Tuesday, 

August 3, 2004 

Part III 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 417 and 422 

Medicare Program; Establishment of the 

Medicare Advantage Program; Proposed 

Rule 

46866 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 417 and 422 

[CMS–4069–P] 

RIN 0938–AN06 

Medicare Program; Establishment of 

the Medicare Advantage Program 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement provisions of the Social 

Security Act (the Act) establishing and 

regulating the Medicare Advantage 

(MA) program. The MA program was 

enacted in Title II of The Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) on December 8, 2003. The 

MA program replaces the 

Medicare+Choice (M+C) program 

established under Part C of title XVIII of 

the Act, while retaining most key 

features of the M+C program. 

The MA program attempts to broadly 

reform and expand the availability of 

private health plan options to Medicare 

beneficiaries. See the ‘‘Executive 

Summary’’ in the SUPPLEMENTARY

INFORMATION section for an outline of the 

key features of the MA program. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

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

ADDRESSES: In commenting, please refer 

to file code CMS–4069–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 issues in this 

document 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–4069– 

P, P.O. Box 8018, Baltimore, MD 21244– 

8018. 

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 (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 

could be considered late. 

All comments received before the 

close of the comment period are 

available for viewing by the public, 

including any personally identifiable or 

confidential business information that is 

included in a comment. After the close 

of the comment period, CMS posts all 

electronic comments received before the 

close of the comment period on its 

public website. 

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: 

Eligibility, Election, and Enrollment— 

Lynn Orlosky, (410) 786–9064 or Randy 

Brauer, (410) 786–1618. 

Benefits and Beneficiary Protections— 

Frank Szeflinski, (303) 844–7119. 

Quality Improvement Program—Tony 

Hausner, (410) 786–1093. 

Submission of Bids, Premiums, and 

Plan Approval—Ann Hornsby, (410) 

786–1181. 

Payments to MA Organizations— 

Anne Hornsby, (410) 786–1181. 

Special Rules for MA Regional 

Plans—Marty Abeln, (410) 786–1032. 

Contracts with MA Organizations— 

Frank Szeflinski, (303) 844–7119. 

Beneficiary Appeals—Chris Gayhead, 

(410) 786–6429. 

General Information—(410) 786–1296. 

SUPPLEMENTARY INFORMATION: 

Executive Summary: Beginning in 

2006, the Medicare Advantage program 

would: 

• Provide for regional plans that 

would make private plan options 

available to many more beneficiaries, 

especially those in rural areas. 

• Expand the number of kinds of 

plans provided for, so that beneficiaries 

can choose from Health Maintenance 

Organizations, Preferred Provider 

Organization plans (the most popular 

type of employer-sponsored plan), Feefor-Service plans, and Medical Savings 

Account plans, if available where the 

beneficiary lives. 

• Enrich the range of benefit choices 

available to enrollees, including not 

only improved prescription drug 

benefits, but also other benefits not 

covered by traditional Medicare, and the 

opportunity to share in savings where 

plans can deliver benefits at lower costs. 

• Provide incentives to plans, and 

add specialized plans, to coordinate and 

manage care in ways that 

comprehensively serve those with 

complex and disabling diseases and 

conditions. 

• Use Open Season competition 

among plans to provide continuing 

pressure on plans to improve service, 

improve benefits, invest in preventive 

care, and hold costs down in ways that 

attract enrollees. These improvements 

would be fostered through enhanced 

and more stable payments to 

organizations, improvements in program 

design, introduction of new flexibility 

for plans, and reductions in 

impediments to plan participation. At 

the same time, the traditional Medicare 

program will be enhanced by addition 

of a prescription drug benefit, and 

beneficiaries will retain the ability to 

remain in or return to this enhanced 

Medicare if they prefer it to a private 

health plan. 

• Advance the goal of improving 

quality and increasing efficiency in the 

overall health care system. Medicare is 

the largest payer of health care in the 

world. As such, Medicare can drive 

changes in the entire health care system. 

For example, as providers and health 

plans implement innovations, such as eprescribing, that can result in improved 

quality of care for Medicare 

beneficiaries, these improvements 

would be passed on to other public 

health programs and commercial health 

care markets. Similarly, competing 

Medicare health plans will seek efficient 

ways to provide health care to their 

beneficiaries, such as through 

prevention and disease management 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46867 

strategies to avoid costly care in the 

future. These efficiencies will spill over 

into plans’ commercial, Medicaid and 

other markets, driving changes in the 

overall health care system. 

Throughout the preamble we identify 

options and alternatives. We welcome 

comments and ideas on our approach 

and on alternatives to help us design the 

Medicare Advantage program to operate 

as effectively, successfully, and 

efficiently as possible in meeting the 

needs of Medicare beneficiaries. 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this proposed rule to assist 

us in fully considering issues and 

developing policies. You can assist us 

by referencing the file code CMS–4069–

P and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: 

Comments received timely will be 

available for public inspection as they 

are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

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

appointment to view public comments, 

phone (410) 786–7195. 

Copies: To order copies of the Federal 

Register containing this document, send 

your request to: New Orders, 

Superintendent of Documents, P.O. Box 

371954, Pittsburgh, PA 15250–7954. 

Specify the date of the issue requested 

and enclose a check or money order 

payable to the Superintendent of 

Documents, or enclose your Visa or 

Master Card number and expiration 

date. Credit card orders can also be 

placed by calling the order desk at (202) 

512–1800 (or toll-free at 1–888–293–

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

The cost for each copy is $10. As an 

alternative, you can view and 

photocopy the Federal Register 

document at most libraries designated 

as Federal Depository Libraries and at 

many other public and academic 

libraries throughout the country that 

receive the Federal Register. 

This Federal Register document is 

also available from the Federal Register 

online database through GPO Access, a 

service of the U.S. Government Printing 

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

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

I. Background 

A. Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Background—Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003’’ at the 

beginning of your comments.) 

Title II of MMA makes important 

changes to the current Medicare+Choice 

(M+C) program—it replaces M+C with a 

new Medicare Advantage (MA) program 

under Part C of Medicare. This title 

provides for additional opportunities for 

organizations to offer private plans to 

Medicare beneficiaries beginning in 

2006. In an effort to increase beneficiary 

choice of plans across all regions of the 

country, including rural areas, Title II of 

the MMA establishes a MA regional 

contracting option. As discussed below, 

MA regional plans would be subject to 

somewhat different rules than MA local 

plans. MMA also provided extra 

incentives, such as a stabilization fund, 

bonus payments, and risk sharing to 

encourage organizations to participate 

as regional plans. 

The MMA also increases payments to 

MA organizations beginning in 2004. 

The increased payments and other 

changes under MMA are intended to 

boost plan participation and thus offer 

more choice of plans to beneficiaries 

and improve health and overall health 

system efficiency. The MMA requires 

that increased payment amounts be 

used to increase benefits, reduce 

beneficiary costs, or enhance beneficiary 

access to services. As explained below, 

beginning in 2006, we would require 

MA organizations to submit ‘‘bids’’ for 

covering Medicare services, and if these 

bid amounts are below a benchmark 

amount established under the new law, 

this difference will be shared with 

enrollees. These provisions will 

potentially reduce Medicare costs. 

One of the principal goals of the 

MMA is to provide beneficiaries with a 

choice in how they get their Medicare 

benefits. Under the MA program, to the 

extent that all parts of the country have 

at least one regional plan, all 

beneficiaries would have a choice in 

how they get their Medicare benefits, 

whether through a Medicare Advantage 

plan or the traditional fee-for-service 

program. Also, depending on plan 

offerings in the area in which they 

reside, beneficiaries would have the 

choice of a variety of types of local 

coordinated care plans, such as health 

maintenance organizations (HMOs), 

provider-sponsored organizations 

(PSOs), and preferred provider 

organization plans (PPOs) including 

both regional and local PPOs, as well as 

Medical Savings Account (MSA) plans 

and private fee-for-service (PFFS) plans. 

In addition, the MMA permits us to 

contract with specialized MA plans that 

create plans for enrollees with special 

needs, such as institutionalized or 

Medicaid-eligible individuals, or those 

with severe or disabling chronic 

conditions. 

The competition among these various 

types of plan offerings in a region 

should improve health care quality for 

beneficiaries. Plans will have to 

compete not only on price but on 

quality to attract beneficiaries’

enrollment and to keep them enrolled 

over time. Such competition based on 

quality should precipitate development 

and implementation of innovations to 

prevent chronic diseases and manage 

the care of diseases for Medicare 

enrollees and other enrolled 

populations. 

With these new and improved 

choices, Medicare beneficiaries, like 

Federal employees and retirees in the 

Federal Employees Health Benefits 

(FEHB) Program, would have the 

opportunity to obtain improved 

benefits, improved services, and 

reduced costs. However, those who 

prefer would be able to remain in 

traditional Medicare, enhanced by the 

new Part D drug benefit. All would have 

the opportunity to switch among plans, 

or to or from traditional Medicare, 

during the annual election period (or 

‘‘open season’’) in November and 

December. Over time, participating 

plans will be under continued pressure 

to improve their benefits, reduce their 

premiums and cost sharing, and 

improve their networks and services, in 

order to gain or retain enrollees. In 

addition, we would expect plans to use 

integrated health plan approaches such 

as disease prevention, disease 

management and other care 

coordination techniques. In doing so, 

integrated plans that combine the 

traditional Parts A and B of Medicare 

and the new Part D drug benefit and 

apply these innovative techniques may 

be able to pass on savings that may 

result from the care coordination to the 

enrollee through reduced premiums or 

additional benefits. 

Beginning in 2006, payments for local 

and regional MA plans would be based 

on competitive bids rather than 

administered pricing. MA organizations 

would submit an annual aggregate bid 

amount for each MA plan. An aggregate 

plan bid is based upon their 

determination of expected costs in the 

plan’s service area for the national 

average beneficiary for providing nonVerDate May<21>2004 22:23 Aug 02, 2004 Jkt 203001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 E:\FR\FM\03AUP3.SGM 03AUP3
46868 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

drug benefits (that is, original Medicare 

(Part A and Part B) benefits), Part D 

basic prescription drugs, and 

supplemental benefits if any (including 

reductions in cost sharing). To 

determine an organization’s payment, 

CMS would compare the non-drug 

portion of the aggregate bid to the local 

or regional plan benchmark, which is an 

average of county rates in the plan’s 

service area. For a plan with a bid below 

its benchmark, CMS would pay the MA 

organization the total plan bid (for Parts 

A, B, and D benefits plus any 

supplemental bid amount), risk adjusted 

for the plan risk profile, plus the rebate 

amount. (The rebate amount is 75 

percent of the difference between the 

plan bid and benchmark, and is used to 

provide mandatory supplemental 

benefits. The remaining 25 percent is 

retained by the Government.) For a plan 

with a bid equal to or above its 

benchmark, CMS would pay the MA 

organization the plan benchmark, risk 

adjusted. 

We would be able to negotiate bid 

amounts with plans in a manner similar 

to negotiations conducted by the Office 

of Personnel Management with Federal 

Employees Health Benefits (FEHB) 

plans. In the spirit of the FEHB process, 

CMS would work with plans to ensure 

benefit packages meet the needs of our 

population and that information is made 

available to beneficiaries so that they 

can make decisions about which plans 

best meet their needs. 

Finally, in conjunction with the new 

drug benefit required under Title I of 

MMA, which will be addressed in 

separate rulemaking, changes made in 

MMA to the M+C program (now called 

the MA program) are intended to bring 

about broad-based improvements to the 

Medicare program’s benefit structure, 

including improved prescription drug 

coverage under the MA program. 

Organizations offering local and 

regional coordinated care MA plans 

must offer at least one plan with the 

Medicare prescription drug benefit or 

the actuarial equivalent. 

We have identified many areas in 

which we believe we can prevent or 

reduce unnecessary burden, 

duplication, or complexity either in 

interpreting the new MMA provisions or 

in modifying existing rules to 

accommodate Medicare Advantage 

reforms. In addition to those specifically 

discussed, we request suggestions for 

other burden-reducing reforms or 

innovations we can incorporate in the 

final regulation that will improve the 

ability of plans to participate in the 

program without compromising quality 

or services. 

B. Relevant Legislation 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Background—Relevant 

Legislation’’ at the beginning of your 

comments.) 

1. Balanced Budget Act of 1997 

Section 4001 of the Balanced Budget 

Act of 1997 (BBA) (Pub. L. 105–33) 

added sections 1851 through 1859 to the 

Social Security Act (the Act) 

establishing a new Part C of the 

Medicare program, known as the 

Medicare+Choice (M+C) program. 

Under section 1851(a)(1) of the Act, 

every individual entitled to Medicare 

Part A and enrolled under Medicare Part 

B, except for individuals with end-stage 

renal disease, could elect to receive 

benefits either through the original 

Medicare program or an M+C plan, if 

one was offered where he or she lived. 

The primary goal of the M+C program 

was to provide Medicare beneficiaries 

with a wider range of health plan 

choices through which to obtain their 

Medicare benefits. The BBA authorized 

us to contract with private organizations 

offering a variety of private health plan 

options for beneficiaries, including both 

traditional managed care plans (such as 

those offered by health maintenance 

organizations (HMOs)) that had been 

offered under section 1876 of the Act, 

and new options that were not 

previously authorized. Three types of 

M+C plans were authorized under the 

new Part C, as follows: 

• M+C coordinated care plans, 

including HMO plans (with or without 

point-of-service options), provider 

sponsored organization (PSO) plans, 

and preferred provider organization 

(PPO) plans. 

• M+C MSA plans (combinations of a 

high deductible M+C health insurance 

plan and a contribution to an M+C 

MSA). 

• M+C private fee-for-service plans. 

The BBA changed the payment 

methodology to Medicare health plans 

and initially afforded beneficiaries more 

choice of plans nationally. However, 

payment rates grew modestly in relation 

to costs health plans incurred, resulting 

in fewer health plans participating in 

the M+C program, decreased choice of 

plans available to beneficiaries, and 

fewer extra benefits available to 

enrollees. Although there were large 

payment increases in rural areas as a 

result of the BBA provisions, access to 

Medicare coordinated care plans 

declined significantly in rural areas after 

1997. 

2. Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999 and the Medicare, Medicaid, and 

SCHIP Benefits Improvement and 

Protection Act of 2000 

The Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999, Pub. L. 106–113 (BBRA), amended 

the M+C provisions of the BBA. Many 

of these amendments were reflected in 

a final rule with comment period 

published in the Federal Register on 

June 29, 2000 (65 FR 40170). In 

addition, the Medicare, Medicaid, and 

SCHIP Benefits Improvement and 

Protection Act of 2000, Pub. L. 106–554 

(BIPA), enacted December 21, 2000, 

further amended the M+C provisions of 

the BBA and BBRA. A final rule 

containing BIPA provisions was 

published on March 22, 2002 (67 FR 

13278). 

These laws enacted subsequent to the 

BBA made incremental changes to M+C 

payments and provided financial 

incentives to plans to participate in the 

M+C program. While these efforts 

helped stabilize the M+C program, they 

did not generally improve plan 

participation in the M+C program nor 

did they increase overall beneficiary 

enrollment or access to plans in rural 

areas. 

The specific sections of Part C of the 

Social Security Act that were impacted 

by the MMA are as follows: 

Section 1851—Eligibility, election and 

enrollment. 

Section 1852—Benefits and beneficiary 

protections. 

Section 1853—Payments to MA 

organizations. 

Section 1854—Premiums. 

Section 1855—Organizational and 

financial requirements for MA 

organizations. 

Section 1856—Establishment of 

standards. 

Section 1857—Application procedures 

and contracts with MA 

organizations 

Section 1858—Special rules for MA 

regional plans. 

Section 1859—Definitions; 

Miscellaneous provisions. 

This proposed rule addresses the new 

MA provisions in Title II of MMA. 

Subtitle B—Immediate Improvements, 

contained in Title II, requires immediate 

payment adjustments for 2004 to MA 

plans. These payment adjustments were 

implemented in 2004 and payment 

adjustments for 2005 will be 

implemented in 2005. The requirement 

in 1858(a)(2)(D) to conduct a market 

survey and analysis before establishing 

MA regions is occurring concurrent 

with the publication of this proposed 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46869 

MA rule. Therefore, the announcement 

of the MA Regions will not be included 

in this proposed rule. As noted above, 

the provisions in Title I of the MMA 

will be set forth in a separate proposed 

rule. 

Provisions of the MMA addressed in 

this proposed rule outside of Title II 

include Section 722—Medicare 

Advantage Quality Improvement 

Program, of Title VII. They may be 

found under Subpart D—Quality 

Assurance. 

C. Codification of Regulations 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Background—Codification of 

Regulations’’ at the beginning of your 

comments.) 

The proposed regulations set forth 

here are codified in 42 CFR Part 422—

The Medicare Advantage Program. Note 

that the regulations for managed care 

organizations that contract with us 

under cost contracts will continue to be 

located in 42 CFR part 417, Health 

Maintenance Organizations, 

Competitive Medical Plans, and Health 

Care Prepayment Plans. 

D. Organizational Overview of Part 422 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Background—Organizational 

Overview of Part 422’’ at the beginning 

of your comments.) 

MMA amends the existing provisions 

of the Medicare statute found in Part C 

of Title XVIII, sections 1851 through 

1859 of the Act, and adds a new section 

1858 to the Act. This proposed rule 

covers a wide range of topics included 

in the existing part 422, including 

eligibility and enrollment, benefits and 

beneficiary protections, payment, 

contracting requirements, and 

grievances and appeals. We have 

generally retained the organization of 

the sections from part 422, except for 

reordering subparts F and G to place the 

bidding and payment provisions in 

sequential order. Where the MMA did 

not amend existing statute, this 

proposed rule does not set forth 

unchanged regulations text from the 

previous part 422. Thus, this proposed 

rule contains only the necessary 

revisions to existing part 422. In some 

subparts of part 422, the only changes 

are in nomenclature, that is, the 

replacement of M+C references with MA 

references. The regulations in those 

subparts, H, L, and N are not set forth 

in this proposed rule. The subparts with 

substantive changes are as follows: 

Subpart A—General provisions, 

establishment of the Medicare 

Advantage program, definitions, types 

of MA plans, and user fees. 

Subpart B—Requirements concerning 

beneficiary eligibility, election, and 

enrollment and disenrollment 

procedures. 

Subpart C—Requirements concerning 

benefits, access to services, coverage 

determinations, and application of 

special benefit rules to PPOs and 

regional plans. 

Subpart D—Quality improvement 

program, chronic care improvement 

program requirements, and quality 

improvement projects. 

Subpart E—Relationships with 

providers. 

Subpart F—Submission of bids, 

premiums, and related information and 

plan approval. 

Subpart G—Payments for MA 

organizations. 

Subpart I—Organization compliance 

with State law and preemption by 

Federal law. 

Subpart J—Special rules for MA 

regional plans, including the 

establishment of MA regions, 

stabilization fund, and risk sharing. 

Subpart K—Application and Contract 

requirements for MA organizations. 

Subpart M—Beneficiary grievances, 

organization determinations, and 

appeals. 

Subpart O—Intermediate Sanctions 

Each of these subparts is discussed 

below in section II of this preamble. 

II. Provisions of the Proposed Rule 

Part 417—Health Maintenance 

Organizations, Competitive Medical 

Plans, and Health Care Prepayment 

Plans 

Subpart J—Qualifying Conditions for 

Medicare Contracts Extension of 

Reasonable Cost Contracts (§ 417.402) 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Extension of Reasonable Cost 

Contracts (§ 417.402)’’ at the beginning 

of your comments.) 

Authority for cost HMOs/CMPs (cost 

plans) had been due to expire on 

December 31, 2004. Section 234 of the 

MMA modified section 1876(h)(5) of the 

Act to extend authority for cost plans 

beyond the previous limit of December 

31, 2004. Section 234 of the MMA 

provides an initial extension of cost 

plans through December 31, 2007. It 

also provides for a continued extension 

of cost plans beyond December 31, 

2007, under specific conditions. 

