

HCPCS code’s share of volume 

(measured in HCPCS units) of drugs in 

a particular drug category during the 

prior year. Within each CAP category, 

the drug weights would sum to one. 

Based on data availability, the volume 

data used for bids in the first CAP 

bidding cycle (for supplying drugs 

starting January 1, 2006) would be from 

2004 since bidding is anticipated to 

occur in mid-2005. (At this time, we 

have not developed a method to weight 

drugs introduced during and after 2004, 

but invite public comment on methods 

for consideration.) The calculated 

composite bid would be equal to the 

average price per HCPCS unit for drugs 

in that category. In this way, the 

composite bid will be proportional to 

the expected cost to the program of 

acquiring drugs from that vendor 

(assuming the 2004 volume in each 

HCPCS category is roughly proportional 

to volume in 2006). If one vendor has 

a lower composite bid than another, it 

will also have a lower expected cost of 

supplying all drugs in the particular 

CAP category. 

To illustrate how the composite bid 

would be calculated, we are providing 

the following example. Suppose that 

there are four drugs in a particular CAP 

drug category (Drug A, Drug B, Drug C, 

and Drug D). The first column of Table 

2 below provides the total volume 

(HCPCS units) of these drugs 

administered in 2004 for this 

hypothetical drug category.

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10763

TABLE 2.—EXAMPLE DRUG VOLUMES

AND RELATIVE VOLUMES, 2004 

Drug 

Total

HCPCS

units 

Relative

volume 

Drug A .............. 1,452,472 0.3520 

Drug B .............. 988,586 0.2395 

Drug C .............. 1,671,567 0.4050 

Drug D .............. 14,302 0.0035 

Total ........... 4,126,927 1.0000 

Three drugs (Drugs A, B, and C) have 

volumes (total HCPCS units) much 

greater than that of the fourth (Drug D). 

The second column of Table 2 gives the 

relative volumes, computed by dividing 

the volumes of the individual 

components of this CAP category by the 

total volume of HCPCS units for drugs 

in this category. These relative volumes 

are the weights used to construct the 

composite bids. 

The computation of the composite 

bids for these four bidders is shown in 

Table 3. The composite bid for Bidder 

1 is computed as the weighted sum of 

the bids for the four drugs: ($520 ×

0.3520) + ($400 × 0.2395) + ($135 ×

0.4050) + ($4,780 × 0.0035), which is 

equal to $350.25. The composite bids for 

the other three bidders are computed 

similarly.

TABLE 3.—EXAMPLE COMPOSITE BID COMPUTATION

Drug Weight Bidder 1 Bidder 2 Bidder 3 Bidder 4 Low

bidder 

Drug A ...................................................................................................... 0.3520 $520 $530 $550 $530 1 

Drug B ...................................................................................................... 0.2395 400 410 380 390 3 

Drug C ...................................................................................................... 0.4050 135 105 135 120 2 

Drug D ...................................................................................................... 0.0035 4,780 4,830 4,430 4,800 3 

Composite Bid .......................................................................................... ................ 350.25 344.19 354.79 345.37 2 

As Table 3 illustrates, it is possible for 

a bidder to be the low bidder on more 

individual drugs than other bidders 

(Bidder 3, the low bidder for Drug B and 

Drug D), but have the highest composite 

bid. This is due to Bidder 3’s relatively 

high bid for Drug A and Drug C, which 

have the largest volumes (in HCPCS 

units). Also note that although Bidder 4 

is not the low bidder for any of the four 

drugs, its composite bid is the second 

lowest. 

As we have noted above, the statute 

requires consideration of price and nonprice (for example, quality of service 

and financial qualifications) aspects of 

the bid. In order to implement this 

requirement, we propose a two-step 

bidder selection: 

• First, certain quality and financial 

thresholds must be met by all bidders. 

• Then, winning bidders would be 

selected from those that meet the quality 

and financial thresholds on the basis of 

a method for evaluating the composite 

bids. 

We have considered several basic 

methods for evaluating the composite 

bids. From these alternatives, we have 

decided to propose a method that bases 

the selection of winning bidders on a 

predetermined threshold. Specifically, 

under the method we are proposing, we 

would select, from all those bidders that 

meet the quality and financial 

thresholds, up to the five lowest bidders 

for a drug category in each area. 

However, we would not select any bid 

for the category that is higher than 106 

percent of the weighted ASP for the 

drugs in that category. We believe that 

limiting the maximum bid price that we 

would accept is consistent with 

Congressional intent that the CAP 

promote savings. 

As an example of this computation, 

suppose that the ASPs for four drugs in 

the composite bid example above (see 

Table 2) are as follows: $516 for Drug A, 

$376 for Drug B, $111 for Drug C, and 

$4,831 for Drug D. Using the relative 

weights in Table 2, we would compute 

the composite bid threshold as 1.06 ×

($516 × 0.3520 + $376 × 0.2395 + $111 

× 0.4050 + $4,831 × 0.0035), which is 

equal to $353.56. In this example, three 

bidders (Bidder 1, 2 and 4) would be 

selected as CAP vendors. (See Table 4.)

TABLE 4.—EXAMPLE: PROPOSED COMPOSITE BID SELECTION METHOD

Drug Weight Bidder 1 Bidder 2 Bidder 3 Bidder 4 Bids

selected 

Drug A .............................................................................. 0.3520 $520 $530 $550 $530 ....................

Drug B .............................................................................. 0.2395 400 410 380 390 ....................

Durg C .............................................................................. 0.4050 135 105 135 120 ....................

Drug D .............................................................................. 0.0035 4,780 4,830 4,430 4,800 ....................

Composite bid ........................................................... .................... 350.25 344.19 354.79 345.37 ....................

Maximum bid ............................................................ .................... 353.56 353.56 353.56 353.56 1, 2, 4 

We are proposing this method for 

selecting bids for several reasons. This 

method is straightforward and relatively 

easy to implement. In addition, 

accepting no bid prices that exceed the 

payment level under the new ASP 

payment methodology is consistent with 

one major purpose of the new 

competitive acquisition system, since it 

creates the possibility of realizing 

savings to the Medicare program. We 

believe that this method is preferable to 

other options. For example, one 

alternative to the method that we are 

proposing is simply to accept any 

composite bid for a drug category that 

is less than 106 percent of the weighted 

ASP for the drugs in that category. 

Under this method, it would be possible 

for every bidder to submit a bid price 

just below ASP plus 6 percent, in the 

confidence that the bid would be 

accepted. This method would thus limit 

the potential for savings to the program, 

compared to the bidding process that we 

are proposing. Under the process that 

we are proposing, bidders retain an 

10764 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

incentive to submit the best bid price 

that is possible for them. Thus, 

restricting the number of bidders that 

might be accepted provides for more 

competition in the bidding process than 

accepting all bidders under a designated 

threshold. In this proposed rule, we are 

therefore proposing to accept up to five 

composite bids, for a category of drugs, 

but we do not propose to accept any bid 

that exceeds a composite bid threshold 

of 106 percent of ASP. We would 

compute the composite bids, and the 

106 percent composite bid threshold, in 

the manner described in the examples 

above. We welcome comments on this 

proposal, and recommendations for 

alternative approaches. In the final rule, 

after we have considered the comments, 

we may adopt some variation of this 

proposal, or some alternative 

recommended by the commenters. 

b. Determining the Single Price for a 

Category of Drugs. Once the winning 

bidders have been identified, section 

1847B(d)(1) of the Act requires that a 

single price must be determined for 

each drug in a competitive acquisition 

area, ‘‘based on bids submitted and 

accepted.’’ We have considered a 

number of options for determining this 

single price on the basis of the accepted 

bid prices. In this proposed rule at 

§ 414.906(c)(1), (which describes the 

computation of the payment amount), 

we are proposing to establish a single 

price, for each drug in a competitive 

acquisition area, based on the median 

bid of the winning bidders. As a simple 

example of how this method might 

work, consider the bids for one drug 

submitted by the winning bidders under 

our proposed composite bid selection 

method (see Table 4). For Drug D, 

Bidder 1 submitted a bid of $4,780, 

Bidder 2 submitted a bid of $4,830, and 

Bidder 4 submitted a bid of $4,800. The 

median of these three bids is $4,800. 