Effective for contract years beginning 

on or after January 1, 2008, cost plans 

may be extended where there are fewer 

than two coordinated care plan-model 

MA plans (as defined in section 

1851(a)(2)(A)(i) of the Act) of the same 

type (that is, either two local or two 

regional plans) available to Medicare 

beneficiaries in the same service area. 

Both of the ‘‘competing’’ MA plans of 

the same type must meet minimum 

enrollment requirements for the entire 

previous year in order to trigger 

mandatory cost plan non-renewal or 

service area reduction. The minimum 

enrollment requirements of the 

‘‘competing’’ MA plans that would 

trigger mandatory non-renewal or 

service area reduction for cost HMOs/ 

CMPs are: (1) At least 5,000 enrollees for 

the portion of the service area that is 

within a metropolitan statistical area 

having more than 250,000 people and 

counties contiguous to such an area; 

and/or (2) at least 1,500 enrollees for 

any other portion of such service area. 

We interpret the statute to require cost 

plan service area reduction where there 

are two or more MA plans of the same 

type meeting minimum enrollment 

requirements competing for Medicare 

members in a portion of the cost plan’s 

service area. An alternative reading of 

the statute might permit a cost plan to 

continue operating in its entire service 

area until such time as all parts of the 

cost plan’s service area are subject to 

MA competition meeting applicable 

thresholds. We believe the approach we 

have taken is consistent with the stated 

intent in the Conference Agreement that 

cost plans be required to operate under 

the same provisions as other private 

plans that enter the cost plan’s service 

area. We invite comment on the 

approach we have taken. 

We propose to permit existing cost 

plans to expand their service areas 

through September 1, 2006. Thereafter, 

service area expansion applications by 

cost HMOs/CMPs will be initially 

evaluated and accepted only when there 

are not two or more MA plans of the 

same type meeting minimum 

enrollment requirements in the area in 

which the cost plan proposes to expand. 

We incorporate these changes into 

regulation by removing obsolete text 

and by revising other portions of 

§ 417.402(b), and by adding a new 

§ 417.402(c). 

Subpart A—General Provisions (§ 422.1) 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart A—General 

Provisions’’ at the beginning of your 

comments.) 

1. Overview 

Subpart A begins with a brief section 

(§ 422.1) that lists the statutory authority 

that is implemented in part 422 

(sections 1851 through 1859 of the Act). 

46870 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

This proposed rule would amend 

§ 422.1(a) by adding the new section 

1858 of the Act, which would be 

implemented in proposed subpart J. 

Under § 422.2, we set forth new 

definitions for terms used in part 422 

that we believe need clarification. These 

definitions provide the generally 

applied meaning for terms that are used 

throughout part 422. Where necessary, 

we have included in specific subparts of 

part 422 definitions for terms used 

primarily in those subparts. As 

discussed below, § 422.4 briefly 

describes the two new types of 

coordinated care MA plans provided for 

under section 1851(a)(2)(A) of the Act. 

The provisions formerly contained in 

§ 422.6 and § 422.8 relating to 

application requirements and evaluation 

and determination procedures have 

been removed from subpart A and 

added as § 422.501 and § 422.502 of 

subpart K. Thus, prospective MA plans 

may find all applications and 

contracting information organized in 

one place. Section 422.6 (formerly 

§ 422.10) describes the user fees 

associated with the Medicare 

Beneficiary Education and Information 

Campaign, required under section 

1857(e)(2) of the Act. 

2. Definitions (§ 422.2) 

In § 422.2, we have included new 

definitions required under MMA and 

found under section 1859 of the Act. In 

addition, § 422.2 provides definitions 

that are not found in specific subparts 

of the regulation because they apply 

broadly to part 422. For example, in 

§ 422.2, we provide the definition of 

‘‘MA regional plans’’ as set forth in 

section 1859 of the Act because this 

term is used throughout part 422. 

However, a definition like ‘‘benchmark’’

found in section 1853 of the Act, that is 

specific to § 422.258 et seq., is not 

described here but in that section. 

Finally, the statute specifies other new 

definitions under section 1859 of the 

Act, such as the definition of 

‘‘specialized MA plans,’’ and they are 

incorporated into this section. 

We remove definitions for ‘‘ACR’’, 

‘‘Additional benefits,’’ ‘‘Adjusted 

community rate,’’ and ‘‘M+C’’ as these 

terms will not apply after 2006. We also 

revise several existing definitions to 

make them consistent with the MMA 

statute. For example, Mandatory 

supplemental benefits are redefined to 

incorporate language reflecting that 

these benefits may be paid for through 

premiums and cost sharing or through 

the application of a rebate, or both. 

Therefore, mandatory supplemental 

benefits are defined as health care 

services not covered by Medicare that 

an MA enrollee must purchase as part 

of an MA plan. Such benefits may 

include reductions in cost-sharing for 

benefits under the original Medicare feefor-service program—and are paid for in 

the form of premiums and cost-sharing, 

or by an application of the beneficiary 

rebate rule in section 1854(b)(1)(C)(ii)(I) 

of the Act, or both. 

However, optional supplemental 

benefits retain the same definition as 

under the M+C program as health 

services not covered by Medicare that 

are purchased at the option of the MA 

enrollee and paid for in full, directly by 

(or on behalf of) the Medicare enrollee, 

in the form of premiums or cost-sharing. 

These services may be grouped or 

offered individually. Note that 

throughout the regulation, the phrase 

‘‘supplemental benefits’’ refers to both 

mandatory and optional supplemental 

benefits. The terms ‘‘mandatory 

supplemental’’ and ‘‘optional 

supplemental’’ are used when referring 

specifically to one of the types of 

supplemental benefits. 

We have removed ‘‘additional 

benefits’’ from the definition of ‘‘basic 

benefits’’ since MA plans will no longer 

offer additional benefits. In addition, we 

have replaced the word ‘‘ACR’’ process 

with the words ‘‘annual bidding’’

process in the definition of ‘‘benefits’’ to 

reflect the new bidding process for 

submission and approval of benefits. 

Finally, we have revised the definition 

of ‘‘service area’’ to incorporate the 

concept of the new MA regional plan’s 

service area that consists of an entire 

region. 

Under section 1851(a)(2)(A) of the 

Act, two new types of coordinated care 

plans are established—Regional MA 

plans, which are regional PPO plans, 

and specialized MA plans for special 

needs individuals. First, we define an 

‘‘MA local area’’ as a county or other 

area specified by us because it is 

important to distinguish an MA local 

area from an MA region. 

Next, we define an ‘‘MA regional 

plan’’ because it is a new type of 

coordinated care plan choice for 

beneficiaries. While PPOs first became a 

choice for beneficiaries under the BBA, 

they operated as ‘‘local’’ plans on a 

county (including multi-county) or 

partial county basis. The MA regional 

plan functions like a local PPO but must 

serve an entire region. 

In all, CMS will establish between 10 

and 50 regions, as described in 

§ 422.455 (subpart J). A regional MA 

plan’s service area is one or more entire 

MA regions. Thus, we define an ‘‘MA 

regional plan’’ as a private health plan 

that operates as a PPO, but serves an 

entire CMS-designated region. Like local 

PPOs that may offer MA plans under the 

MA program, the regional PPOs must 

have a network of contracting providers 

that have agreed to a specific 

reimbursement for covered benefits that 

are offered by the MA regional plan, and 

must also provide for reimbursement for 

all covered benefits regardless of 

whether the covered benefits are 

provided through the network providers 

or outside of the network. MA regional 

plans are further described in § 422.4 

below, which describes types of 

contracting options under the MA 

program. 

We define an ‘‘MA local plan’’ as one 

that is not an MA regional plan. Also 

defined under part 422 is the 

‘‘Prescription Drug Sponsor,’’

‘‘Prescription Drug Plan (PDP),’’ and a 

‘‘Medicare Advantage Prescription Drug 

(MA–PD) plan.’’ A sponsor must be a 

private entity that meets our 

requirements and standards. PDP 

sponsors may offer multiple plans 

throughout the country or in a region, 

but sponsors must submit an individual 

bid for each plan. 

An MA–PD plan is an MA plan that 

also provides qualified prescription 

drug coverage as found in Part D of the 

Act. An organization offering a 

coordinated care MA plan must have an 

MA–PD plan in each of the service areas 

in which it operates, as required under 

section 1860D–21(a)(1) and (2) of Part D 

of the Act. 

The other new type of contracting 

option available is a specialized MA 

plan for special needs individuals, as 

provided for under section 231 of the 

MMA. Section 1851(a)(2)(A) of the Act 

is amended by adding a new clause (ii) 

providing for specialized MA plans for 

special needs beneficiaries. Those 

specialized MA plans are therefore to be 

treated as coordinated care plans. In 

section 1859(b)(6)(A) of the Act, 

specialized MA plans for special needs 

beneficiaries are defined to be MA plans 

that exclusively serve special needs 

individuals defined in section 

1859(b)(6)(B) of the Act, described 

below. 

Currently, MA plans may not 

selectively limit enrollment to a 

subgroup, for example, institutionalized 

individuals (except for areas in which 

an organization is permitted to limit 

enrollment to retirees obtaining their 

employer/union coverage through an 

MA plan, as permitted through waivers 

authorized under section 1857(i)(1) of 

the Act). The establishment of 

specialized MA plans would allow MA 

plans to exclusively enroll special needs 

individuals in MA plans that have 

targeted clinical programs for these 

individuals. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46871 

We may designate an MA plan as a 

specialized MA plan, if the plan 

‘‘disproportionately’’ serves special 

needs beneficiaries. We will establish 

quantitative criteria to be able to 

designate MA plans that 

disproportionately serve special needs 

beneficiaries as specialized MA plans. 

For example, one possible criterion 

might consider the presence of four or 

more chronic conditions for an enrollee 

to represent a ‘‘complex’’ medical 

condition. Persons with complex 

medical conditions might be 

appropriately treated by a specialized 

MA plan. We may also establish criteria 

to validate that specialized MA plans 

have incorporated processes or clinical 

programs that are designed to address 

the unique needs of enrolled special 

needs beneficiaries. We expect to 

determine these criteria based on 

diagnosis data or other administrative 

data that we collect, such as diagnosis 

data for risk adjustment. In an effort to 

focus the care management on special 

needs individuals, a specialized MA 

plan may limit enrollment to special 

needs individuals beginning in January 

2004 through December 2009, as 

described under § 422.52. 

An issue related to specialized MA 

plans for special needs individuals is 

the availability of prescription drugs. 

Special needs individuals in particular 

need access to prescription drugs to 

manage and control their severe or 

disabling chronic conditions. From a 

disease management perspective, a nonprescription drug plan would not serve 

the interest of special needs individuals. 

Additionally, effective January 1, 2006, 

specific dual eligible individuals 

described in section 1935(c)(6)(A)(ii) of 

the Act are required to receive drug 

coverage solely through the Medicare 

Part D program. In other words, effective 

January 1, 2006, a full-benefit dual 

eligible who is also a Part D eligible 

individual will only be able to receive 

drug coverage through the Medicare Part 

D program. Eligibility for drugs under 

Title XIX will no longer be available for 

these individuals. 

Therefore, we propose that effective 

January 1, 2006, all special needs plans, 

as defined in section 1859(b)(6)(B) of the 

Act, will need to provide Part D 

coverage. Again, for individuals with 

special needs enrolled in a special 

needs plan, this would be the only 

means for them to receive their Part D 

coverage as they cannot receive it 

through an MA plan that does not offer 

prescription drug coverage. We would 

welcome comments on this proposed 

requirement. The authority for such a 

requirement is found in our establishing 

requirements for special needs 

individuals under section 

1859(b)(6)(B)(iii) of the Act. In addition, 

we also are interested in receiving 

comments on the development of an 

HIV/AIDS special needs plan that 

would address the special health needs, 

including prescription drugs, of the 

Medicare-eligible population living with 

HIV/AIDS. 

Section 1859(b)(6)(B) of the Act 

identifies three types of special needs 

individuals as: Institutionalized 

individuals (as defined below); 

individuals entitled to medical 

assistance under a State plan under 

Title XIX; and such other individuals 

with severe or disabling chronic 

conditions as the Secretary determines 

would benefit from enrollment in such 

a plan. 

For the purpose of defining a special 

needs individual above, 

‘‘institutionalized’’ means to reside in a 

long-term care facility for more than 90 

days as determined by the presence of 

a 90-day assessment in the Minimum 

Data Set (MDS). We are not at this time 

proposing a definition of ‘‘severe or 

disabling chronic condition.’’ However, 

we welcome comments on whether we 

should set standards for the designation 

of an individual with severe or disabling 

chronic conditions and what criteria 

should be used. For example, does the 

individual need medical management 

by a specialist (for example, 

endocrinologist or cardiologist)? Does 

the individual have complex medical 

conditions? Does the individual qualify 

for the plan’s disease or case 

management program? Are there 

specific benefits or interventions 

provided to these individuals that are 

not provided to the general MA 

population? 

We would also welcome comments on 

whether we should allow specialized 

MA plans to exclusively enroll certain 

subgroups of Medicaid or 

institutionalized beneficiaries. If it were 

determined to be appropriate to enroll 

subgroups of either Medicaid or 

institutionalized beneficiaries, what 

would the appropriate subgroups be? 

We note that MMA allows for the 

enrollment of End-Stage Renal Disease 

(ESRD) beneficiaries in specialized MA 

plans designed for this population. 

Thus, ESRD beneficiaries for whom an 

MA plan would receive payment at the 

ESRD rates would be considered special 

needs individuals who would benefit 

from enrollment in a specialized MA 

plan. 

Finally, we would welcome 

comments on whether there are 

appropriate quality oversight 

mechanisms for specialized MA plans 

that would be appropriate to require to 

ensure that special needs individuals 

experience improved quality. 

3. Types of MA Plans (§ 422.4) 

The MA program is intended to 

provide beneficiaries access to a wider 

array of private health plan choices than 

the existing plans under the M+C 

program and to increase the number of 

areas in which private health care 

options are available to Medicare 

beneficiaries. As under the M+C 

program, entities can contract with us to 

provide three general categories or types 

of plans: MA coordinated care plans, 

MA MSA plans, and MA PFFS plans. 

However, the establishment of the MA 

program is designed to afford 

beneficiaries two additional types of 

plan choices within the coordinated 

care plan category—regional PPO 

coordinated care plans as defined in 

§ 422.2 or specialized MA coordinated 

care plans, also defined in that section. 

These new MA coordinated care plan 

entities must conform to the contracting 

requirements described in § 422.504 et 

seq. 

Section 520(a)(3) of the Medicare, 

Medicaid and SCHIP Balanced Budget 

Refinement Act of 1999 (BBRA) added 

section 1852(e)(2)(D) of the Act and 

defined Preferred Provider Organization 

plans (PPOs) under the MA program for 

purposes of quality assurance 

requirements. As we discussed in the 

preamble to the final rule with comment 

period titled, ‘‘Medicare Program; 

Medicare+Choice,’’ published June 29, 

2000 (65 FR 41070), the definition of 

PPOs at section 1852(e)(2)(D) of the Act 

was explicitly for purposes of applying 

quality assurance requirements in 

1852(e)(2)(B) of the Act and was limited 

in its applicability to paragraph (2) of 

section 1852(e) of the Act. Before the 

BBRA, PPOs had been treated under the 

M+C statute and regulations in the same 

manner as all other M+C coordinated 

care plans for purposes of applying 

quality assurance requirements. In the 

June 29, 2000 final rule with comment 

period, we incorporated this new 

definition into the M+C regulations at 

§ 422.4 and by revising § 422.152. 

The PPO plan definition added by 

section 520 of the BBRA included three 

elements. They were: The PPO (1) has 

a network of providers that have agreed 

to a contractually specified 

reimbursement for covered benefits with 

the organization offering the plan; (2) 

provides for reimbursement for all 

covered benefits regardless of whether 

those benefits are provided within the 

network of providers; and (3) is offered 

by an organization that is not licensed 

or organized under State law as a health 

maintenance organization. 

46872 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Because the definition of PPO plan in 

section 1852(e)(2)(D) only applies for 

the limited purpose of eligibility for 

PPO quality improvement requirements, 

we do not believe that the limitations in 

this definition should have been set 

forth in a generally applicable definition 

of PPO plan in § 422.4, as is currently 

the case. We propose to clarify in 

regulation that it is solely for purposes 

of the application of the more limited 

quality assurance requirements in 

section 1852(e)(2)(B) of the Act that 

PPOs must be offered by MA 

organizations that are not licensed or 

organized under State law as a health 

maintenance organization. For PPO-type 

plans that are offered by MA 

organizations that are licensed or 

organized under State law as health 

maintenance organizations, the quality 

assurance requirements that apply to all 

other coordinated care plans in section 

1852(e) of the Act also apply to those 

PPO type plans. 

Section 722 of the MMA, which 

amends section 1852(e) of the Act 

effective January 1, 2006, is consistent 

with this interpretation insofar as it 

limits the applicability of the definition 

of PPOs in section 1852(e)(3)(A)(iv) of 

the Act (which is the same definition 

currently appearing in section 

1852(e)(2)(D) of the Act) to 

subparagraph (A) of paragraph 

1852(e)(3) of the Act. Effective January 

1, 2006, MA organizations that offer MA 

local plans that are PPOs will only need 

to provide for the collection, analysis, 

and reporting of data that permit the 

measurement of health outcomes and 

other indices of quality insofar as 

services are furnished by providers that 

have contracted with the MA 

organization under those PPO plans. 

However, this exception to the normal 

rule in section 1852(e)(2) of the Act that 

data are to be collected from all clinical 

sources is afforded solely to PPOs that 

are offered by MA organizations that are 

not licensed or organized under State 

law as health maintenance 

organizations—section 

1852(e)(3)(A)(iv)(III) of the Act. To the 

extent that a local PPO is offered by an 

MA organization that is licensed or 

organized under State law as a health 

maintenance organization, the normal 

data collection, analysis, and reporting 

requirements in clause (3)(A)(i) 

continue to apply. We propose to 

modify the definition of PPOs in § 422.4 

to account for this more limited 

interpretation of State licensure 

requirements and to modify headings in 

§ 422.152(b) and (e). 

Another change in the type of MA 

plans authorized is the elimination of 

previous limits on enrollment in MA 

MSAs, described at § 422.56. As 

directed by section 233 of the MMA, 

MA organizations are authorized to offer 

medical savings account (MSA) plans as 

a permanent option. A Medicare MSA 

plan combines a high-deductible 

insurance policy and a savings account 

for health care expenses. The Medicare 

program pays premiums for the 

insurance policies and makes a 

contribution to the beneficiaries’

medical savings account (MSA). The 

beneficiaries use the money in their 

MSAs to pay for their health care before 

the high deductible is reached. The sum 

of the premium and the contribution to 

the account would equal the payment 

made by Medicare to any other MA plan 

for a beneficiary. 

By way of background, the Balanced 

Budget Act of 1997 (BBA) authorized a 

demonstration project for MSA plans 

when it created the Medicare+Choice 

program. MMA changes restrictive rules 

that governed the MSA demonstration. 

MMA eliminates the limits imposed on 

MSA plans by the BBA, including a 

time limit on enrollment and a limit on 

the number of beneficiaries who could 

enroll in such plans. It also exempted 

MSA plans from certain quality 

assurance requirements that the BBA 

applied to ‘‘network’’ MSA plans. The 

Congress made these changes in light of 

the fact that no MSA plans participated 

in the demonstration. We are 

particularly interested in comments on 

whether these changes are sufficient to 

attract MSA plan sponsors and 

beneficiary enrollment. 

Finally, we delete the descriptions of 

M+C network MSA plan and M+C nonnetwork MSA plan as different types of 

plans at § 422.4(a)(2)(B)(ii), since the 

distinction between network and nonnetwork MSAs for the purpose of 

quality assurance requirements is no 

longer applicable. 

4. Expansion of the Beneficiary 

Education and Information Campaign 

‘‘User Fees’’ (§ 422.6, formerly § 422.10) 

The last section of subpart A contains 

regulations implementing the user fees 

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

Act. MMA expands the user fee to 

include PDP sponsors as well as MA 

plans as contributors. The expansion of 

the user fee recognizes the increased 

Medicare beneficiary education 

activities that we would require around 

the new prescription drug benefit. In 

2006 and beyond, user fees will help to 

offset the costs of educating over 41 

million beneficiaries about the drug 

benefit through written materials such 

as a publication describing the drug 

benefit, internet sites, and other media. 

For example, CMS will develop a 

prescription drug price comparison Web 

site for beneficiary use. We may also 

provide information to beneficiaries on 

quality measures, networks, and other 

dimensions. 

Additionally, as before, the user fee 

would pay for the ongoing costs of the 

national beneficiary education 

campaign that includes developing and 

disseminating print materials, the 1–800 

telephone line, community based 

outreach to support State health 

insurance programs (SHIPs), and other 

enrollment and information activities 

required under section 1851 of the Act 

and counseling assistance under section 

4360 of the Omnibus Budget 

Reconciliation Act of 1990 (Pub. L. 103–

66). 

In fiscal year 2006 and thereafter, the 

MMA authorizes up to $200,000,000, 

reduced by the fees collected from MA 

organizations and PDP sponsors in that 

fiscal year (total amount is not indexed 

in any way). In each year, the total 

amount of collected user fees may not 

exceed the estimated costs in the fiscal 

year for carrying out the enrollment and 

dissemination of information activities 

in the MA and Part D prescription drug 

programs or the applicable portions 

(discussed below) of $200,000,000, 

whichever is less. 

Finally, these user fee provisions 

establish the applicable aggregate 

contribution portions for MA 

organizations and PDP sponsors. The 

applicable portion of the user fee for 

MA organizations would be based on 

the total proportion of expenditures for 

Medicare Part C as well as for payments 

under Part D that are made to MA 

organizations as a percent of Title XVIII 

expenditures. The PDP sponsor’s 

applicable portion is the estimate of the 

total proportion of expenditures under 

Title XVIII that are attributable to 

expenditures made to PDP sponsors for 

prescription drugs under Part D. The 

fees charged to individual MA plans 

and PDP sponsors would continue to be 

determined by CMS. These fees are 

calculated by a percent of plan’s 

revenue to avoid over-burdening smaller 

plans. 

The remaining portion of the costs of 

the beneficiary education campaign is 

the fee-for-service beneficiaries’ portion 

of the campaign. It represents the 

portion of costs of fee-for-service 

informational materials, designed to 

enable beneficiaries to make informed 

choices among health plans and 

Medicare fee-for-service. This amount is 

funded through CMS’ appropriations. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46873 

Subpart B—Eligibility, Election and 

Enrollment 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart B—Eligibility, Election 

and Enrollment’’ at the beginning of 

your comments.) 

1. Eligibility To Elect an MA Plan 

(§ 422.50) 

The regulations contained in this 

subpart are largely the same as those 

now used in the M+C program. We have 

made the necessary terminology 

changes throughout subpart B to reflect 

the replacement of the M+C program 

with the MA program. Substantive 

changes are discussed below. 

Under § 422.50 introductory text, we 

would clarify that, for this subpart, a 

reference to an ‘‘MA plan’’ should be 

read to include both MA local and MA 

regional plans, unless specifically noted 

otherwise in the text. 

In addition, based on our experience 

with the M+C program, we believe that 

it is important to provide additional 

optional mechanisms for elections that 

take advantage of modern technology, 

such as allowing an individual to enroll 

at a secure Web site or at a health plan’s 

customer service center. Section 1851(c) 

of the Act allows the Secretary to 

designate other enrollment mechanisms. 

These options promote a more efficient 

and simplified election process for 

beneficiaries as well as partner 

organizations. Therefore, we would 

revise § 422.50(a)(5) to allow other 

election methods as approved by us. 

2. Eligibility To Elect a Special Needs 

MA Plan (§ 422.52) 

We would include a new § 422.52 to 

describe the eligibility requirements for 

enrollment into specialized plans for 

special needs beneficiaries, which have 

been authorized under section 231 of 

MMA. Individuals would be eligible to 

enroll in these specialized plans if they 

are institutionalized, entitled to 

Medicaid (‘‘dual eligible’’), or have a 

severe and disabling condition and meet 

the requirements specified by CMS. We 

are considering including in this last 

category individuals with a disabling 

condition who are not in an institution 

but require a similar level of care. We 

invite comments on this approach. 

Specialized MA plans would be able to 

restrict enrollment solely to those 

individuals who are in one or more 

classes of special needs individuals. 

In general, we believe that the new 

requirements regarding special needs 

MA plans primarily are intended to 

encourage more choices for certain 

populations by allowing plans that 

specialize in the treatment of 

beneficiaries with particular needs by 

providing and coordinating services for 

these individuals and to limit plan 

enrollment to such individuals. This 

provision could encourage plans to 

develop new products in the market 

place by giving them the opportunity to 

develop expertise in efficiently serving 

such specialized populations. We also 

have the authority to waive section 

1851(a)(3)(B) of the Act, which 

precludes beneficiaries with ESRD from 

enrolling in MA plans. This authority 

grants us the discretion to permit people 

with ESRD to enroll in a special needs 

MA plan. We also are considering 

whether beneficiaries with ESRD should 

be considered to meet the requirements 

for special need status and invite 

comments on this idea. 

We are permitted to apply to special 

needs plan enrollees a provision under 

section 1894(c)(4) of the Act that applies 

to enrollees in the Program of All 

Inclusive-Care for the Elderly (PACE). 

This provision provides for continued 

eligibility in certain situations. 

Specifically, this provision allows a 

PACE eligible individual to be deemed 

to continue to be enrolled even if the 

individual no longer meets the PACE 

eligibility requirements if, in absence of 

continued coverage under a PACE 

program, the individual reasonably 

would be expected to meet the 

requirements within the succeeding 6- 

month period. Similarly, we propose to 

allow special needs individuals who no 

longer meet the ‘‘special needs’’ criteria 

to remain enrolled in an MA special 

needs plan if it is reasonable to assume 

that, absent the continued special needs 

care available under the plan, they 

would again meet the eligibility criteria 

for that MA plan within the succeeding 

6-month period. 

We note that a special needs plan is 

described as ‘‘an MA plan that 

exclusively serves special needs 

individuals.’’ We have considered the 

question of whether this means that the 

plan is exclusively offered to special 

needs individuals, and exclusively 

enrolls special needs individuals, or 

whether it means that it only provides 

care to special needs individuals, and 

has no enrollees who do not meet the 

definition of a special needs individual. 

In the latter case, if an existing plan 

were designated as a special needs plan, 

existing enrollees who did not meet the 

definition of a special needs individual 

would be required to terminate their 

enrollment. 

We do not think that this was 

intended by the Congress, and therefore 

have interpreted ‘‘exclusively serves’’

special needs individuals to mean that 

the plan is only offered to special needs 

individuals, and only enrolls such 

individuals. Existing enrollees of such a 

plan, however, would be 

‘‘grandfathered’’ and could remain 

enrolled. Therefore, we are providing in 

proposed § 422.52(e) that individuals 

who are enrolled in MA plans that are 

subsequently designated as ‘‘special 

needs plans’’ would be able to continue 

to be enrolled. Those individuals would 

be able to remain enrolled or choose to 

elect other MA plans during appropriate 

election periods provided to all MA 

eligible individuals. 

We invite comment on the above 

approach, and on the alternative 

approach under which only special 

needs individuals could be enrolled and 

receive services through the plan, and 

any non-special needs individual would 

have to terminate enrollment 

involuntarily if his or her plan wanted 

special needs plan status. To ensure that 

the non-special needs individuals 

would be able to elect a new plan 

outside of an enrollment period, we 

intend to establish a special election 

period for these individuals. We have 

historically established SEPs for 

exceptional circumstances in our 

manual instructions rather than through 

regulation. Thus, we would establish 

such an SEP through that process. 

We would distinguish the situation of 

a ‘‘grandfathered’’ plan enrollee who 

enrolled in the plan before it had special 

needs status from a case in which a new 

special needs plan was created that was 

designed to provide services only to 

people in a special needs category. For 

example, if a special needs plan was 

established to exclusively provide 

services to institutionalized individuals, 

and had no capacity to provide care to 

individuals not in a contracting 

institution, we would not expect the 

plan to allow an individual to remain 

enrolled in the plan if he or she no 

longer required institutional care. 

In this case, unlike the grandfathered 

enrollees of an existing MA plan 

designated as a special needs plan, we 

would expect individuals to be 

informed before initial enrollment that 

they could only remain enrolled in this 

plan for so long as they remained 

institutionalized. If such a notice is 

given, we believe that a new special 

needs plan could require disenrollment 

when a person no longer had special 

needs status. Such a disenrollment 

would be pursuant to section 

1851(e)(4)(B) of the Act, as the 

individual would ‘‘no longer be eligible’’

for that plan ‘‘because of a change in 

* * * circumstances.***’’ (This 

would also be the basis for 

disenrollment of grandfathered 

46874 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

enrollees if we were to adopt the 

alternative reading of the word ‘‘serves,’’

under which grandfathered enrollees 

could not remain enrolled because the 

plan could only provide services to 

special needs individuals.) 

The statute also provides us with the 

authority to designate an MA plan to be 

a special needs plan if it 

‘‘disproportionately serve[s] special 

needs individuals.’’ Under our current 

interpretation of the word ‘‘serves,’’ this 

would mean a plan that 

disproportionately enrolls special needs 

individuals. At a minimum, this would 

mean it enrolls special needs 

individuals in a proportion greater than 

such individuals exist in the area served 

by the plan. We invite comments on the 

question of whether this ‘‘minimum’’

definition would be appropriate, or 

whether there is another level of special 

needs enrollees (for example, 50 percent 

or more) that should be required in 

order to be considered a special needs 

plan under this ‘‘disproportionately 

serves’’ provision. 

We note that under this provision as 

we are interpreting it, the plan would 

remain exempt from the requirement to 

enroll all MA eligible individuals, but 

would nonetheless enroll some MA 

individuals who are not special needs 

individuals. Operationally, this could be 

accomplished in a number of ways. For 

example, the plan could impose a cap 

on the number of non-special needs 

individuals enrolled at any point in 

time, or cap the number of special needs 

individuals served. It also might enroll 

two special needs enrollees for every 

one enrollee who does not meet the 

definition. 

Other than the requirement that all 

MA eligible individuals be permitted to 

enroll, and—if we choose to waive it’the 

preclusion on enrolling individuals 

with ESRD, all other MA provisions 

would apply to specialized needs plans 

(for example, payment rules, appeal 

rights, quality assurance requirements, 

enrollment procedures). 

3. Continuation of Enrollment for MA 

Local Plans (§ 422.54) 

Section 1851(b)(1) of the Act is 

amended by section 222(l)(3)(A)(i) of the 

MMA to limit the offering of MA plan 

continuation areas to MA local plans 

only. We would revise § 422.54 to 

specify that this provision would apply 

only to local MA plans. 

4. Enrollment in an MA MSA Plan 

(§ 422.56) 

Section 1851(b)(4)(A) of the Act is 

amended by section 233 of the MMA to 

eliminate the cap on the number of 

individuals that may enroll in MA MSA 

plans and to make the program 

permanent by removing the enrollment 

cut-off date. While unchanged by the 

MMA, section 1851(b)(2) of the Act 

states that individuals enrolled in health 

benefit plans in the Federal Employees 

Health Benefit Plan, the Veterans 

Administration, or the Department of 

Defense may not enroll in an MSA until 

or unless the Director of OPM adopts 

policies to ensure that the enrollment 

will not result in higher government 

spending under these programs. While 

the existing exclusion of enrollees of 

other Federal programs is reflected in 

current regulations at § 422.56(b), the 

regulatory language does not provide for 

such individuals to be eligible following 

the adoption of new policies by OPM. 

We understand that the Office of 

Personnel Management’s current policy 

is to encourage the creation of high 

deductible plans for Federal employees 

and retirees, and we will explore with 

OPM whether such a policy can now or 

in the future be certified to the 

Secretary. Therefore, we are revising the 

regulations to allow for that policy to be 

implemented in the future, as provided 

in the statute. We would revise § 422.56 

to reflect these changes. 

5. Election Process (§ 422.60) 

We are proposing conforming changes 

throughout § 422.60, as in § 422.50(a)(5), 

to allow us to approve other election 

mechanisms in addition to paper forms. 

We are also streamlining § 422.60(e) to 

allow for notice options for MA plans 

other than the traditional mailing of a 

written document. 

We are also proposing to clarify the 

regulation at § 422.60(b) to provide that 

MA organizations may submit requests 

to restrict enrollment for capacity 

reasons at CMS at any time during the 

year. There are several reasons why MA 

organizations may need to restrict 

enrollment for capacity reasons, 

especially those that are clearly outside 

of the MA organization’s control. For 

instance, we have allowed capacity 

limits for certain organizations when a 

large competitor, in the same service 

area, has non-renewed its contract. The 

remaining contractor may not have the 

capacity to enroll a large percentage of 

its competitor’s enrollees. Another 

example is a case in which an MA 

organization loses its contract with a 

large hospital system or physician group 

and thus can no longer handle the 

potential number of enrollees it 

previously estimated it could. 

6. Election of Coverage Under an MA 

Plan (§ 422.62) 

a. Annual Coordinated Election Period 

Section 1851(e)(3)(B) of the Act is 

revised by sections 102(a)(2) and 

102(a)(5) of the MMA to permanently 

establish the annual coordinated 

election period as November 15 through 

December 31 of each year. For 2006, the 

annual coordinated election period is 

extended through May 15, 2006. 

b. Initial Coverage Election Period 

Section 1851(e)(1) of the Act is 

amended to provide that, ‘‘if any portion 

of an individual’s initial enrollment 

period under Part B occurs after the end 

of the annual, coordinated election 

period [for 2006, from November 15, 

2005 to May 15, 2006], the initial 

enrollment period under this part shall 

further extend through the end of the 

individual’s initial enrollment period 

under Part B.’’

We believe that this provision is 

intended to allow an individual who 

still has time to decide whether to enroll 

in Medicare Part B upon becoming 

eligible for Medicare to be able to enroll 

in an MA plan upon deciding to enroll 

in Medicare Part B. In using the words 

‘‘further extend,’’ we believe the 

Congress made clear that this new 

sentence was designed to expand upon 

the beneficiary’s opportunity to choose 

to enroll in an MA plan by extending or 

lengthening the time the beneficiary has 

relative to the existing rules. 

Accordingly, we are interpreting this 

sentence to apply only to the extent that 

its application would result in an 

extension of an initial enrollment period 

for an MA compared with the period 

that would apply if the sentence had not 

been added. Under the alternative 

interpretation, in which an MA initial 

enrollment period would end when the 

Medicare Part B initial enrollment 

period ends, individuals who defer 

Medicare Part B enrollment, such as 

those who decline enrollment while 

continuing to work, would be adversely 

impacted. The initial enrollment period 

for Medicare Part B is directly 

associated with an individual’s 

eligibility for Medicare Part B, not with 

an individual’s actual enrollment in 

Medicare Part B. 

To ensure that an individual who is 

first eligible for MA has the full 

opportunity to elect an MA plan, we are 

interpreting the statute to provide for an 

initial coverage election period for MA 

that ends on the later of the day it would 

end under pre-MMA rules or the last 

day of the Medicare Part B initial 

enrollment period. The new sentence 

added to section 1851(e)(1) of the Act 

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accordingly would only extend an 

individual’s MA initial election period, 

never reduce or eliminate it. 

c. Open Enrollment Periods Through 

2005 

Section 1851(e)(2)(A) of the Act is 

amended to extend the open enrollment 

and disenrollment period through 2005, 

providing unlimited opportunities for 

MA eligible beneficiaries to enroll in, 

disenroll from, and or change 

enrollment in an MA plan. We would 

revise § 422.62(a)(3) to reflect this 

extension. 

d. Open Enrollment Periods During 

2006 

Section 1851(e)(2)(B)(1) of the Act is 

revised to establish that the open 

enrollment period in 2006 will be the 

first 6 months of 2006. In addition, for 

individuals who first become eligible 

during 2006, an open enrollment period 

will be provided as the first 6 months 

the individual is MA eligible during 

2006, but not to extend past December 

31, 2006. After December 31st, 2006, all 

individuals are provided the 3-month 

open enrollment period from January 

through March, as provided in the next 

section. 

e. Open Enrollment During 2007 

Section 1851(e)(2)(C)(i) of the Act is 

changed to establish that the open 

enrollment period for 2007 and 

subsequent years will be the first 3 

months of each year. In addition, for 

individuals who first become MA 

eligible during 2007 and subsequent 

years, an open enrollment period will be 

provided as the first 3 months the 

individual is MA eligible during the 

year, but not to extend past December 

31, 2006. Although this specific period 

does not extend past December 31, it is 

important to remember that all 

individuals will be provided a 3 month 

open enrollment period from January 

through March, as discussed in this 

section. 

A new clause is added to section 

1851(e)(2)(C) of the Act that limits a 

change of election made during an open 

enrollment period in 2006 and later 

years to the same type of plan the 

individual making the election is 

already enrolled in. Specifically, an 

individual in an MA plan that does not 

provide drug coverage may only change 

to another similar MA plan, or to 

original Medicare, but may not enroll in 

an MA plan that provides Part D 

coverage, or enroll in a Part D plan. An 

individual enrolled in an MA plan that 

includes Part D coverage similarly may 

only enroll in another MA plan with 

Part D coverage, or change to original 

Medicare coverage with an election of a 

Part D plan. (We note that section 

1851(e)(2)(C)(iii)(I) of the Act states that 

an individual who is ‘‘enrolled in an MA 

plan that does provide qualified 

prescription drug coverage,’’ may only 

elect a plan that does not provide that 

coverage. A literal reading of this 

language would be in direct conflict 

with clause (II) of section 

1851(e)(2)(C)(iii) of the Act, which says 

that an individual who is enrolled in an 

MA plan that provides qualified 

prescription drug coverage may not 

enroll in an MA plan that provides no 

Part D coverage. 

This contradiction, plus (1) the fact 

that section 1851(e)(2)(C)(iii)(I) of the 

Act refers to a ‘‘another’’ MA plan that 

‘‘does not’’ provide Part D coverage, (2) 

the fact that clause (I) is contrasted with 

clause (II) with the word ‘‘or’’, and (3) 

committee report language, make it clear 

that the word ‘‘not’’ was inadvertently 

omitted from the first clause of section 

1851(e)(2)(C)(iii) of the Act.) Although 

the MMA and conference agreement are 

clear, we think that there may be some 

concern that the policy set forth in 

section 1851(e)(2)(C)(iii)(II) of the Act, 

as added by section 102(a)(6)(C) of the 

MMA, may be somehow inconsistent 

with the voluntary nature of the Part D 

program. Specifically, that policy would 

require a Medicare beneficiary who has 

changed their mind after initially 

electing Part D coverage through an MA 

plan to maintain drug coverage for the 

entire year, even if they decide during 

the open enrollment period that they do 

not want that coverage. (Of course, a 

Part D enrollee could always forego Part 

D coverage through a PDP by failing to 

pay premiums under the plan). We are 

soliciting comments from interested 

parties as to whether there is a way to 

interpret the statute, and whether it 

would be advisable, on a policy basis, 

to excuse the requirement that an 

enrollee who elects their option to 

disenroll from an MA–PD plan during 

an open enrollment period, enroll only 

in another MA plan with prescription 

drug coverage or enroll in fee-for-service 

Medicare with Part D coverage. 

7. Coordination of Enrollment and 

Disenrollment Through MA 

Organizations (§ 422.66) 

We would revise § 422.66 with 

conforming changes in keeping with our 

proposed clarification at § 422.50(a)(5) 

regarding election mechanisms other 

than, and in addition to, forms. As 

proposed in § 422.60(e), we are making 

similar changes in § 422.66(b) to provide 

for other notice mechanisms, as well as 

a more efficient notice process. This 

includes removing the requirement for 

MA plans to send a copy of the 

individual’s disenrollment request back 

to the individual. 