Under this version of our proposed 

method, then, the single price for this 

drug would be $4,800. 

We are proposing to employ the 

median bid for several reasons. First, 

this method is straightforward and 

relatively easy to implement. In 

addition, this method could realize 

some savings to the Medicare program. 

Unless all accepted bids are at the level 

of the maximum allowable bid (106 

percent of ASP), this method for 

determining the single price would 

yield savings to the program. Finally, 

using the median of the acceptable bids 

is an obvious statistical method to 

determine a single price on the basis of 

using the information provided by these 

bids, as required by the statute.

In cases where there are four winning 

bidders for a drug category in an area, 

we will employ the average of the two 

bid prices in the middle of the array for 

a particular drug in that category in 

order to set the single prices for that 

drug. Specifically, if four bidders are 

selected, we would employ the average 

of the bids of the second and third 

highest bidders on each drug to set the 

price for the drug. If only two bidders 

are selected, we would use the average 

of the two bids for the drug to set the 

price for that drug. The qualified 

vendors would be made aware of the 

established price set for the CAP drugs 

before he or she signs the contract to be 

an approved vendor. 

We invite comments on this proposal 

and also invite commenters to 

recommend alternative approaches. 

After analyzing the comments, we may 

adopt some variation of this proposal, or 

some alternative recommended by the 

commenters, in the final rule. 

Section 1847B(d)(2) of the Act 

requires the Secretary to ‘‘establish rules 

regarding the use * * * of the 

alternative payment amount provided 

under section 1847A of the Act’’ for 

payment of a new drug or biological 

under the CAP. Section 1847A of the 

Act establishes the average sales price 

methodology for most drugs paid under 

Part B of the Medicare program. Section 

1847A(c)(4) of the Act further provides 

alternatives for the Secretary to 

determine the amount payable for new 

drugs during an initial period. In 

accordance with the requirement at 

section 1847B(d)(2) of the Act, we are 

proposing to apply the payment amount 

that we establish under section 1847A 

of the Act in the case of any drug or 

biological for which we determine 

that—(1) The drug or biological is 

properly assigned to a category 

established under the CAP; and (2) 

issuance of a new HCPCS code is 

required for the drug or biological. We 

would employ the payment amount 

determined in accordance with the 

methodology provided under section 

1847A(c)(4) of the Act until the next 

annual update of the single price 

amounts that we are proposing below. 

Section 1847B(b)(4)(B) of the Act 

provides that contracts for the 

acquisition of competitively biddable 

drugs under the CAP must be for a 

period of 3 years. Therefore, it is 

necessary to determine some 

mechanism for setting the single price 

for each category of drugs in the second 

and third years of this 3-year contract. 

We are proposing to employ the 

mechanism provided under section 

1847B(b)(7) of the Act for this purpose. 

That section provides for drug price 

adjustments on the basis of cost 

information provided by vendors to the 

Secretary. Specifically, that section 

provides that each contract must 

provide for disclosure to the Secretary 

of the vendor’s ‘‘reasonable, net 

acquisition costs’’ on a regular basis (not 

more often than quarterly). It further 

requires that contracts must provide for 

‘‘appropriate price adjustments over the 

period of the contract to reflect 

significant increases or decreases in a 

vendor’s reasonable, net acquisition 

costs, as so disclosed.’’ We are therefore 

proposing at § 414.906(c)(1) to update 

the CAP prices for each drug in a 

category in year 2 and year 3 based on 

the vendor’s ‘‘reasonable, net 

acquisition costs’’ for that category as 

determined by CMS based, in part, on 

information disclosed to the Secretary 

and limited by the weighted payment 

amount established under 1847A of the 

Act across all drugs in that category.

Section 1847B(c)(7) of the Act gives 

the Secretary the discretion to establish 

an appropriate schedule for the CAP 

vendor’s disclosure of this cost 

information to us, provided that 

disclosure is not required more 

frequently than quarterly. There are 

obviously a number of possible 

disclosure schedules. We are proposing 

to require that each vendor disclose to 

the Secretary its reasonable, net 

acquisition costs for the drugs covered 

under the contract annually during the 

period of its contract. Annual disclosure 

imposes the minimal burden on vendors 

consistent with employing this 

provision to determine the single price 

for drugs in the second and third years 

of a contract. More frequent disclosure 

(for example, quarterly) is, of course, 

also consistent with this purpose. We 

anticipate that the annual disclosure 

will be required in or around October of 

each year, to provide sufficient time to 

determine what, if any, update in drug 

prices would be appropriate for the 

following year. We invite comments 

regarding an appropriate disclosure 

schedule under section 1847B(b)(7) of 

the Act for this purpose. 

There are also a number of methods 

that we could adopt to develop an 

appropriate adjustment on the basis of 

the net reasonable cost information 

disclosed by vendors. 

We are proposing the following 

methodology. We would employ the net 

reasonable cost information disclosed 

by each vendor to determine whether 

the vendor has experienced significant 

increases or decreases in the reasonable, 

net acquisition costs across a category of 

drugs. For this purpose, we may 

establish a threshold percentage change 

(for example, 5 percent) in these costs, 

to determine whether the changes 

warrant computing an adjustment to the 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10765

single prices for the drugs in that 

category. If the change in the costs 

reported by a particular vendor meet 

this threshold, we would use a two-step 

process to recompute the single price for 

each drug in that class. First, we would 

adjust the bid price that the vendor 

originally submitted by the percentage 

change indicated in the information that 

the vendor disclosed. To return to the 

example discussed earlier, Bidder 1 

submitted a bid of $4,780, Bidder 2 

submitted a bid of $4,830, and Bidder 4 

submitted a bid of $4,800 for Drug D. 

The price for the drug in the first year 

of the contract is therefore the median 

of these three bids, or $4,800. Suppose 

that Bidder 1 submits information prior 

to the second year of the contract 

indicating that the reasonable, net 

acquisition costs for the drugs in a 

category have increased by 7 percent. At 

the same time, Bidder 4 submits 

information indicating that costs have 

increased by 10 percent. We would 

adjust each of the original bid prices for 

the drug accordingly. The bid price of 

Bidder 1 would increase from $4,780 to 

$5,115 ($4,780 × 1.07). Similarly, the 

bid price of Bidder 4 would increase 

from $4,800 to $5,280 ($4,800 × 1.10). 

Next, we would recompute the single 

price for the drug as the median of these 

adjusted bid prices. Specifically, the 

new single price for the drug would be 

$5,115, the median of $5,115, $4,830, 

and $5,280. 

It is important to note that this 

mechanism would apply in the case of 

any significant change in reasonable, net 

acquisition costs, whether those changes 

reflect increase or decreases in costs. It 

is therefore possible that the single price 

for a drug could decrease in the second 

or third year of a contract where, for 

example, acquisition costs for the drug 

have decreased because of the 

introduction of a generic equivalent. 