Section 1860D–21(b) provides the 

Secretary the authority to implement 

default enrollment rules at 

1851(c)(3)(A)(ii) for the MA–PD 

program, which begins in 2006. If 

applied, these rules provide that an 

individual who is in a health benefits 

plan providing any prescription drug 

coverage will be deemed to make an 

election into an MA–PD offered by the 

same organization during the 

individual’s initial election period 

surrounding Medicare entitlement. This 

statutory provision was originally 

created under The Balanced Budget Act 

of 1997 (BBA) for the Medicare+Choice 

(M+C) program. In developing 

regulations for the BBA, CMS decided 

not to default individuals to M+C plans 

offered by the same organization in 

which they were enrolled. Our rationale 

was that to implement such a process 

would require CMS to have access to 

information prior to the individual’s 

initial coverage election period. Since 

we did not have access to the 

individual’s information on health plans 

in which they were enrolled, we did not 

believe it would be feasible to 

implement a default process at that 

time. 

Rather than implement a default 

enrollment process for these individuals 

who are enrolled in a health plan, we 

require (at section 422.66(d)(1) of our 

regulations) that an M+C plan offered by 

an M+C organization must accept any 

individual who is enrolled in a health 

plan offered by that M+C organization 

the month immediately preceding the 

month in which the individual becomes 

entitled to Part A and enrolled in Part 

B, as well as meeting the other M+C 

eligibility requirements. This requires 

an affirmative action by the individual; 

however it does not extend so far as to 

automatically enroll the individual (that 

is, ‘‘default’’) into the M+C plan. 

In addition to our previous concerns 

regarding this provision, we are also 

concerned that, beginning in 2006, an 

individual’s ability to choose his/her 

health care coverage will be limited to 

certain periods. Within these specified 

periods, an individual is limited to one 

election (either enrollment or 

disenrollment). If an individual makes 

an election of any type (including one 

by ‘‘default’’), s/he is prohibited from 

making another choice until the next 

annual election period in November. 

Default enrollment may therefore limit 

an individual’s choice by utilizing the 

individual’s single election. In addition, 

automatically enrolling an individual 

assumes that the ‘‘default’’ plan would 

46876 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

be the plan that the individual would 

have chosen absent such a default 

process. This may not be the case. Given 

the variety of potential options available 

to these individuals, and the 

implications of choosing those options 

(including penalties for late enrollment 

in Part D), we must carefully consider 

the consequences of implementing a 

default enrollment process. 

We must also carefully consider the 

implications a default enrollment 

process may have on individuals 

enrolled in employer groups. For 

example, such a process could conflict 

with the incentives that the MMA will 

provide to employers to encourage them 

to maintain creditable coverage for their 

employees. Such a provision could 

negatively impact married individuals 

enrolled in employer group plans if an 

individual has just become entitled to 

Medicare (and is enrolled in plan under 

default enrollment) while his or her 

spouse, who is already entitled to 

Medicare, receives coverage through the 

employer group in another health plan. 

On the other hand, we may learn from 

system processes we are establishing 

under the new Medicare-approved 

discount drug plan, such as data sharing 

with the States and other agencies. We 

could consider offering MA plans the 

option to establish a process with its 

employers to automatically enroll 

individuals, with an option for 

individuals to decline before 

enrollment. We recognize that any 

strategies to streamline and improve 

enrollment could lead to an overall 

reduction in costs. These are all 

important issues that must be carefully 

considered. 

Since the Secretary has the discretion 

to not implement the default enrollment 

provision, we would continue to require 

affirmative elections by the individual 

upon becoming entitled to Medicare as 

provided under § 422.66. This ensures 

that individuals have the ability to 

remain with the organization that offers 

their health plan and protects 

beneficiary choice by requiring an 

individual to make an affirmative 

election. However, we encourage input 

from the public on this provision given 

the new Part D program, including the 

benefits, as well as the impact of 

implementing such a provision. 

We would implement new rules for 

continuing MA coverage for individuals 

enrolled in MA plans as of December 

31, 2005. Under section 1860D–21(b)(2), 

individuals enrolled in an MA plan that, 

as of December 31, 2005, provides any 

prescription drug coverage, would be 

deemed to be enrolled in an MA–PD 

plan offered by that same organization 

as of January 1, 2006. If an individual 

is enrolled with an MA organization 

that offers more than one MA plan that 

includes drug coverage, and is enrolled 

in one of those plans as of December 31, 

2005, the individual would be deemed 

to have elected to remain enrolled in 

that plan on January 1, 2006 if it 

becomes an MA–PD plan on that date. 

An individual enrolled in an MA–PD 

plan on December 31 of a year would be 

deemed to elect to remain enrolled in 

that plan on January 1 of the following 

year (that is, the next day). We would 

revise § 422.66(e) to add language that 

incorporates these changes. 

8. Effective Dates of Coverage and 

Change of Coverage (§ 422.68) 

To coordinate the effective date of 

elections with the new special annual 

coordinated election period, section 

1851(f)(3) of the Act is amended by 

establishing that the effective date of 

elections for the annual coordinated 

election period do not apply during the 

2006 special annual election period, 

when enrollment will be effective on the 

first day of the month following the 

month in which an election is made. We 

propose to revise § 422.68(b) to provide 

for this coordination and make the 

effective date of elections in the annual 

coordinated election period for 2006 

that are made in 2006 (that is, from 

January 1–May 15, 2006) the first day of 

the calendar month following the month 

in which the election is made. 

9. Disenrollment by the MA 

Organization (§ 422.74) 

We are clarifying the regulation at 

§ 422.74(d)(1) regarding disenrollment 

for nonpayment of premium to provide 

more flexibility to MA plans in 

developing rules for those individuals 

who fail to pay their basic and 

supplementary premiums. Under the 

current regulations at § 422.74(d)(1), MA 

plans are required to provide, at 

minimum, a 90-day grace period before 

disenrolling individuals for failure to 

pay the premium. Thus, MA plans must 

maintain enrollment for individuals 

who do not pay their premiums for 

more than 90 days. We propose to 

provide greater flexibility to MA 

organizations by replacing the 90-day 

grace period in § 422.74(d)(1) with the 

approach taken in § 417.460(c)(1), 

which governs disenrollment from 

HMOs with cost contracts under section 

1876. Cost HMOs must take certain 

actions before an individual may be 

disenrolled for nonpayment of 

premium, including demonstrating a 

reasonable effort was taken to collect the 

monies and providing the individual 

with written notice. While no specific 

timeframe dictates the process, certain 

steps must be taken. Generally, this 

process takes at least 30 days before a 

disenrollment is effective, given that 

disenrollments are effective the first of 

the month. Similarly, we propose to 

remove the mandatory timeframe before 

disenrollment would occur, focusing on 

the required and important steps that 

still must be taken. Such steps would 

continue to include requiring that 

proper notice be provided to individuals 

before that action is taken, and the MA 

organization would have to be able to 

demonstrate to us that it has made 

reasonable efforts to collect unpaid 

premium amounts. The notice would 

also inform the enrollee of his or her 

rights under the organization’s 

grievance procedures. These revisions 

would not, however, preclude 

organizations from offering a more 

generous grace period than provided in 

the regulation, if they so choose. 

Current regulations at § 422.74(d)(2) 

generally prevent an individual from 

being disenrolled from an MA plan if 

his or her behavior is related to 

‘‘diminished mental capacity.’’ While 

we originally intended this provision to 

protect the rights of individuals with 

mental illness, the language requiring 

that the individual’s behavior not be 

related to diminished mental capacity 

has proven to be overly broad. The 

unintended impact of the current 

regulations has been to prohibit 

disenrollment of individuals whose 

violent and threatening behavior put the 

health and safety of enrollees, staff, and 

the public at risk. Therefore, we are 

amending the regulation by revising 

§ 422.74(d)(2) to ensure due process and 

beneficiary protections, while at the 

same time protecting the health and 

safety of that individual as well as 

others. The changes include redefining 

disruptive behavior as ‘‘disruptive or 

threatening,’’ as well as retaining the 

‘‘unruly, abusive, or uncooperative’’

language. The revised provision would 

also require that the behavior be by an 

individual with ‘‘decision-making 

capacity,’’ meaning someone with the 

ability to understand the consequences 

of his or her behavior. In addition, we 

are proposing limiting re-enrollment in 

the MA program he or she has been 

disenrolled from under this provisions, 

as well as a provision to provide for 

expedited disenrollment in cases where 

there is an immediate threat of health 

and safety to others. 

M+C organizations and providers also 

have expressed concern regarding 

nonpayment of cost sharing, including 

co-payments, for health plan services. 

The statute specifically permits 

individuals to be disenrolled for nonpayment of premiums, but it does not 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46877 

provide for disenrollment due to 

nonpayment of cost-sharing. This has 

proven increasingly problematic since 

M+C organizations and providers have 

no effective mechanism to deal with 

individuals who repeatedly refuse to 

meet their cost-sharing responsibilities, 

potentially resulting in disruptions to 

the plan’s ability to maintain its 

provider network. Thus, we are 

considering new regulatory language 

that would include nonpayment of cost 

sharing as ‘‘noncompliant’’ behavior 

under the disruptive behavior 

provisions because it limits the health 

plan’s ability to provide services both to 

the individual and potentially to other 

enrollees. Although we are not 

proposing specific regulatory language 

at this time, we invite comments on 

adopting an interpretation of 

nonpayment of cost sharing as 

‘‘disruptive behavior,’’ as well as 

comments on the elements that we 

propose to include in language. As part 

of the regulation, we intend to require 

the policy be applied consistently, 

however, we would be clear that an 

exception would prohibit low-income 

individuals from being disenrolled 

under this provision. We would also 

indicate that the cost-sharing amount 

must represent a ‘‘significant’’

cumulative amount and that the MA 

plan would be expected to have an 

established threshold that would be 

approved by CMS. CMS envisions MA 

organizations would submit such 

thresholds at the time their annual 

payment rates are submitted to CMS for 

approval. In addition, we propose to 

include that the behavior must be based 

upon a repeated failure to pay cost 

sharing. Since the language for 

disenrollment for nonpayment of cost 

sharing would fall under the regulations 

for disruptive behavior, the process for 

disruptive behavior as provided in 

regulations and in manual instructions 

would be applied, including: required 

approval by CMS before such 

disenrollment is permitted and 

beneficiary notice requirements. This 

would also require plans to offer 

payment agreements with the 

beneficiary as part of the requirement 

under disruptive behavior to make a 

serious effort to work with the 

beneficiary. We may include guidance 

on this matter in a final regulation based 

upon comments received. 

10. Approval of Marketing Materials and 

Election Forms (§ 422.80) 

We have in place a program that 

recognizes consistent compliance with 

marketing guidelines by providing for 

streamlined approval of marketing 

materials submitted by organizations 

that have demonstrated compliance. 

Called the ‘‘File and Use’’ program, 

organizations that have demonstrated to 

us that they continually meet a specified 

standard of performance will have 

certain types of marketing materials 

(such as advertising materials or other 

materials that do not describe plan 

benefits) deemed to be approved by us 

if they are not disapproved within 5 

days of submission to us for prior 

approval. Thus, under these 

circumstances, organizations only need 

to submit material for our approval 5 

days befor its distribution. 

The advantages of File & Use are that 

the organization can decrease the time 

it takes to begin using certain marketing 

materials and improve planning and 

budgeting for publication of these 

materials. 

In addition, we are making the time 

frames under § 422.80(e)(5) consistent 

with those provided under 

§ 422.80(a)(1). Currently, under 

§ 422.80(a)(1), the review period for 

marketing materials is at least 45 days, 

unless using model materials provided 

by CMS, in which case the review 

period is decreased to no more than 10 

days. However, the standards for M+C 

marketing under § 422.80(e)(1)(v) refer 

only to the 45-day period. Hence, we 

will now add a reference to the 10 day 

period in this section to be consistent 

with § 422.80(a)(1). 

We are also making clarifying changes 

under those marketing activities the MA 

plans may not participate in, such as 

specifically using the term ‘‘targeted 

marketing’’ when discussing 

discriminatory activities and engaging 

in any marketing activity that CMS 

prohibits in its marketing guidance. 

Finally, while all entities in which 

CMS does business with are required to 

adhere to all Federal laws, with regard 

to marketing, it is important to refer 

here to section 1140 of the Act 

prohibiting the misuse of symbols, 

emblems, or names in reference to 

Social Security or Medicare. While we 

have not reiterated this provision in our 

proposed rule, we believe that it is 

important to highlight this reference in 

the discussion of marketing 

requirements. 

Subpart C—Benefits and Beneficiary 

Protections 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart C—Benefits and Beneficiary 

Protections’’ at the beginning of your 

comments.) 

In the areas of benefits and 

beneficiary protections, we are 

proposing regulatory reforms based on 

our program experience, as well as 

provisions implementing new 

requirements in the MMA. We have 

tried in these proposed rules to integrate 

new requirements in the MMA with 

existing regulations, while at the same 

time removing impediments in the 

existing rules that have tended to stifle 

innovation and, in some extreme cases, 

have caused Medicare+Choice 

organizations to nonrenew their 

contracts or reduce service areas in 

which they offer Medicare+Choice 

plans. We have done all this while 

keeping foremost in our consideration 

the paramount task of ensuring that 

beneficiaries continue to be fully 

informed and protected in their receipt 

of essential health care services under 

the Medicare program. 

The regulatory reforms we are 

proposing include: (1) New beneficiary 

protections in cases in which an MA 

organization offers an ‘‘in-network’’

point-of-service (POS) option; (2) 

revisions to the rules limiting 

beneficiary cost sharing related to 

emergency episodes, (3) the elimination 

of administratively burdensome 

requirements on MA plans that are 

duplicative of activities already 

conducted by us, and (4) the elimination 

of a number of unnecessary, duplicative, 

or overly burdensome access to care 

provisions. 

We also are proposing new rules that 

would apply only to MA regional plans, 

which are created under the MMA. 

These rules would afford specific 

additional protections to Medicare 

beneficiaries that enroll in those plans. 

For instance, MA regional plans must 

provide for catastrophic limits, or stoploss, on beneficiary out out-of-pocket 

cost-sharing amounts related to original 

Medicare benefits received in and out of 

the MA regional plan’s network of 

providers. 

Finally, we propose regulations 

implementing incentives for MA 

regional plans to serve all areas. These 

incentives involve a new payment 

mechanism for ‘‘essential hospitals.’’ We 

also provide for special access to care 

rights for enrollees in MA regional plans 

related to out-of-network cost sharing. 

1. General Requirements (§ 422.100) 

Section 233(c) of the MMA amended 

section 1852(k)(1) of the Act to include 

enrollees in MSA plans offered by an 

MA organization with MA coordinated 

care plans described in section 

1851(a)(2)(A) of the Act as having 

protection from balance billing by noncontracting providers. A physician or 

other entity that does not have a 

contract with an MSA plan is now 

required to accept as payment in full, 

46878 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

for covered services provided to an 

MSA plan enrollee, the amount the 

physician or other entity could have 

collected had the individual not been 

enrolled in the MSA plan. 

This provision applies to physicians 

and other entities, but not to providers 

of services. For purposes of this portion 

of the preamble discussion, ‘‘provider of 

services’’ has the same meaning as 

‘‘provider of services’’ defined in section 

1861(u) of the Act. Providers of services 

are covered by section 1866(a)(1)(O) of 

the Act related to charges they can 

impose on a Medicare Advantage plan 

enrollee when the provider of services 

does not have a contract with the 

Medicare Advantage organization 

sponsoring the plan in which the 

beneficiary is enrolled. 

In cases in which participating 

physicians do not have an agreement in 

place governing the amount of payment, 

and treat beneficiaries enrolled in a 

coordinated care plan described in 

section 1851(a)(2)(A) of the Act or an 

MSA plan, they must accept the amount 

they would have received under fee-forservice Medicare as payment in full. 

Generally, the amount they would 

receive under fee-for-service Medicare is 

based on the participating physician fee 

schedule and includes both the amount 

paid by the Medicare carrier as well as 

the cost-sharing (generally 20 percent) 

due from the fee-for-service beneficiary 

or another source (that is, a Medigap 

plan). 

In cases in which non-participating 

physicians do not have an agreement in 

place governing the amount of payment, 

and treat beneficiaries enrolled in a 

coordinated care plan described in 

section 1851(a)(2)(A) of the Act or an 

MSA plan, they also must accept the 

amount they would have received under 

fee-for-service Medicare as payment in 

full. Additionally, non-participating 

physicians are permitted to accept 

assignment on a case-by-case basis. If 

they do accept assignment on a claim, 

then the amount a non-participating 

physician must accept as payment in 

full is generally the non-participating 

fee-schedule amount. Non-participating 

physicians that do not accept 

assignment on a claim can generally 

balance bill up to, but no more than, 115 

percent of the non-participating 

physician fee schedule amount. This 

limit on charges is known as the 

‘‘limiting charge.’’

These fee-for-service billing limits 

have always applied to charges that 

providers and other entities could 

impose when providing covered 

services to enrollees in MA coordinated 

care plans where there is no agreement 

in place governing the payment amount. 

The MMA adds the same protections for 

MSA plan enrollees. 

MSAs are ‘‘high deductible’’ MA plans 

and are defined at section 1859(b)(3) of 

the Act. Until the deductible is met, the 

MSA enrollee is generally responsible 

for payment of all covered services. 

Once the deductible is met, the MA 

organization offering the MSA plan is 

responsible for payment of 100 percent 

of the expenses related to covered 

services. In both cases, whether it is the 

enrollee or the MSA that assumes 

responsibility for payment, providers 

and other entities are required to accept 

the amount that fee-for-service would 

have paid as payment in full. We are 

also proposing to make conforming 

changes to § 422.214 to account for this 

new beneficiary protection for MSA 

enrollees. 

To address this MMA requirement 

and other changes in the MMA and for 

purposes of administrative 

simplification and clarification, we 

propose the following provisions: 

• We would delete the parenthetical 

‘‘(other than an M+C MSA plan)’’ from 

the first sentence of § 422.100(b)(2) and 

replace it with ‘‘(and an MA MSA plan, 

after the annual deductible in 

§ 422.103(d) has been met).’’

• We would modify the reference to 

‘‘additional benefits’’ in § 422.100(c), as 

those benefits are no longer applicable 

to MA plans offered on or after January 

1, 2006. 

• We would remove § 422.100(e), as it 

is duplicative of § 422.111(b)(2), and we 

would accordingly redesignate 

paragraphs (f) through (j) as paragraphs 

(e) through (i), respectively. 

• We would remove the reference to 

operational policy letters in § 422.100(f), 

as instructions on benefit policy 

guidelines and requirements have been 

incorporated into the Medicare 

Managed Care Manual and other written 

instructions. 

• We would add ‘‘or encourage 

disenrollment’’ to § 422.100(f)(2) after 

‘‘discourage enrollment,’’ as one of the 

prohibitions on the design of benefit 

packages. 

2. Requirements Relating to Basic 

Benefits (§ 422.101) 

Section 221 of the MMA adds a new 

section 1858 to the Act. Section 1858(g) 

of the Act provides for a special rule 

related to the way local coverage 

determinations (for example, ‘‘local 

medical review policies,’’ or ‘‘LMRPs’’) 

will be applied by MA regional plans. 

MA regional plans are permitted to elect 

any one of the local coverage 

determinations that applies to original 

Medicare fee-for-service beneficiaries in 

any part of an MA region to apply to its 

enrollees in all parts of an MA region. 

Application of these local coverage 

determinations by an MA regional plan 

may be appealed under provisions of 

section 1869(f)(2) of the Act. 

We interpret section 1858(g) of the 

Act to mean that the MA regional plan, 

if it chooses to exercise this option, 

must elect a single fee-for-service 

contractor’s local coverage 

determination that it will apply to all 

members of an MA regional plan. The 

MA organization offering an MA 

regional plan may not select local 

coverage policies from more than one 

fee-for-service contractor that it will 

apply to all members of the plan. We 

invite comment on this interpretation 

and our proposed policy related to it. 

We propose the following provisions: 

• We would add a new 

§ 422.101(b)(4) related to election of a 

local coverage determination by MA 

regional plans to provide for new 

language in section 221 of the MMA. 

• We would remove reference to 

operational policy letters (OPLs) in 

§ 422.101(b)(2), as all OPLs related to 

general coverage guidelines have been 

incorporated into the Medicare 

Managed Care Manual and other written 

instructions. 

The MMA provides for new costsharing requirements in the statute at 

section 1858(b) of the Act related to MA 

regional plans. There are three specific 

requirements: 

1. MA regional plans, to the extent 

they apply deductibles, are permitted to 

have only a single deductible related to 

combined Medicare Part A and Part B 

services. Applicability of the single 

deductible may be differential for 

specific in-network services and may 

also be waived for preventative services 

or other items and services. 

2. MA regional plans are required to 

have a catastrophic limit on beneficiary 

out-of-pocket expenditures for innetwork benefits under the original feefor-service program (Medicare Part A 

and Part B benefits). 

3. Regional MA plans are required to 

have an additional catastrophic limit on 

beneficiary out-of-pocket expenditures 

for in-network and out-of-network 

benefits under the original fee-forservice program. This second out-ofpocket catastrophic limit, which would 

apply to both in-network and out-ofnetwork benefits under original 

Medicare, could be higher than the innetwork catastrophic limit, but may not 

increase the limit applicable to innetwork services. 

We propose to make MA regional 

plans responsible for tracking these 

beneficiary out-of-pocket limits and for 

notifying members when they have been 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46879 

met. We also propose to require MA 

regional plans to track and limit 

incurred rather than paid out-of-pocket 

expenses. 

• We would add § 422.101(d) to 

account for these new cost-sharing 

requirements. 

The MMA also adds new section 

1859(b)(4) to the Act. MA regional plans 

are required to provide reimbursement 

for all covered benefits, regardless of 

whether the benefits are provided 

within or outside the network of 

contracted providers. 

MA regional plans are preferred 

provider organizations (PPOs) and are 

defined at section 1859(b)(4) of the Act. 

(However, it should be noted that the 

statute does not preclude HMOs and 

other entities from offering other MA 

plan types on a region-wide basis, nor 

does it preclude other entities from 

offering MA regional plans as long as 

these plans meet statutory and 

regulatory requirements related to MA 

regional plans including, but not limited 

to, sections 1859(b)(4), 1851(a)(2)(A), 

and 1858(b) of the Act.) As PPOs, MA 

regional plans are permitted to impose 

differential cost sharing related to nonemergent services received from nonnetwork providers. To the extent 

differential cost-sharing is part of the 

benefit package, the MA regional plan 

would generally be responsible for its 

portion of payment to a non-network 

provider and the enrollee would be 

responsible for the remainder—up to the 

limits discussed in item 2 and 3 of this 

part of the preamble. 

In applying the actuarially equivalent 

level of cost sharing with respect to MA 

bids related to benefits under the 

original Medicare program option set 

forth under § 422.308, only the 

catastrophic limit on out-of-pocket 

expenses for in-network benefits (item 2 

above) is to be taken into account. 

We would accommodate these 

requirements related to MA regional 

plans by adding a § 422.101(e) to this 

section. 

3. Supplemental Benefits (§ 422.102) 

An MA plan may reduce cost sharing 

below the actuarial value specified in 

section 1854(e)(4)(B) of the Act as a 

mandatory supplemental benefit. 

Beginning in 2006, an MA plan can 

reduce the cost sharing that applies to 

plan members below the value that 

would apply to these members if they 

remained enrolled in the original 

Medicare program. This reduction in 

cost sharing can be included as a 

mandatory supplemental benefit. We 

propose the following provisions: 

• We would add § 422.102(a)(4). 

• We would remove the reference to 

‘‘additional benefits’’ in § 422.102(a)(1), 

as those benefits are no longer 

applicable to MA plans offered on or 

after January 1, 2006. 

• We would remove the reference to 

operational policy letters (OPLs) in 

§ 422.102(a)(3), as guidelines related to 

benefits that had been contained in 

OPLs have been incorporated into 

regulation, into the Medicare Managed 

Care Manual, or into other instructions. 

4. Benefits Under an MA MSA Plan 

(§ 422.103) 

We would remove the extraneous 

word ‘‘under’’ from the second sentence 

of paragraph (a). 

5. Special Rules for Point of Service 

Option (§ 422.105) 

‘‘Point of Service’’ (POS) is an option 

in some plans that allows enrollees to 

use providers who are not preferred, on 

a fee-for-service basis. To clarify an 

issue that has created confusion for both 

beneficiaries and MA organizations, we 

propose to include the following 

statement as introductory text to 

§ 422.105 of the regulation: 

‘‘If an MA organization does not offer 

a POS benefit to members of a plan, or 

if it offers a POS benefit as an optional 

supplemental benefit and the member 

has not selected that benefit, then when 

those members receive what is a 

covered item or service from contracted 

providers of that plan, the member 

cannot be financially liable for more 

than the normal in-plan cost sharing, if 

the member correctly identified himself 

or herself as a member of that plan to 

the contracted provider before receiving 

the covered item or service.’’

We believe that indemnifying the 

Medicare member in such a situation 

conforms with normal industry practice 

and also clarifies our long-standing 

policy that members cannot be held 

financially liable when contracting 

providers fail to follow or adhere to plan 

referral or pre-authorization policies 

before providing covered services. If a 

plan member insists on receiving what 

would otherwise be covered services 

from a contracted provider (but for the 

lack of a referral or pre-authorization), 

then the contracted provider would be 

required to inform the member that 

those services will not be covered under 

the plan. The provider would also be 

required to document the medical 

record as to why the services are 

medically necessary but not available 

through the plan. 

In addition, an MA regional plan 

might choose to provide for a POS–LIKE 

benefit where beneficiary cost sharing 

would be less than it would otherwise 

be for non-network provider services, 

but where it still might be greater than 

it would be for in-network provider 

services. We propose the following 

provisions: 

• We would remove the extraneous 

word ‘‘only’’ from § 422.105(a)(1) and 

§ 422.105(a)(2), and we would modify 

§ 422.105(a)(1) to account for the fact 

that beginning January 1, 2006, there 

will no longer be any additional benefits 

under the MA program. 

• We propose to add § 422.105(a)(4) 

to clarify that although an MA regional 

plan may offer a POS–LIKE benefit to 

members, it still may not deny 

reimbursement for any covered benefit, 

regardless of whether such benefit is 

provided within the network of 

contracted providers. 

6. Coordination of Benefits With 

Employer Group Health Plans and 

Medicaid (§ 422.106) 

Section 222(j) of the MMA revised 

section 1857(i) of the Act in order to 

facilitate employer sponsorship of MA 

plans. Specifically, section 222(j)(1) of 

the MMA redesignated existing section 

1857(i) of the Act as section 1857(i)(1) 

of the Act and adds a new subheading—‘‘Contracts with MA 

Organizations.’’ Section 222(j)(2) of the 

MMA created a new section 1857(i)(2) 

of the Act with a sub-heading of 

‘‘Employer Sponsored MA Plans.’’

Section 222(j)(2) of the MMA allows 

us to waive or modify requirements that 

hinder the design of, the offering of, or 

the enrollment in an MA plan offered by 

an employer, a labor organization, or the 

trustees of a fund established by one or 

more employers or labor organizations 

(or combination thereof) to furnish 

benefits to the entity’s employees, 

former employees (or combination 

thereof), or members or former members 

(or combination thereof) of labor 

organizations. Section 222(j) of the 

MMA further states that the MA plan 

may restrict enrollment to individuals 

who are beneficiaries and participants 

in such a plan. 

We propose a new paragraph (d) to 

account for this new statutory authority, 

which is effective for plan years 

beginning on or after January 1, 2006. 

We would also revise the paragraph 

heading for existing paragraph (c) to 

‘‘Waiver or modification of contracts 

with MA Organizations.’’ In addition, 

we make editorial corrections to the first 

sentence of paragraph (c)(2) and to 

remove the second sentence. We remove 

the second sentence of paragraph (c)(2) 

because we believe that instructions 

related to the specific manner in which 

ACRs or bids are to be filed and specific 

requirements related to the filings are 

46880 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

better suited to manual instructions and 

other written instruments. 

• We would revise the paragraph (c) 

heading. 

• We would make editorial 

corrections to paragraph (c)(2). 

• We would add a new paragraph (d) 

to allow for employer sponsored MA 

plans effective January 1, 2006. 

7. Medicare Secondary Payer (MSP) 

Procedures (§ 422.108) 

Section 232 amended section 

1856(b)(3) of the Act to remove all 

ambiguity related to State authority over 

the MA program. Congressional intent is 

now unambiguous in prohibiting States 

from exercising authority over MA plans 

in any area other than State licensing 

laws and State laws relating to plan 

solvency. Therefore, we would amend 

paragraph (f) to remove language that 

suggests States can limit the amount an 

MA organization can recover from liable 

third parties under Medicare secondary 

payer procedures. Consistent with 

specific preemption authority now 

provided by section 1856(b)(3) of the 

Act, MAs are permitted by section 

1852(a)(4) of the Act to fully recover 

from liable third parties according to 

section 1862(b)(2) of the Act. 

We would amend paragraph (f) of 

§ 422.108 to account for enhanced 

preemption authority provided by 

section 232 of the MMA. 

8. Effect of National Coverage 

Determinations (NCDs) (§ 422.109) 

Section 1853(c)(7) of the Act requires 

us to ‘‘adjust’’ MA payments when a 

national coverage determination (NCD) 

or legislative change in benefits will 

result in a significant increase in costs 

to MAs. We have historically 

interpreted what constituted 

‘‘significant’’ costs in regulation at 

§ 422.109, where the costs of a coverage 

change are considered ‘‘significant’’ if 

either the average cost of providing the 

service exceeds a specified threshold, or 

the total cost for providing the service 

exceeds an aggregate cost threshold. 

In a final rule published on August 

22, 2003, at 68 FR 50839, we amended 

§ 422.109 to refine the definition of 

‘‘significant’’ cost to include a new test. 

By adding a new paragraph at the end 

of § 422.109(a)(2), we provided that, for 

purposes of determining whether to 

make an additional payment adjustment 

under § 422.256, the tests for reaching 

the ‘‘significant’’ cost threshold were to 

include the aggregate costs of all NCDs 

and legislative changes in benefits made 

in the prior contract year. 

Under this new test, the ‘‘average 

cost’’ of every NCD and legislative 

change in benefits for the contract year 

would have been added together. If the 

sum of all these average amounts 

exceeded the threshold under 

§ 422.109(a)(1), then an adjustment to 

payment would have been made in the 

following contract year under § 422.256 

to reflect this ‘‘significant’’ cost. 

Alternatively, if the costs of the NCDs 

and legislative changes in benefits, in 

the aggregate, exceeded the level set 

forth in § 422.109(a)(2), an adjustment to 

payment would also have been made 

under § 422.256 on that basis. 

Among the reasons for the above 

change, as noted in the preamble to the 

August 22, 2003 final rule, was that 

even when the ‘‘significant’’ cost 

threshold had been met under the 

existing definition, the methodology 

then employed for making a payment 

adjustment under section 1853(c)(7) of 

the Act did not result in an adjustment 

in the capitation rate in those counties 

with the ‘‘minimum’’ update rate (the 

so-called ‘‘2 percent minimum update’’

counties paid under section 

1853(c)(1)(C)) of the Act. In accordance 

with section 1853(c) of the Act, the CMS 

Office of the Actuary used the annual 

growth rate to update only the floor and 

blended rates, so the ‘‘minimum’’ 2 

percent update rate, which was 102 

percent of the prior year’s rate, did not 

reflect the costs of new benefits effective 

in the middle of the previous payment 

year. Therefore, we decided that 

payments in counties in which payment 

was based on the ‘‘minimum’’ 2 percent 

update rate were not appropriately 

adjusted to reflect new coverage costs as 

required by section 1853(c)(7) of the 

Act. 

The MMA has changed the 

‘‘minimum’’ percentage payment prong 

of the former M+C payment 

methodology by adding a new basis for 

a minimum update. The ‘‘minimum’’

percentage increase rate is changed, 

effective January 2004, as follows: 

Instead of being set at 102 percent of the 

prior year’s rate, the minimum increase 

rate will now be the greater of 102 

percent of the prior year’s rate, or the 

annual MA growth percentage. This 

means that under the MMA, the 

minimum percentage increase rate (the 

so-called ‘‘minimum 2 percent rate’’) 

will now reflect the cost of mid-year 

NCDs and legislative changes in 

benefits. These costs are now 

automatically built into the annual MA 

growth percentage and will no longer 

require an additional adjustment under 

§ 422.256. 

Therefore, we are proposing to revise 

the regulatory change established in the 

August 22, 2003 final rule, in order to 

implement this new MMA payment 

provision that became effective January 

1, 2004. Specifically, the changes to 

§ 422.109 and § 422.256, which 

established a new ‘‘NCD adjustment 

factor’’ effective CY 2004, which was to 

be added to the county rates in counties 

receiving the ‘‘minimum’’ 2 percent 

update, will be eliminated. We propose 

the following provisions: 

• We would remove the final 

paragraph of § 422.109(a)(2). 

• We would amend § 422.109(a)(2) to 

remove ‘‘all’’ from the first clause of the 

first sentence. 

The ‘‘national standardized annual 

capitation rate’’ described in 

§ 422.254(f) is already an average and 

does not need to be further 

‘‘normalized’’ by multiplication ‘‘by the 

total number of Medicare beneficiaries 

for the applicable calendar year.’’

• We would remove the portion the 

first sentence of § 422.109(a)(2) to 

remove all language after ‘‘§ 422.254(f).’’

• We would revise § 422.109(c)(3) to 

read: ‘‘Costs for significant cost NCD 

services or legislative changes in 

benefits for which our fiscal 

intermediaries and carriers will make 

payment are those Medicare costs not 

listed in paragraphs (c)(2)(i) through 

(c)(2)(iv) of this section.’’

• We would remove paragraphs 

(c)(3)(i) and (c)(3)(ii). 

9. Discrimination Against Beneficiaries 

Prohibited (§ 422.110) 

We would make the following 

correction to this section, to bring it into 

conformance with § 422.50(a)(3)(ii). We 

would modify paragraph (b) to say that 

if an MA organization chose to apply 

the rule in § 422.50(a)(3)(ii) and allowed 

individuals who are enrolled in a health 

plan offered by the organization at the 

time of first entitlement to Medicare, but 

residing outside the MA plan’s service 

area, to remain enrolled that such an 

allowance would also need to be 

applied to individuals with end-stage 

renal disease. 

The new paragraph (b) would read: 

(b) Exception. An MA organization 

may not enroll an individual who has 

been medically determined to have endstage renal disease. However, an 

enrollee who develops end-stage renal 

disease while enrolled in a particular 

MA organization may not be disenrolled 

for that reason. An individual who is an 

enrollee of a particular MA 

organization, and who resides in the 

MA plan service area at the time he or 

she first becomes MA eligible, or, an 

individual enrolled by an MA 

organization that allows those who 

reside outside its MA service area to 

enroll in an MA plan as set forth at 

§ 422.50(a)(3)(ii), then that individual is 

considered to be ‘‘enrolled’’ in the MA 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46881 

organization for purposes of the 

preceding sentence. 

We would remove paragraph (c), as it 

is duplicative of a requirement 

appearing in § 422.502(h) of the current 

MA regulation. In the subpart K section 

of this preamble related to § 422.502(h) 

(redesignated as § 422.504(h)), we 

explain why we are proposing to modify 

the language currently found there. 

10. Disclosure Requirements (§ 422.111) 

When the Balanced Budget Act of 

1997 introduced the M+C program, the 

Annual Coordinated Election Period 

was established as the month of 

November. In subsequent legislation, 

the Annual Coordinated Election Period 

for years after 2001 was changed to 

November 15 through the end of 

December. We propose that rather than 

changing the date in § 422.111(d)(2) to 

a ‘‘date certain,’’ we would leave the 

date flexible—should the Congress again 

decide to change the date on which the 

Annual Coordinated Election Period 

begins. Additionally, this proposed 

change is consistent with section 

1851(d)(2)(A) of the Act, the authority 

for this regulatory requirement. The 

intent of section 1851(d)(2)(A) of the Act 

and § 422.111(d)(2) of the regulation is 

simply to provide notice to plan 

members of impending changes to plan 

benefits, premiums, and copays in the 

coming year. That notice is to be 

provided at least 2 weeks before the 

onset of the Annual Coordinated 

Election Period as a means of ensuring 

that plan members will be in the best 

possible position to make an informed 

choice on continued enrollment in or 

disenrollment from that plan. 

Section 422.111(d)(2) would be 

modified to say that plan members need 

to be notified of January 1 changes at 

least 15 days before the Annual 

Coordinated Election Period defined in 

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

Section 422.111(c)(1) states that an 

MA plan must disclose the information 

in § 422.111(f) upon request to 

individuals eligible to elect an MA plan. 

We would remove § 422.111(f)(4), as 

the requirement to provide information 

on Medigap and Medicare Select as a 

Secretarial responsibility under section 

1851(d)(2)(A)(i) and (d)(3)(D) of the Act 

and is to occur as part of the ‘‘open 

season notification’’ required by section 

1851(d)(2)(A) of the Act. 

In addition to an ‘‘open season’’

notification, information on Medigap 

and Medicare Select is available yearround from the Federally funded State 

Health Insurance Assistance Program 

(SHIP) and the 1–800 MEDICARE 

telephone number. Both the local SHIP 

and the 1–800 MEDICARE telephone 

numbers are prominently displayed in 

MA plan literature. In addition, we will 

continue to require MA plans to 

publicize the availability of information 

on Medigap, Medicare Select, and other 

MA plans through appropriate CMS 

information channels. This will not only 

remove unnecessary administrative 

burden, but it will also ensure that 

reliable, accurate, and complete 

information is made available to those 

seeking it. 

Since the introduction of http:// 

www.medicare.gov in 1998, we have 

substantially increased the amount of 

personalized information available to 

Medicare beneficiaries, making it one of 

the government’s most comprehensive 

and customer-oriented sites available to 

the public. The web site hosts twelve 

separate database applications to help 

individuals make their own health care 

decisions. The most significant ones are: 

the Medicare Personal Plan Finder 

(which contains costs, benefits, quality, 

satisfaction and disenrollment 

measures), Nursing Home Compare 

(which contains basic characteristics, 

staffing information and inspection 

results), the Prescription Drug and Other 

Assistance Programs application (which 

contains the most extensive, nationally 

complete listing of the Medicareapproved discount drug cards, 

including price comparisons, as well as 

other government and private programs 

designed to help with prescription drug 

costs), and the Medicare Eligibility Tool 

(which assists users in determining 

when they are eligible, how to enroll 

and what they need to consider when 

joining Medicare). Other tools providing 

customized results include: the 

Participating Physician and Supplier 

Directories, Home Health and Dialysis 

Facility Compare, Your Medicare 

Coverage, Helpful Contacts, 

Publications, and Frequently Asked 

Questions. By updating all information 

on the web site at least once a month, 

the information provided to Medicare 

beneficiaries via http:// 

www.medicare.gov is the most reliable 

and consistent information available. 

Much of the information available 

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

available via the 1–800 MEDICARE 

helpline. 1–800 MEDICARE is a major 

information channel for providing the 

most personalized and reliable 

information to people with Medicare. 

As a result of the MMA, we are 

receiving the largest call volume ever for 

1–800 MEDICARE. The beneficiary can 

call 1–800 MEDICARE to find out the 

most reliable information on public and 

private programs that offer discounted 

or free medication, programs that 

provide help with other health care 

costs, and Medicare health plans that 

include prescription coverage. The 

caller can always talk to a live person 

at 1–800 MEDICARE to get the facts they 

need. When a beneficiary calls 1–800 

MEDICARE, we can send them a 

personalized brochure that allows them 

to look at discount cards based on their 

drug needs and their preferences about 

how to get their medicines, and their 

enrollment forms. We can also give the 

beneficiary personalized brochures 

containing information on their health 

plan choices, nursing homes and 

Medicare participating physicians in 

their area. 

1–800 MEDICARE is available 24 

hours a day, 7 days a week, to provide 

the one-on-one service that our 

Medicare beneficiaries need to make 

appropriate health care decisions. 