We would consider ‘‘reasonable, net 

acquisition costs’’ to be those costs 

actually incurred by the vendor that are 

necessary and proper for acquiring the 

drugs that the vendor is obligated to 

provide under a CAP contract. Actual 

acquisition costs are net of all discounts 

and rebates provided by the vendor’s 

own suppliers. We would require full 

disclosure of the vendor’s acquisition 

costs for drugs included in the CAP 

contract. We propose that this 

disclosure would reflect the vendor’s 

purchases of these drugs from all 

manufacturers, and the total number of 

units purchased from each 

manufacturer. The vendor would be 

required to submit full documentation 

reflecting these purchases, including 

contracts, invoices, and other 

agreements that reflect the actual 

purchase prices. This documentation 

would include all records reflecting 

discounts that result in a reduction of 

actual cost to the vendor. These 

discounts would include volume 

discounts, prompt pay discounts, cash 

discounts, free goods that are contingent 

on any purchase requirement, 

chargebacks, rebates, refunds, and other 

price concessions. 

We also propose to make more 

frequent adjustments (but not more 

often than quarterly) in three cases: 

introduction of a new drug, expiration 

of a drug patent, or a material shortage 

that results in a significant price 

increase for a drug. We may restrict the 

circumstances in which we would make 

adjustments to account for shortages to 

those in which the Secretary has 

declared a public health emergency 

under section 319 of the Public Health 

Service Act. We invite comments on 

this approach. 

We also welcome comments on every 

aspect of this discussion, especially on 

the frequency with which we would 

collect the requisite data and the precise 

manner in which we would calculate 

the changes in single drug prices. 

4. Contract Requirements 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Contract Requirements’’ at the 

beginning of your comments.] 

Sections 1847B(b)(4) of the Act 

discusses items to be incorporated in 

the contract entered into with a CAP 

vendor. These include the following:

—The length of the contract. 

—Assurance of the integrity of the drug 

distribution system. 

—A pledge to comply with code of 

conduct and fraud and abuse rules. 

—Assurance that drugs are only 

supplied directly to CAP physicians 

upon receipt of a prescription and 

other necessary data.

We propose to set forth the contract 

terms between CMS and the approved 

vendor as well as vendor 

responsibilities in proposed § 414.914.

5. Judicial Review 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Judicial Review’’ at the 

beginning of your comments.] 

Provisions of 1847(B)(g) of the Act 

concerning administrative and judicial 

review are set forth in regulations at 

proposed § 414.920. This section of the 

Act specifies aspects of the CAP that are 

not subject to administrative or judicial 

review. 

D. Implementation of the CAP 

1. Physician Election Process 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Physician Election Process’’ at 

the beginning of your comments.] 

Section 1847B(a)(1)(A) of the Act 

specifies that each physician is given 

the opportunity annually to elect to 

participate in the CAP. Payment for a 

charge for any drug or biological may be 

made only on an assignment-related 

basis in accordance with section 

1842(o)(3)(A) of the Act. Physicians who 

do not elect to participate in the CAP 

would continue to buy the drugs they 

provide to beneficiaries incident to a 

physician’s service and bill the 

Medicare program for them under 

section 1847A of the Act, the ASP 

methodology. 

Section 1847B(a)(5)(A) of the Act 

requires that we develop a process that 

physicians who wish to participate in 

the CAP may use on an annual basis to 

select the vendor from whom they wish 

to obtain drugs and the categories of 

drugs they wish to obtain under the 

CAP program. The statute also requires 

that we coordinate the physician’s 

election to participate in the CAP with 

the Medicare Participating Physician 

Process described in section 1842(h) of 

the Act. To inform physicians about the 

choices of drugs and vendors available 

to them under the CAP, we are required 

to post a directory on the CMS Web site 

or to make such a directory available to 

interested physicians on an ongoing 

basis. 

We propose that physicians who elect 

to participate in the CAP would remain 

in the program for at least 1 calendar 

year. As described in more detail later 

in this section, physicians who elect to 

participate in the CAP would be 

required to complete a CAP election 

agreement. We propose that by 

completing this CAP election 

agreement, the physician would select 

the approved vendor that he or she 

would use under the CAP and would 

agree to the CAP participating physician 

requirements. Under these 

requirements, the physician would 

agree to—

• Share information with the vendor 

to facilitate the collection of applicable 

deductible and coinsurance. 

• Promptly file claims. 

• Timely and appropriately pursue 

claims that are denied because of 

medical necessity issues. 

• Notify the vendor when a drug is 

not administered. 

• Maintain an inventory for each CAP 

drug he or she obtains. 

10766 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

Participating CAP physicians would 

also agree to comply with emergency 

drug replacement rules and 

requirements for using the ‘‘furnish as 

written’’ provision. If we find it 

necessary, we may revoke the 

physician’s election to participate in the 

CAP if the physician fails to abide by 

the CAP election agreement. 

We propose to initiate an annual CAP 

physician election process. We have 

modeled our proposed CAP physician 

election process after the Medicare 

Participating Physician Process to the 

extent possible. In addition, we 

communicated information to 

physicians about the upcoming CAP 

through the fact sheet that accompanied 

the 2005 Participating Physician 

Mailing, and plan to continue to use 

that vehicle to communicate 

information about CAP to physicians in 

future years. However, we note that the 

annual Physician Participation election 

process runs from November 14 to 

December 31 of each year. Waiting until 

December 31 to receive information 

about physicians’ CAP election choices 

would not provide sufficient time for us 

and our claims processing contractors to 

record information about CAP 

physicians and their drug category 

selections, update claims processing 

files, perform testing, and inform 

vendors so that we are ready to pay CAP 

claims on January 1, 2006. In addition, 

a deadline of December 31 would not 

allow sufficient time for vendors to meet 

the operational timeframe of January 1. 

Therefore, we propose that the CAP 

physician election process would run 

from October 1 to November 15 of each 

calendar year. We propose that 

physicians who intend to continue into 

subsequent years may signal that 

preference by executing an abbreviated 

CAP election agreement. The 

abbreviated agreement may be used to 

indicate a preference to change vendors 

or drug categories from year to year. We 

propose that a CAP participating 

physician may select a vendor outside 

the annual election process if the 

previously selected vendor ceases 

participation in CAP, or if the physician 

leaves the group practice that had 

selected the given vendor or relocates to 

another competitive area. We propose to 

specify the exceptions to the annual 

selection process at proposed 

§ 414.908(a)(2) of our regulations. 

We seek comment on the potential 

options available to affected physicians 

when a vendor leaves the program 

during the middle of the CAP year. 

Proposed physician options would 

include leaving the CAP or switching 

vendors as is required by the proposed 

CAP election agreement for the 

physician to participate in the CAP. We 

propose that, consistent with the 

Medicare Participating Physician 

Process, if members of a group practice 

elect to participate in the CAP, the 

entire practice would participate. Group 

practices enroll as a group, and are 

assigned a group PIN number to bill 

Medicare. Physician groups that elect to 

participate in the CAP would be paid for 

drug administration based on the group 

PIN number that they place on their 

claim. We propose that when a 

physician bills as a member of a group 

using the group PIN, he or she must 

follow the group’s election to participate 

or not to participate in the CAP. 

However, we also propose that if the 

physician in the group practice also has 

a solo practice, he or she may make a 

different determination to participate or 

not to participate in the CAP when 

using his or her individual PIN.

We also propose that consistent with 

the Medicare Participating Physician 

Process, new physicians would be given 

90 days in which to decide to elect to 

participate in the CAP. They would 

receive information about CAP when 

they enroll as a Medicare provider and 

would be instructed how to find the 

election information and forms on the 

CMS Web site. If they elect to 

participate, they would download the 

forms and submit them to their 

Medicare carrier. 

We propose to implement the 

following process: 

(1) We would prepare a posting on 

our Web site by October 1, describing 

the vendors we have selected to 

participate in the CAP, the categories of 

drugs they would be providing, and the 

geographic areas within which each 

vendor would operate. 

(2) We would publicize the 

availability of the CAP physician 

election information on our Web site via 

our physician listservs, and our 

Medicare fee for service contractors’

Web sites and newsletters. We would 

also coordinate with physician specialty 

organizations to enlist their assistance 

in informing their members that the 

physician election information is 

available. 