We would also remove § 422.111(f)(6), 

since this is also a Secretarial 

responsibility under section 

1851(d)(2)(A)(ii) of the Act and is also 

to occur as part of the Secretarial ‘‘open 

season notification.’’ We propose the 

following provisions: 

• We would redesignate paragraph 

(f)(5) as paragraph (f)(4), and we would 

redesignate paragraphs (f)(7) through 

(f)(11) as paragraphs (f)(5) through (f)(9). 

• We would remove a portion of the 

existing paragraph (f)(7)(iv) and all of 

paragraph (f)(7)(v) (the new paragraphs 

(f)(5)(iv) and (f)(5)(v)) to remove the 

requirement that MAs and MSAs 

provide comparative information related 

to other MA plans. The new paragraph 

(f)(5)(iv) would read, in full: ‘‘In the case 

of an MA MSA plan, the amount of the 

annual MSA deposit.’’ The new 

paragraph (f)(5)(v) would be deleted. 

The existing paragraphs (f)(7)(vi) 

through (f)(7)(viii) would be 

redesignated as paragraphs (f)(5)(v) 

through (f)(5)(vii). 

• We would change ‘‘contracted is 

terminating’’ to ‘‘contract is terminating’’

in the second sentence, just before the 

comma, in § 422.111(e). 

To prevent what might otherwise be 

the unreasonable result that MA 

regional or national plans would be 

required to provide comprehensive lists 

of contracting providers to all enrollees, 

we propose to modify paragraph (b)(3) 

in this section. We will, however, 

specifically require MA organizations to 

provide information on contracted 

providers in other geographic areas to 

enrollees who plan to travel (for 

instance) by adding a new paragraph 

(f)(10), requiring MA organizations to 

provide detailed information on 

contracted providers in other areas upon 

request. 

• We would modify paragraph (b)(3) 

by inserting ‘‘reasonably be expected to’’

46882 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

between ‘‘may’’ and ‘‘obtain’’ in the first 

sub-clause of the first full sentence, so 

it would read: ‘‘The number, mix, and 

distribution (addresses) of providers 

from whom enrollees may reasonably be 

expected to obtain services;’’

• We would add a new paragraph 

(f)(10), which would read: ‘‘The names, 

addresses, and phone numbers of 

providers from whom the enrollee may 

obtain in-network coverage in other 

areas.’’

Section 1851(d)(3)(F) of the Act, as 

modified by the MMA, would require 

MA regional plans to provide members 

an annual description (at the time of 

enrollment and annually thereafter) of 

the catastrophic stop-loss coverage and 

single deductible (if any) applicable 

under the plan. We would add a new 

paragraph (b)(11) to account for this. 

• We would change the existing 

paragraph (f)(11) (the new paragraph 

(f)(9)) related to supplemental benefits 

to read: ‘‘Supplemental benefits. 

Whether the plan offers mandatory and 

optional supplemental benefits, 

including any reductions in cost sharing 

offered as a mandatory supplemental 

benefit as permitted under section 

1852(a)(3) of the Act (and implementing 

regulations at § 422.102) and the terms, 

conditions, and premiums for those 

benefits.’’

• In § 422.111(c)(1), we would insert 

‘‘in’’ between ‘‘required’’ and 

‘‘paragraph.’’

The Internet has proven to be an 

inexpensive and widely available source 

of information on health plans. Almost 

all FEHB insurance plans, most large 

employer plans, and commercial HMOs 

maintain websites for the convenience 

of enrollees. Many MA organizations 

also currently provide information on 

the MA plans they offer on websites 

available through the Internet. 

We currently require MA plans to 

communicate with us via electronic 

media—§ 422.502(b) (redesignated as 

§ 422.504(b)). Finally, all MA 

coordinated care plans would be 

required to offer Part D drug benefits to 

the enrollees of at least one of their 

plans and as part of that offering will be 

required to maintain formulary and 

other information on an Internet Web 

site. 

Therefore, pursuant to our authority 

under section 1856(b) of the Act to 

establish standards by regulation, we are 

considering imposing a requirement that 

all MA plans set up an Internet Web site 

that will make basic MA plan 

information and materials available to 

interested Medicare beneficiaries and 

other parties. The basic information and 

materials could include the Evidence of 

Coverage, the Summary of Benefits, and 

information (names, addresses, phone 

numbers, specialty) on the network of 

contracted providers. Those Internet 

materials and information would 

duplicate materials already produced in 

print format and made available by MA 

organizations relative to the MA plans 

they offer. We are interested in receiving 

comments on whether or not such a 

requirement should become part of the 

MA regulation. 

11. Access to Services (§ 422.112) 

There are no new access standards for 

MA regional plans, and existing MA 

standards will generally apply. An 

important provision (discussed below) 

will likely improve access to hospital 

services for MA regional plan enrollees. 

In attempting to create region-wide 

networks, MA regional plans will be 

forced to bargain with hospitals, that 

are, in effect, the only hospital (or the 

only hospital with a particular service 

or services) in a broad area. Such a 

hospital would have what some call 

‘‘monopoly power’’ in negotiating with 

plans that are, in effect, forced to 

contract with it in order to secure an 

adequate network of contracted 

providers with which to serve 

anticipated Medicare enrollees. The 

MMA attempts to address this situation 

through a provision that would make 

limited funds available to supplement 

payments to such hospitals. 

While we reviewed our existing 

regulatory requirements related to 

network adequacy and propose to 

remove some that are either duplicative 

or, in our view, overly onerous without 

a resultant payoff in beneficiary 

protections, we have retained our core 

requirements. We expect competition to 

be the best method for ensuring network 

adequacy, as enrollees will favor and 

enroll in plans with more extensive 

networks and tend to avoid those 

without. Note that we will continue to 

require MA organizations to make a list 

of network providers available to 

prospective enrollees prior to 

enrollment. Finally, Medicare 

beneficiaries can simply choose to 

remain in the original Medicare fee-forservice program, if they cannot find an 

MA plan that meets their needs. 

We note that the Office of Personnel 

Management does not mandate specific 

access standards while it serves nearly 

2 million retirees who are located 

around the country in a manner similar 

to Medicare beneficiaries. Yet, ‘‘An 

Analysis of the Availability of 

Medicare+Choice, Commercial HMO, 

and FEHBP Plans in Rural Areas: 

Implications for Medicare Reform’’ by 

the Rural Policy Research Institute (at 

http://rupri.org/healthpolicy/) shows 

that 98 percent of rural counties 

demonstrate usage of three or more 

FEHB plans, which is in sharp contrast 

to the 16 percent of rural counties 

showing access to even a single M+C 

coordinated care plan. We expect the 

Medicare Advantage program to 

produce a pattern of plan availability 

more like the FEHB program than to the 

current M+C program. 

In order to encourage MA 

organizations to offer MA regional plans 

covering rural areas, we are considering 

one new requirement related to an 

exception process for enrollees in an 

area without a preferred provider for a 

specific medically-necessary service. 

We discuss this requirement and the 

exception process later in this section of 

the preamble. We welcome comment on 

this possible change and on any of the 

other changes we propose to make to 

our access to care standards. 

We propose to make three technical 

corrections to this section of the 

regulation. By removing unnecessary 

administrative burden, and in light of 

protections afforded by the MMA, 

which makes certain access 

requirements redundant, we hope to 

facilitate participation by MA 

organizations in the new Medicare 

program. We would remove or modify 

three current requirements from 

§ 422.112 of the regulation. None of 

these requirements are based on 

statutory authority, and many of them 

become unnecessary as they are 

replaced or superseded by requirements 

in the MMA. 

Effective January 1, 2006, the MMA—

section 1852(e) of the Act—requires all 

MA coordinated care plans to focus 

quality assurance activities on ‘‘chronic 

care improvement programs.’’ We note 

that MA private fee-for-service plans 

and MSA plans are already exempt from 

this requirement. We also note in 

section 1852(e)(3)(A)(iii) of the Act, that 

to the extent that MA local PPOs have 

a contracted network, they must also 

meet the same quality assurance 

requirements as do all other MA 

coordinated care plans. To the extent 

that all coordinated care plans will be 

required to focus on quality 

improvement activities on identifying 

and monitoring enrollees with multiple 

or severe chronic conditions, and also to 

measure and improve the health 

outcomes of those enrollees, it would be 

redundant and to a degree unnecessarily 

proscriptive to suggest a specific 

approach to those quality improvement 

activities in the context of and as a 

means of ensuring enrollee access to 

care. We would delete § 422.112(a)(4)—

serious and complex medical 

conditions. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46883 

Written standards are simply one tool 

MA coordinated care plans can use to 

ensure adequate access to medically 

necessary health care items and 

services. 

The three items enumerated in 

§ 422.112(a)(7) are redundant of other 

parts of the regulation. Section 

422.112(a)(7)(i), related to written 

standards for access to care, is 

duplicative of § 422.112(a)(1). Sections 

422.112(a)(7)(ii) and (a)(7)(iii), related to 

written standards that allow for medical 

necessity determinations and patient 

input into treatment plans, are 

duplicative of § 422.206—Interference 

with health care professionals’ advice to 

enrollees prohibited, § 422.202(b) 

Participation procedures—Consultation, 

and § 422.152(b)(3)(paragraph new 

(b)(2)). We would delete paragraph 

(a)(7)—written standards. 

Section 422.112(b) requires all MA 

organizations for all MA plans they offer 

to ensure continuity of care through 

integration of health care services. 

Additional requirements in 

§ 422.112(b)(1) through (b)(6) require 

specific methods by which MA 

organizations are to ensure an effective 

continuity and integration of health care 

services. While all of the enumerated 

services and processes are clearly 

desirable, it is not as clear that the 

responsibility for them is appropriately 

or reasonably placed on organizations 

whose business is primarily insurance 

coverage. While it may be reasonable to 

expect coordinated care plans to 

undertake these coordination, 

continuity, and integration 

requirements, it is less clear that MA 

private fee-for-service plans, MSAs, and 

(to a lesser extent) local PPO plans and 

MA regional plans (which will be 

offered as PPOs) should also be 

expected to. One might argue that 

continuity of care rules cannot apply in 

the same manner to MA plans in which 

the enrollee is free to choose his or her 

own providers without restraint—such 

as MSAs and private fee-for-service 

plans. We are therefore considering 

eliminating most of the requirements in 

§ 422.112(b) for MSAs and private feefor-service plans. We are also 

considering eliminating or modifying 

many of the requirements in 

§ 422.112(b) for local PPOs and regional 

MA plans. Finally, we are considering 

the continued appropriateness of these 

continuity of care standards for all other 

coordinated care plans. We are seeking 

comment on this proposal. We would 

specifically welcome input on the 

extent to which requirements similar to 

those in § 422.112(b)(1) through (b)(6) 

are established for commercial health 

insurers offering HMOs, PPOs or 

indemnity plans. 

Special access requirements apply to 

MA regional plans beginning in 2006 

based on section 221(c) of the MMA, 

which created a new section 1858 of the 

Act. Specifically, section 1858(h) of the 

Act creates special access rules for MA 

regional plans as a means of enabling 

MA organizations that offer MA regional 

plans to meet provider access 

requirements under section 1852 of the 

Act and thus under § 422.112 of the 

regulation. 

Beginning for benefits offered to MA 

enrollees of an MA regional plan for 

contract year 2006, if an MA 

organization certifies that it was unable 

to reach an agreement with an ‘‘essential 

hospital’’ paid under subsection (d) of 

section 1886 of the Act, under specific 

circumstances we are authorized to pay 

additional amounts to that hospital from 

the Federal Hospital Insurance Trust 

Fund. This additional payment to the 

‘‘essential hospital’’ is in addition to and 

does not affect the normal monthly MA 

payment amount that we would make to 

the MA organization. 

An ‘‘essential hospital,’’ for purposes 

of this section, means a general acute 

care hospital as defined in section 

1886(d) of the Act that we determine the 

MA regional plan must have under 

contract in order to meet our access 

requirements. The determination of 

‘‘essential hospital’’ status is only 

conferred after application to us by an 

MA organization offering an MA 

regional plan. Additionally, as part of its 

application to establish the hospital as 

an ‘‘essential hospital,’’ the MA regional 

plan must also certify that it made a 

good faith effort to contract with the 

hospital. The MA organization must 

also provide assurances that it will 

make payment to the hospital for 

inpatient hospital services in an amount 

not less than the amount that would be 

payable under section 1886 of the Act. 

Finally, in order to qualify for the 

additional payment, the ‘‘essential 

hospital’’ must demonstrate to our 

satisfaction that the amounts normally 

payable under section 1886 of the Act 

are less than the hospital’s costs for 

providing services to MA regional plan 

enrollees. 

The intent of the additional payment 

to the section 1886(d) ‘‘essential 

hospital’’ is to facilitate an MA regional 

plan’s ability to meet network adequacy 

requirements across large geographic 

areas—an MA region. Such an ‘‘essential 

hospital’’ would become part of the 

contracted network of providers of the 

MA regional plan and in-network 

enrollee cost-sharing rules would apply. 

Payments under this new authority, 

however, are limited to a total of $25 

million for 2006, and the prior year’s 

amount updated by the market basket 

percentage increase under section 

1886(b)(3)(B)(iii) of the Act for future 

years. 

We invite comment from the public as 

to how we can ensure that payments are 

limited to the amount specified. We also 

invite comment on how we can best 

ensure that a ‘‘good faith effort’’ to 

contract has actually occurred. For 

instance, should we require negotiations 

to occur before the admission of an MA 

regional plan patient? Or, in the case of 

an emergency admission, should we 

permit negotiations between the MA 

regional plan and the hospital to occur 

after admission, or perhaps even after 

discharge? 

Additionally, we invite comment on 

the best way to determine that a 

hospital’s actual costs for services 

provided to an MA regional plan 

enrollee actually exceeded the amount 

that would normally be payable to that 

hospital under section 1886 of the Act 

with respect to those services. Total 

additional payments under this section 

are limited to $25 million in 2006 and 

in subsequent years, $25 million 

increased by the market basket 

percentage increase as specified in 

statute. In a specific case, the actual 

payment to an ‘‘essential hospital’’ from 

the Federal Hospital Insurance Trust 

Fund would be the sum of the 

difference between the amount that 

would have been paid to the hospital 

under section 1886 of the Act and the 

amount of payment that would have 

been paid for those services under feefor-service Medicare had the ‘‘essential 

hospital’’ been a critical access hospital. 

We would like input on how to best 

minimize the administrative burden 

associated with implementing this 

statutory provision, while still ensuring 

the accuracy and integrity of the 

process. 

We would add a new paragraph (c) to 

account for the special access 

requirements related to MA regional 

plans beginning in 2006 based on 

‘‘essential hospitals.’’

Instead of always requiring 

comprehensive, contracted provider 

networks in all cases, we propose to 

require MA regional plans to offer 

beneficiaries reasonable access to innetwork cost-sharing, even if there are 

no contracted providers of a specific 

type available in a geographic location 

within the service area. This is the 

exception process mentioned earlier in 

this section of the preamble. We also 

propose a new requirement related to 

this exception process, which is similar 

46884 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

to a United States Office of Personnel 

Management (OPM) requirement 

imposed on the FEHB Blue Cross and 

Blue Shield Basic Option plan to 

address similar circumstances. 

We propose to permit relaxation of 

comprehensive network adequacy 

requirements for MA regional plans, but 

only to the extent that beneficiaries are 

not put ‘‘at risk’’ for high cost sharing 

related to services received from nonnetwork providers. This new tolerance 

that we propose to afford MA regional 

plans need not be applied on a planwide basis, but rather can be applied in 

a county or portion of a region where, 

for example, the MA regional plan is 

unable to secure contracts with an 

adequate number of a specific type of 

provider or providers to satisfy our 

comprehensive network adequacy 

requirements. 

Such an exception process might 

require the MA regional plan enrollee to 

contact the sponsoring MA organization 

when seeking a specific service that is 

not otherwise available from a 

contracted provider. The MA 

organization, in such a case, could 

designate a non-contracted provider 

from whom (or from which) the enrollee 

could obtain the service at in-plan cost 

sharing levels. Or, the MA organization 

could allow the enrollee to seek the 

service from any provider and guarantee 

that in-plan cost sharing limits would 

apply. 

In applying the above principle, we 

need to consider two forms of 

beneficiary cost sharing. One is the cost 

sharing related to a specific item or 

service—for instance, a hospital 

coinsurance charge. Another is the 

‘‘catastrophic limits’’ that MA regional 

plans must apply to benefits under the 

original Medicare fee-for-service option. 

MA regional plans are required to 

provide reimbursement for all covered 

benefits regardless of whether those 

benefits are received from network 

providers—section 1859(b)(4)(B) of the 

Act and the new § 422.101(e)(1). MA 

regional plans are also required to apply 

a catastrophic out-of-pocket limit on 

beneficiary cost sharing for covered innetwork services and another on all 

covered services (in and out of 

network)—section 1858(b)(2)(B) of the 

Act and the new § 422.101(d)(2) and 

(d)(3). 

We propose to permit MA regional 

plans with lower out-of-network cost 

sharing to have less robust networks of 

contracted providers. While we propose 

to permit MA regional plans with more 

robust networks of contracted providers 

to impose higher cost sharing charges on 

individuals going out-of-network. This 

is because if the plans’ networks were 

robust, we would not expect beneficiary 

access to be unduly limited by higher 

cost-sharing requirements when they 

seek care from out-of-network providers. 

However, for plans with less robust 

networks, we propose to limit those 

plans’ ability to impose higher costsharing requirements for out-of-network 

care. We believe that higher cost-sharing 

requirements imposed by plans with 

limited provider networks could unduly 

limit access and that more equitable 

cost-sharing requirements would serve 

as a safety valve to ensure that 

beneficiary access is not compromised. 

For instance, we could require MA 

regional plans that have less than 20, 50, 

or 70 percent of hospital beds in the 

service area (or portion of the service 

area) under contract to charge lower outof-network cost sharing to individuals 

accessing non-network hospitals. In 

other words, in such a case, we would 

require the MA regional plan to charge 

lower coinsurance for out-of-network 

hospital care as a means of ensuring 

adequate access to hospital services. 

Similarly and related to the 

‘‘catastrophic limits’’ on out-of-pocket 

expenditures, to the extent that an MA 

regional plan had a less robust network 

of contracted providers, we would 

require a convergence in the cost 

sharing limits that apply to network and 

all (network and non-network) services. 

While for plans with more robust 

contracted networks, we would allow 

the ‘‘catastrophic limits’’ to diverge. 

We ask for comment on the measures 

we should adopt to assess the 

robustness of contracted provider 

networks. We also seek comment on the 

thresholds we should adopt relative to 

the cost-sharing limits (related to both 

individual services and the catastrophic 

limits on out-of-pocket costs that 

regional MA plans must provide related 

to in-network and all services) that 

should apply to services when 

contracted provider networks are less 

than robust. For instance, would it be 

adequate to adopt fee-for-service cost 

sharing limits for individual services as 

a means of ensuring adequate access, or 

should a different standard apply, and 

why? We specifically ask for comments 

in this area. Finally, related to out-ofpocket cost-sharing limits for innetwork and all services, is there a 

formula that we should apply that 

rationally expresses the maximum outof-pocket cost sharing that we should 

permit? Is there a means of quantifying 

how the two out-of-pocket cost-sharing 

limits should converge, or how much 

we should allow divergence, based on 

the robustness of the contracted 

provider network? 

The preceding discussion is from the 

perspective of an MA regional plan 

establishing compliance with our access 

requirements at the time of initial 

application or on a continuing basis. 

From a beneficiary perspective, the MA 

regional plan would always need to 

provide an accessible and available 

source of treatment at network cost 

sharing levels. Our normal access 

standards would apply. For instance, 

where community patterns of care call 

for travel of no more than 30 minutes or 

30 miles to access hospital services, 

then MA regional plans would need to 

ensure comparable access to a 

contracted hospital. To the extent that 

an MA regional plan did not actually 

have a contracted hospital within 30 

minutes or 30 miles, then the MA 

regional plan would need to designate a 

non-contracted hospital from which the 

member could receive care at network 

cost sharing levels. Such a requirement 

would be similar to a requirement 

imposed by OPM related to the Basic 

Option plan offered to Federal 

employees and annuitants under the 

FEHB program where normal OPM 

access standards are not met. 

We provide for this exception to the 

normal access requirements related to 

MA regional plans by proposing to add 

a new paragraph (ii) to § 422.112(a)(1). 

We invite comment on the access 

standards we should establish for 

primary care, specialty, and 

institutional providers. 

12. Special Rules For Ambulance 

Services, Emergency Services, and 

Urgently Needed Services, and 

Maintenance and Post-Stabilization Care 

Services (§ 422.113) 

Policies on enrollee cost-sharing for 

emergency care are historically a point 

of contention. Cost-sharing limits for 

emergency care are important to ensure 

that there is no disincentive to receive 

emergency care that is critical to a 

beneficiary’s health. 

On the other hand, since the proposed 

M+C regulation was published in June 

1998, when the cost-sharing limit of $50 

on out-of-network emergency services 

was initially established, there have 

been unforeseen consequences that have 

tended to increase confusion rather than 

contribute to the goal of appropriate 

access. Additionally, the $50 emergency 

services cost-sharing limit has not 

increased since 1998, despite changing 

market conditions. For instance, in 

recent years, some M+C plans have 

established inpatient hospital copays of 

$200 per day and fee-for-service 

Medicare coverage has a per-hospital 

stay deductible of $840 in 2004. These 

hospital copays, combined with the 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46885 

regulatory definition of ‘‘emergency 

services’’ that includes inpatient care 

‘‘until stabilized,’’ requires a review of 

§ 422.113(b)(2)(v). 

Section 422.113(b)(2)(v) reads: ‘‘[The 

M+C organization is financially 

responsible for emergency and urgently 

needed services—] With a limit on 

charges to enrollees for emergency 

services of $50 or what it would charge 

the enrollee if he or she obtained the 

services through the M+C organization, 

whichever is less.’’

The regulation states that emergency 

services continue until the enrollee is 

stabilized. Hence, a strict (and 

unintended) reading of the current 

regulation could require an assessment 

of the exact time that stabilization 

occurred in order to determine when the 

$50 ‘‘emergency services’’ cost-sharing 

limit ends and when inpatient ‘‘poststabilization’’ cost sharing can begin. A 

detailed review of the member’s medical 

record is needed to make a stabilization 

assessment in order to assess costsharing liability. This review of the 

medical record is an administrative 

burden on plans as well as appeal 

review entities—our reconsideration 

contractor and Administrative Law 

Judges. All are required to spend 

considerable amounts of time 

determining when stabilization 

occurred for purposes of properly 

assigning enrollee cost sharing. This is 

contrary to medical practice, which 

does not generally identify when a 

patient is stabilized. 

We propose to modify the regulation 

to clarify that the $50 limit for 

‘‘emergency services’’ at 

§ 422.113(b)(2)(v) applies only to the 

emergency department, and that while 

the limit on cost-sharing for ‘‘poststabilization’’ care at § 422.113(c)(2)(iv) 

continues to apply, its application 

would always begin upon admission. 

Thus, emergency cost-sharing limits 

would shift from being tied to the type 

of service (emergency services) to being 

tied to the site of service (emergency 

department). Making this clarification 

would retain cost-sharing limits for both 

emergency services and poststabilization care, while eliminating the 

unanticipated complexities and 

administrative burden associated with 

this section of the regulation. 

We believe that final regulations 

published on September 9, 2003, and 

effective November 10, 2003 (68 FR 

53222), provide support for this change. 

These regulations establish the rule that 

requirements related to the Emergency 

Medical Treatment and Labor Act 

(EMTALA) end at the time a patient is 

admitted. We recognize that EMTALA 

rules related to patients who present to 

hospitals with emergency medical 

conditions and our rules related to 

allowable cost sharing in the MA 

program are not a perfect fit; however 

we do believe that similar 

administrative difficulties warrant 

similar administrative solutions. In 

addition to the consonance this change 

would have with our EMTALA rules, 

we also believe that this clarification 

will allow the MA program to reflect 

current commercial practices. Finally, 

the clarification is consistent with our 

intent. We propose the following 

provisions: 

We propose to change ‘‘emergency 

services’’ to ‘‘emergency department 

services’’ in § 422.113(b)(2)(v). 

13. Access to Services Under an M+C 

Private Fee-For-Service Plan (§ 422.114) 

Section 211(j) of the MMA allows MA 

private fee-for-service plans that have a 

contracted network of providers through 

which the plan entirely meets access 

and availability requirements (for a 

specific category of health care 

professional or provider) to provide for 

a higher beneficiary copayment in the 

case of health care professionals and 

providers of that category who do not 

have contracts with the plan. Generally, 

this would permit a private fee-forservice plan to charge higher co-pays to 

members who opt out of a private feefor-service plan’s contracted network. 

This provision does not apply to private 

fee-for-service plans that meet access 

requirements solely through ‘‘deemed’’

networks as defined in 

§ 422.114(a)(2)(i). We proposed to add a 

new paragraph (c) to account for section 

211(j) of the MMA. 

14. Return to Home Skilled Nursing 

Facility (§ 422.133) 

Under our authority under section 

1856 of the Act to establish MA 

standards by regulation, we are 

proposing to extend the provisions in 

§ 422.133 to SNF services provided in 

cases in which an MA organization 

elects, under § 422.101(c), to provide 

Medicare covered SNF care in the 

absence of a prior qualifying hospital 

stay. Note that our policy to waive the 

3-day hospital stay requirement for MA 

plans does not require MA plans to 

cover SNF stays without a 3-day 

hospitalization. The policy simply 

allows such SNF stays to be considered 

Medicare-covered if the MA plan 

chooses to cover them. In such an 

instance, we are proposing to require by 

regulation that an individual who 

would be eligible under section 1852(l) 

of the Act for admission to a ‘‘home 

SNF’’ upon discharge from a hospital 

stay, would nonetheless retain his or her 

right to receive ‘‘home SNF’’ benefits in 

the absence of such a stay. We propose 

to deem that a hospital discharge has 

occurred prior to an admission for SNF 

services, and provide the MA enrollee 

full rights to the ‘‘home SNF’’ benefit. 

For example, the reference in 

§ 422.133(b)(3) to the SNF ‘‘in which the 

spouse of the enrollee is residing at the 

time of discharge from the hospital’’

would be deemed to refer to the SNF in 

which the spouse of the enrollee is 

residing at the time covered extended 

care services are initiated. We propose 

to add a new paragraph (b)(4). 

Subpart D—Quality Improvement 

Program 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart D—Quality Improvement 

Program’’ at the beginning of your 

comments.) 

1. Overview 

The MMA amended section 1852(e) of 

the Act in a number of significant ways. 

First the heading of the section was 

changed from quality assurance to 

quality improvement. It also deleted the 

sections of the Act that provided a list 

of ‘‘elements’’ that an MA plan’s quality 

assurance program was required to 

address. These provisions were removed 

and replaced with several new 

provisions, including the following: 

• Each MA plan (other than an MA 

private fee-for-service plan or an MSA 

plan) must have an ongoing quality 

improvement program. 

• Each ongoing quality improvement 

program must have a chronic care 

improvement program. 

• Each MA plan must provide for the 

collection, analysis, and reporting of 

data that permits the measurement of 

health outcomes and other indices of 

quality, such as HEDIS, CAHPS, and 

HOS, as discussed below. PPOs 

however, are only required to collect, 

analyze, and report data that are 

furnished by providers that have a 

contract with the PPO. The MMA also 

provides for the Secretary to establish 

separate rules for implementing this 

requirement with respect to MA 

regional plans. (See § 422.152(e).) 

In response to these amendments, we 

would change the heading and all 

references in the section from ‘‘quality 

assurance’’ to ‘‘quality improvement.’’ In 

addition, we would modify many of the 

provisions in § 422.152 that address 

quality assurance and performance 

improvement programs. We would also 

delete the provisions of § 422.154 that 

address external review, and add 

requirements related to MA–PD benefits 

to those that can be ‘‘deemed’’ to be met 

46886 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

based on accreditation under 

§ 422.156(b). 

The key provisions of this subpart 

form the cornerstone for a competition 

based program in quality of care. We 

already place information from these 

systems on the Medicare.gov web site, 

such as Health Plan Employer Data 

Information Survey (HEDIS), and 

Consumer Assessment of Health Plans 

(CAHPS). We will be exploring 

additional ways to enhance the use of 

quality of care systems as part of a 

competition based program. 

2. Quality Improvement Program 

(§ 422.152) 

To reflect the congressional intent to 

refocus the section on quality 

improvement, rather than quality 

assurance, we would change the 

heading of § 422.152 from ‘‘quality 

assessment and performance 

improvement program’’ to ‘‘quality 

improvement program.’’ The revised 

section 1852(e)(1) of the Act excludes 

MA private fee-for-service (PFFS) and 

MSA plans from the requirement to 

have an ongoing quality improvement 

program. This exclusion is, in part, 

because enrollees of MA PFFS and MSA 

are not restricted to seeking care from a 

network of providers. In addition, some 

believe MA PFFS and MSA plans lack 

the ability to influence the behavior of 

providers and enrollees. We would 

modify § 422.152(a) to reflect that each 

plan (except MA private-fee-for-service 

and MSA plans) offered by a MA 

organization must have an ongoing 

quality improvement program. As 

required under section 1852(e)(2) of the 

Act, we would require MA plans to have 

a chronic care program in place as part 

of their quality improvement program. 

As discussed below, we are proposing 

that this program be required to meet 

requirements set forth in § 422.152(c). 

Under our authority in section 

1856(b)(1) of the Act to establish 

standards by regulation, we are 

proposing to require that the quality 

improvement program required under 

section 1852(e)(1) of the Act include 

quality improvement projects that could 

be expected to have a favorable effect on 

health outcomes and enrollee 

satisfaction, and that meet regulatory 

requirements set forth in proposed 

§ 422.152(d). 

We believe that the broad 

requirements in proposed § 422.152(d) 

will not present an undue burden for 

MA organizations, which have years of 

experience in carrying out performance 

improvement projects under the current 

version of § 422.152(d), which, as 

discussed below, is more prescriptive 

than the revised version we are 

proposing in this rule. 

In light of the substantially revised 

quality requirements under this 

proposed rule, we believe that it is 

reasonable to expect all MA plans, 

including regional and local PPOs, to 

meet the quality improvement project 

requirements in proposed § 422.152(d). 

MSAs are excluded from this 

requirement altogether. We would also 

require an organization offering an MA 

plan to encourage its providers to 

participate in CMS and HHS quality 

improvement initiatives. Also, MA 

organizations are encouraged to seek 

technical assistance from the State 

quality improvement organization in 

designing and implementing quality 

improvement initiatives. By 

encouraging this participation, MA 

organizations are facilitating quality 

improvement in a variety of health care 

settings. 

Our previous quality improvement 

efforts for M+C coordinated care plans 

focused on requiring improvement in 

specific clinical topics and included 

specific performance measures to be 

improved. Thus, while we propose to 

retain regulatory requirements for 

quality improvement programs, we 

would revise the requirements in the 

current § 422.152(b) to enhance plans’

ability to target quality improvement 

efforts to their enrollees’ needs by 

deleting, modifying, and renumbering 

most of the requirements in this 

paragraph. Similar to the existing 

requirements, this paragraph would 

provide quality requirements for MA 

coordinated care plans, but would no 

longer refer to MSA plans. We would 

also address certain local PPO and all 

regional MA plan quality requirements 

in another paragraph—§ 422.152(e) of 

this section. We are interested in 

comments on whether or not we should 

require plans to use comparable 

measures across plans and making QI 

program size/scope proportionate to 

plan size. 

The requirements in the existing 

§ 422.152(b)(1) and § 422.152(b)(2) 

would be retained, as we believe these 

standards are integral to any plan’s 

quality improvement program, and are 

consistent with the requirements of 

private accrediting organizations. 

Section § 422.152(b)(1), for example, 

would require that in processing a 

request for initial or continued 

authorization of services, MA plans 

would need to follow written policies 

and procedures that reflect current 

standards of medical practice. Section 

422.152(b)(2) would require MA plans 

to have mechanisms in place to detect 

both under utilization and over 

utilization of services. 

We are directed in section 

1852(e)(3)(B)(i) of the Act to require the 

collection of only the types of data that 

we collected as of November 1, 2003. 

We address this requirement in 

§ 422.152(b)(3). We interpret section 

1852(e)(3)(B)(i) of the Act to mean that 

we can continue to require MA 

coordinated care plans to collect, 

analyze, and report their performance 

by using the measurement systems that 

are currently required, such as HEDIS, 

Health Outcomes of Seniors (HOS), and 

CAHPS, as appropriate for the type of 

plan. We believe that, consistent with 

private sector practices, we would be 

allowed to add, delete, or modify 

measures within these systems. Changes 

to these measurement systems are 

generally reviewed and approved by a 

committee with representatives from 

managed care plans, beneficiary 

advocacy groups, private and public 

health care purchasers. 

We are interested in comments on the 

following options. There are two basic 

ways to go (1) use the same metrics 

across all plan types which allows 

consumers to compare all plans (both 

groups of plans (for a specific plan 

type), or specific plans (across or within 

plan types)) for a larger set of metrics, 

or (2) tailor the metrics to specific plan 

types, which limits the dimensions 

upon which consumers would be able to 

compare plans. 

If, in the future, we believe that a new 

measurement system should be used to 

assess MA plans’ performance, we are 

required under section 1852(e)(3)(B)(ii) 

of the Act to submit a report to Congress 

that is prepared in consultation with 

MA organizations and private 

accrediting organizations. Thus, we 

have proposed to remove the provisions 

in § 422.152(c) that address measuring 

and reporting performance. We also 

would remove all the requirements 

relating to minimum performance levels 

and requirements that address clinical 

and non-clinical areas. 

We will continue to look for costeffective ways to measure quality for 

MA plans and will use a variety of 

procedures to get input from the public, 

MA organizations, private accrediting 

organizations, and seek Congressional 

review. 

Proposed § 422.152(b)(3)(ii) would 

require MA plans to make available to 

us the information on quality and 

outcomes measures that will enable 

beneficiaries to compare health coverage 

options and select among them, as 

provided in § 422.64(c)(10). 

Section 422.152(b)(4) would require 

MA local PPO plans that are offered by 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46887 

an organization that is licensed or 

organized under State law as a health 

maintenance organization to follow the 

same quality improvement requirements 

as other MA coordinated care plans. 

Quality improvement requirements for 

local PPOs that meet the definition of a 

local PPO that is specified in 

§ 422.152(e)(1) (local PPOs that are not 

offered by organizations that are 

licensed or organized under State law as 

HMOs) are addressed in that paragraph. 

3. Chronic Care Improvement Program 

Requirements (§ 422.152(c)) 

We would replace the provisions in 

§ 422.152(c) with requirements for MA 

plans’ chronic care improvement 

programs. As directed by MMA, we 

would require MA plans to develop 

criteria for participating in a chronic 

care improvement program. The criteria 

must include methods for identifying 

MA enrollees with multiple or 

sufficiently severe chronic conditions 

who would benefit from participating in 

a chronic care improvement program. 

The criteria must also provide 

mechanisms for monitoring MA 

enrollees that are participating in the 

chronic care improvement program. We 

invite comments on these requirements 

to help us provide additional guidance 

to MA plans on additional criteria and 

mechanisms that might be useful to help 

them identify and monitor MA enrollees 

that are participating in their chronic 

care improvement program. For 

example, are there data or approaches 

used to identify special needs 

individuals with severe or disabling 

chronic conditions who might benefit 

from enrollment in specialized MA 

plans that could also be used in the 

identification of MA enrollees who 

would benefit from participating in a 

chronic care improvement program 

because of their severe chronic 

conditions? 

4. Quality Improvement Projects 

(§ 422.152(d)) 

As noted above, we have proposed to 

delete many of the prescriptive 

requirements for quality improvement 

projects that appear in the current 

§ 422.152(d). While MMA has resulted 

in the deletion of a number of the more 

prescriptive requirements of quality 

improvement programs, it still retained 

the basic requirements of such projects. 

The MMA retained the requirements of 

the collection, analysis, and reporting of 

data that permits the measurement of 

health outcomes and other indices of 

quality, for example, HEDIS, HOS, and 

CAHPS. Furthermore, it added the 

chronic care improvement program. As 

mentioned, these aspects of the program 

provide the cornerstone for a 

competition based program in quality of 

care. We already place information from 

these systems on the Medicare.gov Web 

site. We will be exploring additional 

ways to enhance the use of quality of 

care systems as part of a competition 

based program. We propose deleting the 

list of clinical and non-clinical topic 

areas because it is our intention that MA 

plans select the topic area for a quality 

improvement project based on the needs 

of their enrolled population. It is our 

intention, however, that MA plans 

would select topic areas that are 

relevant to a Medicare population. 

We would delete the requirement of 

including the entire relevant population 

in the measurement because it has been 

proven that sampling is an approved 

method for assessing the performance of 

providing care and services to a 

population. Since MA plans conduct 

quality improvement projects for both 

the Medicare program and private 

accreditation organizations, we feel that 

it is appropriate for them to conduct 

projects that include both Medicare and 

non-Medicare enrollees. Thus, they 

would be allowed to conduct a study of 

persons with Coronary Artery Disease 

that includes enrollees that are both 

over and under 65. However, the sample 

of enrollees that are studied must be 

appropriately representative of 

Medicare beneficiaries. Since the MA 

plans would be selecting their own 

topics, it is not necessary for us to 

ensure that the entire spectrum of 

clinical and non-clinical areas are 

addressed by an MA plan. Similarly, we 

propose deleting the requirement that 

addresses national and statewide 

projects because MA plans would be 

selecting their quality improvement 

project topics by assessing the needs of 

their population. Thus, we would delete 

the following requirements: 

• The lists of required clinical and 

non-clinical areas (§ 422.152(d)(4), 

§ 422.152(d)(5)). 

• The requirement that an entire 

relevant population must be included in 

the measurement set (§ 422.152(d)(2)). 

• The provision authorizing us to 

ensure that the entire spectrum of 

clinical and non-clinical areas are 

addressed by establishing the number 

and distribution of projects 

(§ 422.152(d)(3)). 

• The requirement for participation in 

national or site-wide projects 

(§ 422.152(d)(6)(ii))). 

In § 422.152(d)(1), we would require 

that quality improvement projects be 

initiatives that include the entire 

organization and focus on clinical and 

non-clinical areas. The projects would 

need to follow the regular quality 

improvement process (measure, 

intervene, and then remeasure to 

determine if the intervention resulted in 

improvement). We have retained the 

provisions that quality improvement 

projects must measure performance, and 

the interventions must be system-wide 

and include the establishment or 

alteration of practice guidelines. In 

addition, the projects must focus on 

improving performance and involve 

systemic and periodic follow-up on the 

effect of the interventions. 

To ensure that the measures (or 

quality indicators) used in quality 

improvement projects are reliable and 

relevant for improving the health care 

and services furnished to MA enrollees, 

we would require in § 422.152(d)(2) that 

the quality indicators be objective, 

clearly and unambiguously defined, and 

based on current clinical knowledge or 

health services research. The measures 

must also be capable of measuring 

outcomes, such as changes in health 

status, functional status, and enrollee 

satisfaction, or valid proxies of those 

outcomes. 

Likewise, in § 422.152(d)(3), we 

would require that the data used in an 

MA plan’s quality improvement projects 

be valid and reliable and based on 

systemic ongoing collection and 

analysis of information. We would also 

require in § 422.152(d)(4) that the 

interventions achieve measurable and 

sustained improvement. We would not 

define what constitutes measurable and 

sustained improvement in the 

regulation, but we mean some 

movement in the quality indicator in an 

upward or downward direction as 

appropriate. 