(3) Physicians would be asked to 

access the CAP election agreement on 

our Web site and determine whether 

they would like to elect to participate in 

the program. 

(4) Physicians who elect to participate 

would be asked to download, complete 

and sign the CAP election agreement. 

The CAP election agreement would 

require that they select the vendor(s) in 

their area from which they would like 

to obtain drugs and the categories of 

drugs they wish to obtain through the 

program. 

(5) Physicians would be instructed to 

return completed CAP election 

agreement to their local carrier. The 

CAP election agreement must be 

postmarked by November 15. 

(6) The local carrier would make note 

of the physician’s decision to participate 

in the CAP, and the vendor(s) and 

categories of drugs selected. 

(7) The local carrier would forward 

information from the CAP election 

agreement to the CAP designated 

carrier. 

(8) The designated carrier would 

compile a master list of all Medicare 

physician’s vendor and drug selections. 

In addition, the designated carrier 

would notify each CAP vendor of the 

physician who has elected to enroll 

with that vendor. 

(9) After the necessary claims 

processing files are prepared, the local 

carrier and the designated carrier would 

begin system testing to be ready to pay 

claims by January 1, 2006. 

As we become more experienced with 

the CAP program, we plan to evaluate 

these timeframes to determine if 

adjustments should be made to the dates 

for the CAP election process. The 

requirements concerning a physician’s 

election to participate in the CAP are set 

forth in regulations at proposed 

§ 414.908(a). 

2. Vendor or Physician Education 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Vendor or Physician 

Education’’ at the beginning of your 

comments.] 

To ensure that vendors and 

physicians have timely access to 

accurate Medicare program information 

regarding the CAP, we would instruct 

the CAP designated carrier to utilize 

various communication channels at the 

local and national levels to disseminate 

information about the CAP and assist 

vendors and physicians in 

understanding the Medicare program’s 

operations, policy, and billing and 

administration procedures regarding the 

CAP. The CAP designated carrier would 

be instructed to utilize data analyses in 

tailoring its outreach and educational 

efforts for vendors and physicians 

regarding identified areas of confusion 

about the CAP. Additionally, the CAP 

designated carrier would be instructed 

to utilize mass media, as well as 

educational and outreach products, 

services, forums, and partnerships in an 

effort to disseminate information about, 

and provide assistance regarding, the 

CAP to the vendor and healthcare 

practitioner communities. The 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10767

fundamental goal of the CMS provider 

outreach and education requirements of 

the CAP designated carrier would be to 

ensure that those who provide service(s) 

to beneficiaries receive the information 

they need to understand the Medicare 

program so that it is administered 

appropriately and billed correctly. As 

such, we would be involved in oversight 

of, and partnership with, the CAP 

designated carrier’s vendor and 

physician outreach and educational 

program regarding the CAP.

3. Beneficiary Education 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Beneficiary Education’’ at the 

beginning of your comments.] 

The CAP would have an impact on 

beneficiaries who receive physician 

administered drugs. If a physician elects 

to participate in the CAP, beneficiaries 

receiving services from this physician 

would receive a separate MSN from the 

designated carrier that processes 

invoices for the drug vendor as well as 

a bill from the drug vendor for the 

copayment of the drug. This may cause 

confusion for the beneficiary because he 

or she would only know that the drugs 

were administered by a physician. In 

addition, because the activity of the 

drug vendor would be transparent to the 

beneficiaries, they may question why 

they are receiving a bill from an 

unknown entity. 

To educate beneficiaries in a 

proactive fashion, we propose to 

develop a beneficiary-focused fact sheet, 

and to update existing related 

educational materials, to reflect these 

changes. The fact sheet would be 

available for physicians who elect to 

participate in the CAP to provide to 

beneficiaries at the time of service. It 

would explain the CAP and its impact 

on the beneficiary. We would also make 

this fact sheet available at 1–800–

MEDICARE, as well as on the 

www.medicare.gov website. Although 

we are not proposing to require 

physicians to provide beneficiaries with 

the fact sheet, we seek comment on the 

administrative burden associated with 

this activity. In addition, while we are 

not proposing to require any additional 

options for specific outreach, we are 

also interested in obtaining comments 

on other mechanisms that might be 

utilized to inform the beneficiary of 

services provided as part of the CAP 

(such as a notice constructed to allow 

the physician to specifically identify the 

drugs administered and the CAP vendor 

which could be handed out to 

beneficiaries at the end of a physician 

encounter) and the burden that would 

be associated with this mechanism. 

We also propose to provide 

information about CAP in the 2006 

versions of the Medicare & You 

handbook and Your Medicare Benefits. 

The handbook is mailed annually to 

each beneficiary household. Your 

Medicare Benefits is available upon 

request at 1–800–MEDICARE, as well as 

on the http://www.medicare.gov Web 

site. Information would also be 

provided to the 1–800–MEDICARE 

helpline so that operators can answer 

CAP related questions. The http://

www.medicare.gov Web site would also 

have consumer-friendly information 

available about CAP. 

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 30-

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether 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: 

Section 414.906 Competitive 

Acquisition Program as the Basis for 

Payment 

A physician who elects to participate 

in the program and has selected an 

approved vendor, must provide 

information to the approved vendor to 

facilitate collection of applicable 

deductible and coinsurance as described 

in § 414.906(a)(3). 

The burden associated with this 

requirement is the time and effort 

necessary for the physician to provide 

the information to the vendor to 

facilitate collection of applicable 

deductible and coinsurance. CMS is 

requesting public comment on the 

extent of burden associated with this 

requirement. In the final rule CMS will 

quantify the amount of burden 

associated with this requirement based 

upon public input.

Section 414.908 Competitive 

Acquisition Program 

A physician is provided an 

application process for the selection of 

an approved vendor on an annual basis. 

The CAP election agreement will 

facilitate physician enrollment and 

designation of their approved CAP 

vendor and agreement to abide by the 

CAP program requirements. 

The burden associated with this 

requirement is the time and effort 

necessary for the physician to enroll and 

designate an approved CAP vendor. We 

estimate that it will require 70,000 

physicians 15 minutes each to fulfill the 

application requirements. 

In addition, physicians participating 

in the CAP must elect to use an 

approved vendor for the drug category 

area as discussed in § 414.904(a)(1); 

submit a written order or prescription to 

the approved vendor; not receive 

payment for the competitively biddable 

drug except as described in 

§ 414.906(c)(2)(ii); provide information 

to the approved vendor to facilitate 

collection of applicable deductible and 

coinsurance as described in 

§ 414.906(a)(3); notify the approved 

vendor when a drug is not administered; 

maintain a separate electronic or paper 

inventory for each CAP drug obtained; 

agree to file the Medicare claim when 

the drug is administered. 

The burden associated with this 

requirement is the time and effort 

necessary for the physician to provide 

and/or maintain the information 

required as discussed above. CMS is 

requesting public comment on the 

extent of burden associated with this 

requirement. In the final rule CMS will 

quantify the amount of burden 

associated with this requirement based 

upon public input. 

Section 414.910 Bidding Process 

Vendors may bid to furnish 

competitively biddable drugs in all 

areas of the United States, or a specific 

region that meets the requirements of 

this section. 

The burden associated with these 

requirements is the time and effort 

necessary to submit the bid application, 

supporting documentation, and 

maintain necessary documentation 

demonstrating that the requirements set 

forth in the contract have been or will 

be met. 

We estimate that it will require 25 bid 

applicants 40 hours each to meet the 

bidding and contract requirements. 

10768 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

Section 414.914 Terms of Contract 

The terms of the contract between 

CMS and the approved vendor will be 

for a term of 3 years. During the contract 

period the vendor must disclosure to 

CMS or its agent, the approved vendor’s 

reasonable, net acquisition costs for a 

specified period of time, on at least an 

annual basis. 

The burden associated with these 

requirements is the time and effort 

necessary for the vendor to submit to 

CMS or its agent, the vendor’s 

reasonable, net acquisition costs for a 

specified period of time, at least on an 

annual basis. 

We estimate that it will require each 

of the 10 vendors 8 hours on an annual 

basis to submit the necessary 

information, for total annual burden of 

8 hours per vendor. 

Section 414.916 Dispute Resolution 

Cases of an approved vendor’s 

dissatisfaction with denied drug claims 

are resolved through a voluntary 

alternative dispute resolution process. 

Since the requirements set forth in 

this section are in accordance with 

administrative action, audit, or 

investigation, the requirements of this 

section are exempt from the PRA as 

stipulated under 5 CFR 1320.4 (a)(2). 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following:

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Regulations Development Group, 

Attn: John Burke, CMS–1325–P, Room 

C5–13–28, 7500 Security Boulevard, 

Baltimore, MD 21244–1850; and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: Christopher Martin, CMS 

Desk Officer, CMS–1325–P, 

Christopher Martin@omb.eop.gov. Fax 

(202) 395–6974. 

IV. Response to Public 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. 

V. Regulatory Impact Analysis 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Regulatory Impact Analysis’’ at 

the beginning of your comments.] 

We have examined the impact of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), and Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

reassigns responsibility of duties) 

directs agencies to assess all costs and 

benefits of available regulatory 

alternatives and, when regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

must be prepared for final rules with 

economically significant effects (that is, 

a final rule that would have an annual 

effect on the economy of $100 million 

or more in any 1 year, or would 

adversely affect in a material way the 

economy, a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local, or tribal governments or 

communities). 

Since this rule is considered to be a 

major rule because it is economically 

significant, we have prepared a 

regulatory impact analysis. The RFA 

requires that we analyze regulatory 

options for small businesses and other 

entities. We prepare a Regulatory 

Flexibility Analysis unless we certify 

that a rule would not have a significant 

economic impact on a substantial 

number of small entities. The analysis 

must include a justification concerning 

the reason action is being taken, the 

kinds and number of small entities the 

rule affects, and an explanation of any 

meaningful options that achieve the 

objectives with less significant adverse 

economic impact on the small entities. 

For purposes of the RFA, physicians 

and non-physician practitioners are 

considered small businesses if they 

generate revenues of $8.5 million or 

less. Approximately 96 percent of 

physicians are considered to be small 

entities. There are in excess of 20,000 

physicians and other practitioners that 

receive Medicare payment for drugs. 

These physicians are more concentrated 

in the specialties of oncology, urology, 

and rheumatology. Of the physicians in 

these specialties, approximately 40 

percent are in oncology and 45 percent 

in urology.

The impact of this proposed rule on 

an individual physician is dependent on 

the drugs they provide to Medicare 

beneficiaries and whether these drugs 

are included in the categories of drugs 

considered for competitive acquisition 

and whether the physician chooses to 

obtain drugs administered to Medicare 

beneficiaries through the CAP. 

In addition, this proposed rule would 

have an impact on entities, either 

existing or formed specifically for this 

purpose, that are involved in the 

dispensing of drugs. This impact would 

be dependent on the categories of drugs 

and geographic areas that are 

determined to fall under the CAP and 

on their ability to successfully compete 

and receive approval as a vendor under 

the competitive acquisition program. 

Section 1102(b) of the Act requires us 

to prepare a regulatory impact analysis 

for any proposed rule that may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside a 

Metropolitan Statistical Area and has 

fewer than 100 beds. We have 

determined that this proposed rule will 

have no significant impact on the 

operations of a substantial number of 

small rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that may result in expenditures in 

any 1 year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $110 million. 

We have examined this proposed rule 

in accordance with Executive Order 

13132 and have determined that this 

regulation would have no consequential 

effect on the rights, roles, or 

responsibilities of State, local, or tribal 

governments. 

A. Anticipated Effects 

We have prepared the following 

analysis, related to the assessment 

requirements. It explains the rationale 

for, and purposes of, the rule, details the 

costs and benefits of the rule, analyzes 

alternatives, and presents the measures 

we are using to minimize the burden on 

small entities. As indicated elsewhere, 

we are making changes to method of 

payment for drugs in response to the 

requirements of section 1847B of the 

Act. We provide information on the 

options being considered in the 

development of the CAP in the relevant 

sections in this rule. The provisions of 

this rule discuss changes to our 

payment for drugs through the 

establishment of a competitive 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10769

acquisition process as an alternative 

payment system for Part B drugs and 

biologicals. This rule does not impose 

reporting, record keeping, and other 

compliance requirements except as 

described in sections II.C.3 and II.D.1 of 

the preamble. We are unaware of any 

relevant Federal rules that duplicate, 

overlap, or conflict with this rule. 

The effect of this proposed rule on an 

individual physician would be 

dependent on the drugs they provide to 

Medicare beneficiaries and whether 

these drugs are included in the 

categories of drugs considered for 

competitive acquisition. For example, a 

physician may—(1) Determine the cost 

associated with acquiring drugs through 

the competitive acquisition program, (2) 

determine the cost associated with 

acquiring drugs through traditional 

means and billing Medicare under the 

ASP plus six percent methodology, and 

(3) determine if there is a cost savings 

associated with either program. 

Different outcomes may result from 

these calculations depending on the 

drug mix, overhead cost, and patient 

mix.

A physician who elects to participate 

in the program would obtain all of their 

Medicare related drugs in categories for 

which CAP is implemented in their area 

through a competitive acquisition 

program vendor. The vendor would 

then collect applicable deductibles and 

coinsurance from the beneficiary. Under 

this option, the physician would never 

take legal ownership of the drug and 

would eliminate the cost associated 

with collecting deductibles and 

coinsurance. Because the drug remains 

the property of the vendor until the time 

of administration, the physician can 

also reduce the cost associated with 

storage and individual drug supplier 

negotiations. The CAP may also save 

physicians money since they would not 

be in the drug purchasing and 

procurement business and would not 

have to collect coinsurance from 

beneficiaries. 

This rule also proposes establishing 

rules whereby drugs and biologicals 

administered by the physician in 

emergency situations that were not 

originally acquired through a Medicare 

vendor may be resupplied through the 

Medicare competitive acquisition 

program vendor. 

B. Impact of Establishment of a 

Competitive Acquisition Program 

We have simulated the impact of the 

costs of furnishing or administering 

drugs through the competitive 

acquisition program and found it to be 

negligible. At this time we anticipate no 

additional cost savings or increases 

associated with the competitive 

acquisition program, particularly 

relative to the ASP + 6 percentages since 

the specific parameters under which the 

CAP will be operating (for example, 

specific drugs, physicians electing to 

participate in CAP) will be directed by 

this rulemaking and are not yet 

determined. Moreover, some of the key 

purposes of the CAP program are to 

provide alternatives to physicians who 

do not wish to be in the drug purchasing 

and coinsurance collection business. 

C. Alternatives Considered 

This proposed rule contains 

alternative approaches to implementing 

a competitive acquisition program for 

Part B drugs that we considered, each of 

which has been discussed in detail. We 

will select one of these approaches after 

reviewing all public comments received 

on the proposed rule and making any 

necessary modifications. 

D. Impact on Beneficiaries 

We have simulated the effect of 

changes in beneficiary coinsurance for 

drugs and related changes in beneficiary 

Part B premium payments resulting 

from the implementation of competitive 

acquisition program for Part B drugs. 

We have concluded that there will be no 

appreciable difference to the 

beneficiaries if their drugs were to be 

administered by a physician 

participating in the CAP or purchasing 

them at ASP plus 6 percent, thus there 

would be no cost or savings to the 

beneficiary whose physician 

participates in the CAP. 

We do not believe that any 

beneficiaries would experience drug 

access issues as a result of 

implementation of CAP. We intend to 

monitor beneficiary access closely and 

may propose additional changes to our 

payment system in the future if 

necessary. 

We propose to develop educational 

material to distribute to beneficiaries, 

such as pamphlets and a discussion in 

The Medicare Handbook, to help 

explain the CAP and the changes they 

will see on their Medicare summary 

notices. Specifically, under the CAP 

beneficiaries would now pay their 

coinsurance and deductibles to their 

CAP vendor instead of the 

administering physician. 

In accordance with the provisions of 

Executive Order 12866, the Office of 

Management and Budget has reviewed 

this regulation.

List of Subjects in 42 CFR Part 414

Administrative practice and 

procedure, Health facilities, Health 

professions, Kidney diseases, Medicare, 

Reporting and recordkeeping 

requirements.

For the reasons set forth in this 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR chapter IV as set forth below:

PART 414—PAYMENT FOR PART B 

MEDICAL AND OTHER HEALTH 

SERVICES 

1. The authority citation for part 414 

continues to read as follows:

Authority: Secs. 1102, 1871, and 1881(b)(1) 

of the Social Security Act (42 U.S.C. 1302, 

1395hh, and 1395rr(b)(1)).

Subpart K—Payment for Drugs and 

Biologicals Under Part B 

2. Revise the heading of subpart K as 

set forth above. 

3. Amend § 414.900 by—

A. Revising the section heading. 

B. Revising paragraph (a). 

C. Revising paragraph (b)(3)(ii). 

The revisions read as follows:

§ 414.900 Basis and scope. 

(a) This subpart implements sections 

1842(o), 1847A, and 1847B of the Act 

and outlines the two payment 

methodologies applicable to drugs and 

biologicals covered under Medicare Part 

B that are not paid on a cost or 

prospective payment system basis.

(b) * * *

(3) * * *

(ii) Pneumococcal and Hepatitis B 

vaccines.

* * * * *

4. Republish the introductory text to 

§ 414.902 and add the definitions of 

‘‘Approved vendor,’’ ‘‘Bid,’’ ‘‘CAP 

election agreement,’’ ‘‘Competitive 

acquisition program,’’ ‘‘Competitive 

area,’’ ‘‘Competitively biddable drugs,’’

‘‘Designated carrier,’’ ‘‘Local carrier,’’

and ‘‘Participating CAP physician’’ to 

read as follows:

§ 414.902 Definitions. 

As used in this subpart, unless the 

context indicates otherwise—

Approved vendor means an entity that 

has been awarded a contract by CMS to 

participate in the competitive 

acquisition program. 

Bid means an offer to furnish a 

competitively biddable drug within a 

category of competitively biddable 

drugs in a competitive area for a 

particular price and time period. 

Competitive acquisition program

(CAP) means a program as defined 

under section 1847B of the Act. 

CAP election agreement means the 

form that the physician must complete 

to notify CMS that he or she elects to 

participate in the CAP. 

10770 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

Competitive area means the 

geographic area established by the 

Secretary for purposes of implementing 

the CAP required by section 1847B of 

the Act. 

Competitively biddable drugs means a 

physician-administered drug or 

biological furnished on or after January 

1, 2006 described in section 

1842(o)(1)(C) of the Act. 

Designated carrier means an entity 

assigned by CMS to process and pay 

claims for drugs and biologicals under 

the Part B drug competitive acquisition 

program.

* * * * *

Local carrier means an entity assigned 

by CMS to process and pay claims for 

administration of drugs and biologicals 

under the Part B drug competitive 

acquisition program.

* * * * *

Participating CAP physician means a 

Medicare physician electing to 

participate in the CAP described in this 

subpart. The participating CAP 

physician must complete and sign the 

CAP election agreement.

* * * * *

5. Amend § 414.904 by revising the 

section heading to read as follows

§ 414.904 Average sales price as the basis 

of payment.

* * * * *

6. Add § 414.906 to read as follows:

§ 414.906 Competitive acquisition program 

as the basis for payment. 

(a) Program payment. Beginning in 

2006, as an alternative to payment 

under § 414.904, payment for a drug 

may be made through competitive 

acquisition if the following occurs: 

(1) The competitively biddable drug is 

supplied under the program by an 

approved vendor as specified in 

§ 414.908(b). 

(2) The claim for the prescribed drug 

is submitted by the approved vendor 

that supplied the drug and payment is 

only made to that vendor. 

(3) The approved vendor collects 

applicable deductible and coinsurance 

with respect to the drug furnished under 

the CAP only after the drug is 

administered to the individual. 

(4) The approved vendor delivers the 

drugs directly to the participating CAP 

physician. 

(b) Exceptions to competitive 

acquisition. Specific competitively 

biddable drugs, including a category of 

these drugs, may be excluded from the 

CAP if the application of competitive 

bidding to these drugs—

(1) Is not likely to result in significant 

savings; or 

(2) Is likely to have an adverse impact 

on access to such drugs. 

(c) Computation of payment amount.

(1) Except as specified in paragraph 

(c)(2) of this section, payment for 

competitively biddable drugs is based 

on bids submitted and accepted as 

described in § 414.910. Based on these 

bids, a single payment amount for each 

competitively biddable drug in the 

competitive area is determined. This 

payment is updated on an annual basis 

based on the approved vendor’s 

reasonable net acquisition costs for that 

category as determined by CMS based, 

in part, on information disclosed to 

CMS and limited by the weighted 

payment amount established under 

section 1847A of the Act across all 

drugs in that category. Adjustment to 

the payment amounts may be made 

more often than annually, but no more 

often than quarterly, in any of the 

following cases: 

(i) Introduction of new drugs. 

(ii) Expiration of a drug patent. 

(iii) Material shortage that results in a 

significant price increase for the drug. 

(2) The alternative payment amount 

established under section 1847A of the 

Act may be used to establish payment 

for a competitively biddable drug—

(i) For which a payment and BILLING 

CODE has not been established; or 

(ii) When medical necessity requires a 

certain brand of drug that the approved 

vendor has not been contracted to 

furnish under the CAP. 

(d) Adjustments. There is an 

established process for adjustments to 

payments to account for drugs that were 

billed at the time of dispensing but 

which were not administered. 

(e) Resupply of participating CAP 

physician drug inventory. A 

participating CAP physician may 

acquire drugs under the CAP to 

resupply his or her inventory if all of 

the following requirements are met: 

(1) The drugs were required 

immediately. 

(2) The participating CAP physician 

could not have anticipated the need for 

the drugs. 

(3) The vendor could not have 

delivered the drugs in a timely manner. 

(4) The participating CAP physician 

administered the drugs in an emergency 

situation. 

7. Add § 414.908 to read as follows:

§ 414.908 Competitive acquisition 

program. 

(a) Physician selection of an approved 

vendor. (1) CMS provides the physician 

with a process for the selection of an 

approved vendor on an annual basis, 

with exceptions as specified in 

§ 414.908(a)(2), and will also receive 

information about the CAP in the 

enrollment process for Medicare 

participation discussed in section 

1842(h) of the Act. 

(2) A physician may select an 

approved vendor outside the annual 

selection process when—

(i) The approved vendor ceases 

participation in the CAP; or 

(ii) Other exigent circumstances 

defined by the Secretary, for example 

the participating CAP physician 

relocates to another competitive area or 

the physician leaves a group practice 

participating in the CAP. 

(3) The physician participating in the 

CAP—

(i) Elects to use an approved vendor 

for the drug category area as set forth in 

§ 414.904(a)(1); 

(ii) Completes and signs the CAP 

election agreement; 

(iii) Submits a written order or 

prescription to the approved vendor; 

(iv) Does not receive payment for the 

competitively biddable drug except as 

described in § 414.906(c)(2)(ii); 

(v) Provides information to the 

approved vendor to facilitate collection 

of applicable deductible and 

coinsurance as described in 

§ 414.906(a)(3); 

(vi) Notifies the approved vendor 

when a drug is not administered; 

(vii) Maintains a separate electronic or 

paper inventory for each CAP drug 

obtained; 

(viii) Agrees to file the Medicare claim 

within 14 days of the date of drug 

administration; and 

(ix) Agrees to submit an appeal 

accompanied by all required 

documentation (such as medical records 

or a certification) necessary to support 

payment if the participating CAP 

physician’s drug administration claim is 

denied. 

(4) Physician group practices. If a 

physician group practice using a group 

billing number elects to participate in 

the CAP, all physicians in the group are 

considered to be participating CAP 

physicians when using the group 

number. 

(b) Program requirements. (1) CMS 

selects approved vendors through a 

competition among entities based on the 

following: 

(i) Submitting the bid prices for 

competitively biddable drugs within the 

category and competitive area that—

(A) Place the vendor among the 

lowest five qualified bidders; and 

(B) Do not exceed the weighted 

payment amount established under 

section 1847A of the Act across all 

drugs in that category. 

(ii) Ability to ensure product integrity. 

(iii) Customer service. 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10771

(iv) At least 3 years experience in 

furnishing Part B injectable drugs. 

(v) Financial performance and 

solvency. 

(vi) Record of integrity and the 

implementation of internal integrity 

measures. 

(vii) Internal financial controls. 

(viii) Acquisition of all drugs and 

biological products directly from the 

manufacturer or from a distributor that 

has acquired the products directly from 

the manufacturer. 

(ix) Other factors as determined by the 

Secretary. 

(2) Approved vendors must also meet 

the contract requirements under 

§ 414.914. 

(c) Additional considerations. CMS 

may refuse to award a contract or 

terminate an approved vendor contract 

based upon the following: 

(1) Suspension or revocation by the 

Federal or State government of the 

entity’s license for distribution of drugs, 

including controlled substances. 

(2) Exclusion of the entity under 

section 1128 of the Act from 

participation in Medicare or other 

Federal health care programs. 

(d) Multiple source drugs. In the case 

of multiple source drugs, there must be 

a competition among entities for the 

acquisition of at least one competitively 

biddable drug with each billing and 

payment code within each category for 

each competitive area. 

(e) Multiple contracts for a category.

The number of bidding qualified entities 

that are awarded a contract for a given 

category and area may be limited to no 

fewer than two. 

8. Add § 414.910 to read as follows:

§ 414.910 Bidding process. 

(a) Entities may bid to furnish 

competitively biddable drugs in all 

competitive areas of the United States, 

or a specific competitive area.

(b) There will be uniformity among 

the bids for any specific competitive 

area. 

(c) A submitted bid price must 

include the following: 

(1) All costs related to the delivery of 

the drug to the participating CAP 

physician. 

(2) The costs of dispensing (including 

shipping) of the drug and management 

fees. The costs related to the 

administration of the drug or wastage, 

spillage or spoilage may not be 

included. 

9. Add § 414.912 to read as follows:

§ 414.912 Conflicts of interest. 

(a) Approved vendors and applicants 

that bid to participate in the CAP are 

subject to the following: 

(1) The conflict of interest standards 

and requirements of the Federal 

Acquisition Regulation (FAR) 

organizational conflict of interest 

guidance, found under 48 CFR subpart 

9.5. 

(2) Those requirements and standards 

contained in each individual contract 

awarded to perform functions under 

section 1847B of the Act. 

(b) Post-award conflicts of interest.

Approved vendors must have a code of 

conduct that establishes policies and 

procedures for recognizing and 

resolving conflicts of interest between 

the approved vendor and any entity, 

including the Federal Government, with 

whom it does business. The code of 

conduct must—

(1) State the need for management, 

employees, and agents to comply with 

the approved vendor’s code of conduct, 

and policies and procedures for 

conflicts of interest; and 

(2) State the approved vendor’s 

expectations of commitment to 

compliance by management, employees, 

and agents. 

10. Add § 414.914 to read as follows:

§ 414.914 Terms of contract. 

(a) The terms of the contract between 

CMS and the approved vendor will be 

for a term of 3 years. The contract may 

be terminated—

(1) By CMS for default if the approved 

vendor violates any term of the contract; 

or 

(2) In the absence of a contract 

violation, by either CMS or the 

approved vendor, if the terminating 

party notifies the other party by June 30 

for an effective date of termination of 

December 31 of that year. 

(b) The contract will provide for a 

code of conduct for the approved 

vendor that includes standards relating 

to conflicts of interest standards at 

§ 414.912. 

(c) The vendor will have a compliance 

plan that contains policies and 

procedures that control program fraud, 

waste, and abuse, and consists of the 

following minimum elements: 

(1) Written policies, procedures, and 

standards of conduct articulating the 

organization’s commitment to comply 

with all applicable Federal and State 

standards. 

(2) The designation of a compliance 

officer and compliance committee 

accountable to senior management. 

(3) Effective training and education 

between the compliance officer and 

organization employees, contractors, 

agents, and directors. 

(4) Enforcement of standards through 

well publicized disciplinary guidelines. 

(5) Procedures for effective internal 

monitoring and auditing. 

(6) Procedures for ensuring prompt 

responses to detected offenses and 

development of corrective action 

initiatives relating to the organization’s 

contract as a drug vendor. 

(i) If the drug vendor discovers 

evidence of misconduct related to 

payment or delivery of drugs or 

biologicals under the contract, it will 

conduct a timely and reasonable inquiry 

into that conduct. 

(ii) The drug vendor will conduct 

appropriate corrective actions 

including, but not limited to, repayment 

of overpayments and disciplinary 

actions against responsible individuals, 

in response to potential violations 

referenced at paragraph (c)(6)(i) of this 

section. 

(7) Procedures to voluntarily selfreport potential fraud or misconduct 

related to the CAP to the appropriate 

government agency. 

(d) The contract must provide for 

disclosure of the approved vendor’s 

reasonable, net acquisition costs for a 

specified period of time, not to exceed 

quarterly. 

(e) The contract must provide for 

appropriate adjustments as described in 

§ 414.906(c)(1). 

(f) Under the terms of the contract, the 

approved vendor must also—

(1) Have sufficient arrangements to 

acquire and deliver competitively 

biddable drugs within the category in 

the competitive area specified by the 

contract; 

(2) Have arrangements in effect for 

shipment at least 5 days each week of 

competitively biddable drugs under the 

contract, including emergency 

situations, and for timely delivery of 

such drugs in the competitive area;

(3) Have procedures in place to 

address and resolve complaints of 

participating CAP physicians and 

individuals and inquiries regarding 

shipment of competitively biddable 

drugs; 

(4) Have a grievance and appeals 

process for dispute resolution; 

(5) Meet applicable licensure 

requirements in each State in which it 

distributes drugs under the CAP; 

(6) Enroll in Medicare as a 

participating provider; and 

(7) Comply with all necessary 

provisions related to the prevention of 

fraud and abuse. 

11. Add § 414.916 to read as follows:

§ 414.916 Dispute resolution. 

(a) General rule. Cases of an approved 

vendor’s dissatisfaction with denied 

drug claims are resolved through a 

voluntary alternative dispute resolution 

process delivered by the designated 

carrier, and a reconsideration process 

provided by CMS. 

10772 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

(b) Dispute resolution. (1) When an 

approved vendor is not paid on claims 

submitted to the designated carrier, the 

vendor may appeal to the designated 

carrier to counsel the responsible 

participating CAP physician on his or 

her agreement to file a clean claim and 

pursue an administrative appeal in 

accordance with subpart H of part 405 

of this chapter. If problems persist, the 

vendor may ask the designated carrier 

to—

(i) Review the participating CAP 

physician’s performance; and 

(ii) Potentially recommend a 

suspension of the participating CAP 

physician’s CAP election agreement. 

(2) Responsibility of the designated 

carrier. The designated carrier—

(i) Investigates and makes a 

recommendation to CMS on whether the 

participating CAP physician has been 

meeting the claims and appeals 

obligations in his or her CAP election 

agreement; 

(ii) Gathers information from the local 

carrier and the approved vendor; and 

(iii) Makes a recommendation to CMS 

on whether the participating CAP 

physician has been filing his or her CAP 

drug administration claims in 

accordance with the requirements for 

physician participation in the CAP as 

set forth in § 414.908(a)(3). 

(3) CMS reviews the recommendation 

of the designated carrier and, if 

necessary, gathers additional 

information before deciding whether to 

suspend the participating CAP 

physician’s CAP election agreement for 

a period not to exceed the end of the 

following CAP election cycle. This 

suspension is limited to the 

participating CAP physician’s ability to 

order drugs from the specific vendor. 

(4) The participating CAP physician 

may appeal that exclusion by requesting 

a reconsideration. A determination must 

be made as to whether the participating 

CAP physician’s denied claims and 

appeals were the result of the 

participating CAP physician’s failure to 

participate in accordance with the 

requirements of § 414.908(a)(3). 

(c) Reconsideration. (1) Right to 

reconsideration. A participating CAP 

physician dissatisfied with a 

determination that his or her CAP 

election agreement has been suspended 

by CMS is entitled to a reconsideration 

as provided in this subpart. 

(2) Eligibility for reconsideration.

CMS reconsiders any determination to 

suspend a participating CAP physician’s 

election agreement if the participating 

CAP physician files a written request for 

reconsideration in accordance with 

paragraphs (c)(3) and (c)(4) of this 

section. 

(3) Manner and timing of request for 

reconsideration. A participating CAP 

physician who is dissatisfied with a 

CMS decision to suspend his or her CAP 

election agreement may request a 

reconsideration of the decision by filing 

a request with CMS. The request must 

be filed within 30 days of receipt of the 

CMS decision letter. From the date of 

receipt of the decision letter until the 

day the reconsideration determination is 

final. The ASP payment methodology 

under section 1847A of the Act applies. 

(4) Content of request. The request for 

reconsideration must specify—

(i) The findings or issues with which 

the participating CAP physician 

disagrees; 

(ii) The reasons for the disagreement; 

(iii) A recital of the facts and law 

supporting the participating CAP 

physician’s position; 

(iv) Any supporting documentation; 

and 

(v) Any supporting statements from 

vendors, local carriers, or beneficiaries. 

(5) Withdrawal of request for 

reconsideration. A participating CAP 

physician may withdraw his or her 

request for reconsideration at any time 

before the issuance of a reconsideration 

determination. 

(6) Discretionary informal hearing. In 

response to a request for 

reconsideration, CMS may, at its 

discretion, provide the participating 

CAP physician the opportunity for an 

informal hearing that—

(i) Is conducted by a hearing officer 

appointed by the director of the CMS 

Center for Medicare Management or his 

or her designee; and 

(ii) Provides the participating CAP 

physician the opportunity to present, by 

telephone or in person, evidence to 

rebut CMS’ decision to suspend or 

terminate a participating CAP 

physician’s CAP election agreement. 

(7) Informal hearing procedures. (i) 

CMS provides written notice of the time 

and place of the informal hearing at 

least 10 days before the scheduled date. 

(ii) The informal reconsideration 

hearing will be conducted in accordance 

with the following procedures: 

(A) The hearing is open to CMS and 

the participating CAP physician 

requesting the reconsideration, 

including—

(1) Authorized representatives; 

(2) Technical advisors (individuals 

with knowledge of the facts of the case 

or presenting interpretation of the facts); 

(3) Representatives from the local 

carrier; 

(4) Representatives from the approved 

vendor; and 

(5) Legal counsel. 

(B) The hearing is conducted by the 

hearing officer who receives relevant 

testimony;

(C) Testimony and other evidence 

may be accepted by the hearing officer 

even though it would be inadmissible 

under the rules of evidence applied in 

Federal courts; 

(D) Either party may call witnesses 

from among those individuals specified 

in the paragraph (c)(7)(ii)(A) of this 

section; and 

(E) The hearing officer does not have 

the authority to compel by subpoena the 

production of witnesses, papers, or 

other evidence. 

(8) Hearing officer’s findings. (i) 

Within 30 days of the hearing officer’s 

receipt of the hearing request, the 

hearing officer presents the findings and 

recommendations to the participating 

CAP physician who requested the 

reconsideration. If the hearing officer 

conducts a hearing in person or by 

phone, the findings and 

recommendations are due to the 

participating CAP physician within 30 

days from of the hearing’s conclusion. 

(ii) The written report of the hearing 

officer includes separate numbered 

findings of fact and the legal 

conclusions of the hearing officer. 

(9) Final reconsideration 

determination. (i) The hearing officer’s 

decision is final unless the director of 

the CMS Centers for Medicare 

Management or his or her designee 

chooses to review that decision within 

30 days. 

(ii) The CMS official may accept, 

reject, or modify the hearing officer’s 

findings. 

(iii) If the CMS official reviews the 

hearing officer’s decision, the CMS 

official issues a final reconsideration 

determination to the participating CAP 

physician on the basis of the hearing 

officer’s findings and recommendations 

and other relevant information. 

(iv) The reconsideration 

determination of the CMS official is 

final. 

(v) CMS publishes a final 

reconsideration determination against a 

participating CAP physician in the 

Federal Register.

(d) The approved vendor treats 

quality and service issues through its 

grievance process. If the approved 

vendor does not resolve a quality issue 

to the participating CAP physician’s 

satisfaction, the participating CAP 

physician may escalate the matter to the 

designated carrier. The designated 

carrier attempts to develop solutions 

that satisfy program requirements and 

the needs of both the participating CAP 

physician and the approved vendor. 

Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 10773

(e) The approved vendor may not 

charge the beneficiary for the full drug 

coinsurance amount if the designated 

contractor did not pay the approved 

vendor in full. When a beneficiary 

receives a coinsurance bill under these 

circumstances, the beneficiary may 

participate in the approved vendor’s 

grievance process to request correction 

of the approved vendor’s file. If the 

beneficiary is dissatisfied with the result 

of the approved vendor’s grievance 

process, the beneficiary may request 

intervention from the designated carrier. 

This is in addition to, rather than is 

place of, any other beneficiary appeal 

rights. The designated carrier will first 

investigate the facts and then facilitate 

correction to the appropriate claim 

record and beneficiary file. 

12. Add § 414.918 to read as follows:

§ 414.918 Assignment. 

Payment for a charge for a 

competitively biddable drug for which 

payment is made may be made only on 

an assignment-related basis. 

13. Add § 414.920 to read as follows:

§ 414.920 Judicial review. 

The following areas under the CAP 

are not subject to administrative or 

judicial review: 

(a) The establishment of payment 

amounts. 

(b) The awarding of vendor contracts. 

(c) The establishment of competitive 

acquisition areas. 

(d) The selection of competitively 

biddable drugs 

(e) The bidding structure. 

(f) The number of vendors selected.

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program)

Dated: February 10, 2005. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: February 24, 2005. 

Michael O. Leavitt, 

Secretary.

[FR Doc. 05–3992 Filed 2–25–05; 4:00 pm] 

BILLING CODE 4120–01–P