Finally, in § 422.152(d)(5), we would 

retain the requirement that MA plans 

report the status and results of their 

projects when requested by us. At this 

time, we believe that because of the 

various changes just described, the 

reporting and review burden would be 

much less than the current process used 

in the M+C program. We are considering 

using a model similar to the one used 

by private accrediting organizations, 

where quality projects would be 

submitted before an onsite monitoring 

review. For plans selecting MA 

deeming, their quality improvement 

projects would be collected and 

evaluated by the accrediting 

organization that would be conducting 

the deeming review. 

5. Requirements for MA Regional Plans 

and MA Local Plans That Are PPOs as 

Defined in § 422.152(e) 

As noted above, section 

1852(e)(3)(A)(ii) of the Act provides for 

us to establish separate regulatory 

46888 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

requirements for MA regional plans 

relating to the collection, analysis, and 

reporting of data that permit the 

measurement of health outcomes and 

other indices of quality for MA regional 

plans. Section 1852(e)(3)(A)(ii) of the 

Act further provides that these 

requirements for MA regional plans 

could not exceed the requirements 

established for MA local plans that are 

PPO plans as defined in section 

1852(e)(3)(A)(iv) of the Act—local PPO 

plans that are offered by an organization 

that is not licensed or organized under 

State law as an HMO. We propose to 

apply these same principles in applying 

general quality requirements, beyond 

those relating to the collection, analysis, 

and reporting of data. Thus, as noted 

above, and as provided in the current 

regulations, we propose a separate set of 

requirements for these specific PPOs, 

which we would also apply to regional 

MA plans. 

In § 422.152(e)(1), we would provide 

a definition for the term ‘‘local PPO 

plan’’ as used in this section. The other 

requirements in this paragraph are the 

requirements that apply to PPOs under 

current regulations. We are aware that 

some organizations that offered PPO 

plans felt that some of the performance 

measures required of PPO plans in the 

M+C program were difficult to collect in 

a PPO environment. To address this 

concern, we will assess all the 

performance measurement and 

reporting requirements and make the 

necessary adjustments. We anticipate 

that PPOs will not be required to collect 

data such as medical records, because 

they have difficulty in obtaining such 

records. We will work with outside 

experts, the public, MA organizations, 

and private accrediting organizations on 

developing HEDIS measures appropriate 

to PPOs and welcome comments on 

these issues. We anticipate that in early 

2005 that we will finalize the reporting 

requirements for PPOs. 

In § 422.152(f), we retain the 

provisions that address health 

information systems, quality 

improvement program review, and 

remedial action. MA organizations 

would be required, for all the MA plans 

they offer, to maintain a health 

information system that collects, 

analyzes, and integrates the data 

necessary to implement their quality 

improvement program. The organization 

would also be required to ensure that 

the information it receives from 

providers of services is reliable and 

complete. In addition, for each plan, 

there would have to be in effect a 

process for formal evaluation, at least 

annually, of the impact and 

effectiveness of its quality improvement 

program. 

Finally, for each plan it offers, an MA 

organization would be required to 

correct all problems that come to its 

attention through internal surveillance, 

complaints, or other mechanisms. 

MMA removed the provision that 

each MA organization’s quality 

assurance program include a separate 

focus on racial and ethnic minorities. 

Thus, we would remove the current 

§ 422.152(f)(4) addressing this issue. It 

should be noted that CMS specified that 

the 2003 national projects for M+C 

plans be Clinical Health Care Disparities 

or Culturally and Linguistically 

Appropriate Services. Thus, this 

requirement has already been initiated 

by the plans. 

MMA removed the requirement that 

for each plan it operated the MA 

organization would have an agreement 

with an external quality review and 

improvement organization. Thus, we 

would remove the corresponding 

regulatory requirements in § 422.154. 

MMA provided that all the part D 

(Voluntary Prescription Drug Benefit) 

requirements are to be included as 

among those that could be deemed to be 

met through accreditation, and we 

accordingly have added this provision 

to the list of deemable requirements in 

§ 422.156(b). 

Subpart E—Relationships With 

Providers (§ 422.210) 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart E—Relationships with 

Providers’’ at the beginning of your 

comments.) 

MMA has not changed most existing 

MA program requirements concerning 

MA organization relationships with 

providers. Since these aspects of the 

program have worked well, we generally 

have proposed to keep the existing 

provisions of subpart E as they are. The 

only exceptions, which are discussed 

below, are modifications to the 

physician incentive plan requirements 

to reflect changes made by MMA to 

section 1852(j)(4) of the Act. 

Section 222(h) of MMA revised 

section 1852(j) of the Act to eliminate 

requirements that were set forth in 

section 1852(j)(4)(A)(ii)(II) and (iii) of 

the Act and to require only that an MA 

organization ‘‘provide assurances 

satisfactory to the Secretary’’ that it 

meets certain stop loss protection 

requirements that were in what was 

section 1852(j)(4)(A)(ii)(I) of the Act, 

and that remain in the revised version 

of section 1852(j)(4) of the Act. Section 

1852(j)(4)(A)(ii)(II) of the Act had 

required that, where a physician 

incentive plan places physicians at 

substantial financial risk, MA 

organizations conduct ‘‘periodic surveys 

of both individuals enrolled and 

individuals previously enrolled with the 

organization to determine the degree of 

access of such individuals to services 

provided by the organization and 

satisfaction with the quality of such 

services.’’ This requirement was 

deleted. We have proposed to delete this 

requirement in § 422.208(h). We are 

redesignating existing paragraph 

§ 422.208(i) as § 422.208(h). 

We note that the surveys that were 

previously required under this section 

were covered for the most part by our 

administration of the CAHPS survey, 

which will be continued. 

Section 1852(j)(4)(A)(iii) of the Act 

contained a requirement that descriptive 

information be provided to the Secretary 

to permit the Secretary to determine 

compliance with the requirements in 

section 1852(j) of the Act. This 

requirement was also deleted by section 

222(h) of MMA. We note that in a final 

rule published on August 22, 2003, at 68 

FR 50840 through 50859, we had 

deleted a regulatory provision that had 

previously implemented this reporting 

requirement by requiring routine 

reporting of data to us. This final rule 

proposed that the information only be 

made available to us upon request. 

Given the MMA amendment providing 

that the MA organization will now only 

be providing ‘‘assurances,’’ the need to 

gather data to make an independent 

determination no longer exists. 

Moreover, the Congress repealed the 

statutory basis for requiring that the 

information be provided. We therefore 

propose to revise § 422.210 to eliminate 

the requirement that information on 

physician incentive plans be disclosed 

to us. 

Subpart F—Submission of Bids, 

Premiums, and Related Information and 

Plan Approval 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart F—Submission of Bids, 

Premiums, and Related Information and 

Plan Approval’’ at the beginning of your 

comments.) 

Under the current MA regulations, 

subpart F addresses payments to MA 

organizations, and subpart G discusses 

beneficiary premiums and cost sharing. 

Given the substantial revisions that 

MMA makes to pricing and payment 

rules for MA organizations, we propose 

to replace these subparts with new 

subparts F and G. In doing so, we will 

reverse the order of provisions to reflect 

the chronology of events in the new MA 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46889 

bidding system more accurately. In this 

proposed rule, provisions addressing 

bid submissions and CMS review of 

bids come first in subpart F, and a 

description of the methodology and 

process for CMS’ payment to MA 

organizations follows in subpart G. 

The proposed rules in the new 

subpart F set forth the annual bid 

submission process for organizations 

intending to offer MA local and regional 

plans in the upcoming year. In 

particular, they address the basis for 

bids, what must be included in the bid, 

and other information MA organizations 

must submit by law for each plan, such 

as the actuarial bases for the bid. The 

proposed rules set forth general rules 

that apply to all MA organizations, and 

special rules for certain types of plans. 

They contain authority to review the 

submitted bids and the standards for 

reviewing those bids, including the 

actuarial analyses that are mandated by 

the MMA, and describe the negotiation 

process between MA organizations and 

us. 

After provisions addressing 

submission, review, and approval of 

bids, the proposed regulations address 

‘‘bid-to-benchmark’’ comparisons, 

including how local and regional 

benchmark amounts are determined and 

how beneficiary premiums and savings 

are calculated. The rules also set forth 

how beneficiary savings are used for 

beneficiary rebates and Government 

savings, and distinguish between 

calculations for regional MA plans and 

local MA plans. The proposed rules also 

describe the various premium payment 

options available to beneficiaries, and 

require that beneficiary premiums and 

cost-sharing be uniform within a service 

area (or service area segment). Finally, 

the new subpart F describes the options 

for distributing the beneficiary portion 

of the rebate. 

We propose to replace the previous 

MA provisions from the old subpart G 

(now subpart F) almost in their entirety, 

with the exception of the following 

proposed provisions, which largely 

retain existing language: 

§ 422.262(d), monetary inducement 

prohibited, which precludes an MA 

organization from providing cash or 

other monetary rebates as an 

inducement for enrollment or for any 

other reason or purpose. 

§ 422.262(e), timing of payments, 

which gives beneficiaries the right to 

make premium payments on a monthly 

basis, and protects them from a 

termination of coverage for failure to 

make these payments except as 

provided in § 422.74(b). The only 

change to this provision is the addition 

of the prescription drug premium to the 

list of beneficiary premiums. 

§ 422.270, incorrect collection of 

premiums and cost sharing, which 

addresses cases in which an MA 

organization collects more than the 

amount of beneficiary premium 

allowed. Under this provision, the 

organization is required to refund these 

over-collections through an adjustment 

to current and future premiums. This 

language is identical to the current MA 

regulation now in subpart G at 

§ 422.309. 

1. Basis and Scope (§ 422.250) 

Proposed § 422.250 sets forth the basis 

and scope of the revised subpart F, 

noting that it is based largely on section 

1854 of the Act, but includes provisions 

from sections 1853 and 1858 of the Act. 

Section 422.250 notes that subpart F 

addresses the bidding methodology 

upon which MA payments will be based 

beginning in 2006 and provisions for 

CMS’ negotiation and approval of 

organizations’ bids. 

2. Terminology (§ 422.252) 

There are several general terms 

defined in parts of section 1853 and 

section 1854 of the Act that apply to 

both bidding rules (subpart F) and 

payment calculations (subpart G), so we 

define these terms in the regulatory text 

for this part. The proposed definitions 

throughout both subparts F and G are 

intended to reflect the statutory 

definitions they implement in a 

simplified manner. We will identify 

clearly those cases in which we propose 

independently to define a term that is 

not defined in the statute. In this 

preamble, we provide an overview of 

rate terms used in both subparts F and 

G. 

Mandatory and optional supplemental 

benefits are defined at § 422.102. In 

subparts F and G the phrase 

‘‘supplemental benefits’’ refers to both 

mandatory and optional supplemental 

benefits. The terms ‘‘mandatory 

supplemental’’ and ‘‘optional 

supplemental’’ are used when referring 

specifically to one these types of 

supplemental benefits. 

The MMA introduces regional MA 

plans, thus revising section 1853(d) of 

the Act to define two types of payment 

areas. For MA regional plans, the 

payment area is an MA region, and for 

MA local plans, the payment area is a 

county (called an ‘‘MA local area’’). 

Under the rate setting method for the 

previous M+C program, the general rule 

was that an annual capitation rate was 

the rate for a county, and an MA 

payment area was a county. Under the 

MMA, the ‘‘annual MA capitation rate’’

continues to be the county rate. As set 

forth at section 1853(c)(1) of the Act, 

capitation rates are called ‘‘MA local 

area’’ rates, and references throughout 

the MMA to capitation rates are to 

county rates (or in the case of ESRD 

enrollees, to State-level rates). Note, 

however, that section 1858 of the Act 

does require us to calculate a regional 

per capita rate, described in proposed 

§ 422.262(b)(3) as the ‘‘statutory regionspecific non-drug amount.’’ We chose to 

not define this term separately in 

proposed § 422.252, however, because it 

is an intermediate product that we 

would use to arrive at the administrative 

pricing component of the region-specific 

benchmark amount (discussed below). 

Proposed § 422.252 also includes a 

definition of ‘‘MA–PD plan,’’ which 

means an MA local or regional plan that 

offers prescription drug coverage under 

Part D. We would note that MSA plans 

are not allowed to offer Part D 

prescription drug coverage, and private 

fee-for-service plans may but do not 

have to offer Part D coverage. 

The following terms are also defined 

in proposed § 422.252: 

‘‘Unadjusted MA statutory non-drug 

monthly bid amount’’ is defined as the 

plan’s estimate of its monthly required 

revenue for Part A and Part B original 

Medicare benefits. 

‘‘Monthly aggregate bid amount’’ is 

defined as the total monthly plan bid for 

coverage of an MA eligible beneficiary 

with a nationally average risk profile. 

This bid is composed of: the unadjusted 

MA statutory non-drug monthly bid 

amount; an amount for coverage of basic 

prescription drug benefits under Part D 

(if applicable), and an amount for 

provision of supplemental benefits, if 

any. 

In the preambles to subparts F and G, 

the term ‘‘basic A/B bid’’ is used to refer 

to the unadjusted MA statutory nondrug monthly bid amount. The term 

‘‘bid’’ refers to the aggregate monthly bid 

amount unless otherwise indicated. 

‘‘Plan basic cost sharing’’ means cost 

sharing that would be charged by a plan 

for benefits under the original Medicare 

fee-for-service program option before 

any reductions resulting from 

mandatory supplemental benefits. 

‘‘Unadjusted MA area-specific nondrug monthly benchmark amount’’ is 

defined, for local MA plans serving one 

county, as the county capitation rate. 

For local MA plans serving multiple 

counties it is the weighted average of 

county rates in a plan’s service area, 

where the weights are by the plan’s 

projected enrollment per county. 

‘‘Unadjusted MA region-specific nondrug monthly benchmark amount’’ is 

the sum of two components: the 

46890 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

statutory component (based on a 

weighted average of capitation rates in 

the region) and the plan bid component 

(based on a weighted average of plan 

bids in the region). 

‘‘MA monthly basic beneficiary 

premium’’ is the amount that an MA 

plan (other than an MSA plan) charges 

an enrollee for original Medicare 

benefits if its bid is above the 

benchmark. 

‘‘MA monthly prescription drug 

beneficiary premium’’ is the base 

beneficiary premium, adjusted to reflect 

differences between the plan bid and 

the national average bid, less the 

amount of rebate the MA–PD plan elects 

to apply toward a reduction of the base 

beneficiary premium, as described in 

proposed § 422.266(b). 

‘‘MA monthly supplemental 

beneficiary premium’’ is the portion of 

the plan bid attributable to mandatory 

and/or optional supplemental health 

care benefits described in § 422.102, less 

any rebate applied to a mandatory 

supplemental benefit under 

§ 422.266(b)(2). 

‘‘MA monthly MSA premium’’ is the 

amount of the plan premium for 

coverage of benefits under the original 

Medicare program through an MSA 

plan, as described in proposed 

§ 422.254(e). 

3. Submission of Bids (§ 422.254) 

General rule. Section 1854 of the Act 

was amended by the MMA to replace 

the adjusted community rate (ACR) 

proposal system currently in effect 

under the MA program with a bid 

submission process. No later than the 

first Monday of June each year, 

beginning for contract year 2006, MA 

organizations must submit bids for each 

plan that they intend to offer in the 

following year. Plan bids would be 

required to meet the requirements 

specified at proposed § 422.254(b), and 

bid submissions would be required to 

include the information listed in 

proposed § 422.254(c), discussed below. 

Section 1853(a)(1)(H) of the Act, as 

proposed in § 422.254(a)(2), gives us the 

authority to determine if ESRD MA 

enrollees should be included in the 

MMA bidding process. We propose that 

ESRD enrollees be fully incorporated 

into the plan’s aggregate bid for contract 

year 2007 and succeeding years. 

However, for contract year 2006, we are 

concerned that MA organizations would 

have to submit bids in June 2005, and 

at that time they would have very little 

experience with the impact on their 

payments of the new ESRD risk 

adjustment model, which is effective 

January 1, 2005. Therefore, we propose 

three options for handling the costs of 

ESRD enrollees in the June 2005 bid 

submission. We invite comment on 

these approaches. 

One option for contract year 2006 

only is that MA organizations would not 

include costs for ESRD enrollees in their 

basic A/B bids and supplemental bids. 

We would pay MA organizations for 

ESRD enrollees using the MMA rate 

setting methodology, as discussed at 

proposed § 422.304(c)(1)(i). A second 

option for 2006 only is that MA 

organizations would not include costs 

for ESRD enrollees in their basic A/B 

bids, but would include costs for ESRD 

enrollees in the supplemental portion of 

the bid in order to determine the 

appropriate price of supplemental 

benefits other than Part B premium 

reductions. The third option would be 

that MA organizations fully incorporate 

ESRD enrollees in the pricing of both 

basic and supplemental benefits for 

contract year 2006 and succeeding 

years. That is, we would not delay full 

incorporation until 2007. 

Under all three options, ESRD 

enrollees would be included in plan 

estimates of the amount it would cost to 

provide qualified prescription drug 

coverage under Part D for 2006. 

Regardless of whether a plan’s ESRD 

enrollees were excluded from the basic 

A/B bid or from both basic and 

supplemental bids for 2006, they would 

still be subject to the same premium and 

cost sharing as other plan enrollees 

under the uniformity of premiums 

provision in proposed § 422.262(c). 

Accordingly, for any plan offering a Part 

B premium reduction to MA plan 

enrollees, we would adjust our 

payments for ESRD enrollees to reflect 

that part of the plan benefit package is 

payment of all or a portion of the 

enrollee’s Part B premium. For further 

discussion of payments to MA 

organizations for ESRD enrollees, see 

the subpart G preamble discussion of 

§ 422.304(c)(1)(i). 

Bid requirements. Proposed 

§ 422.254(a) and (b) would implement 

section 1854(a)(1)(A) and section 

1854(a)(6)(A) of the Act, which set forth 

requirements for plan bids. MA 

organizations must submit an aggregate 

monthly bid amount for each MA plan 

the organization intends to offer. 

Each bid submission for an MA plan 

represents the MA organization’s 

estimate of its average monthly 

estimated required revenue to provide 

coverage in the service area of the plan 

for an MA eligible beneficiary with a 

nationally average risk profile for the 

risk adjustment factors (that is, the 

aggregate bid is a standardized bid). 

This aggregate bid is the sum of several 

amounts the plan estimates are its 

revenue requirements: (1) The 

‘‘unadjusted MA statutory non-drug 

monthly bid,’’ to provide original 

Medicare benefits; (2) the amount to 

provide basic prescription drug 

coverage; and/or (3) the amount to 

provide supplemental coverage, if any. 

We state in proposed § 422.254(b)(2) 

that each bid would be for a uniform 

benefit package for the service area (or 

service area segment, if applicable, for 

local plans). Plan premiums and all 

applicable cost sharing would also be 

uniform. 

We state in proposed § 422.254(b)(3) 

that the bid submission would contain 

all estimated required revenue, 

including administrative costs and 

return on investment (profit, retained 

earnings). We state in proposed 

§ 422.254(b)(4) that the bid amount is 

for plan payments only but must be 

based on plan assumptions about the 

amount of estimated revenue required 

from enrollee cost sharing. 

When estimating required revenue, a 

plan would include adjustments for the 

effect that providing any non-Medicare 

benefit has on utilization. This method 

of pricing supplemental coverage would 

apply to both mandatory and optional 

supplemental benefits. 

To the extent that the provision of 

reductions in Part A, Part B, and/or Part 

D cost sharing results in higher 

utilization of these benefits, the 

additional expenditures attributable to 

the change in cost sharing structure are 

categorized as mandatory supplemental 

benefits. That is, when a plan offers a 

benefit package that includes reductions 

in cost sharing, the pricing of such a 

mandatory supplemental benefit would 

include not only the cost of ‘‘buying 

down’’ the cost sharing (that is, the 

estimated revenue needed to cover the 

amounts enrollees would have 

otherwise paid as cost sharing), but also 

the cost of financing the expenditures 

associated with the additional 

utilization resulting from offering the 

cost sharing benefits. 

The basic A/B bid should assume a 

utilization pattern consistent with 

Medicare cost-sharing. The portion of 

the aggregate bid related to the 

provision of basic prescription drug 

coverage should assume a utilization 

pattern consistent with defined standard 

cost sharing. Since the basic A/B bid is 

used to determine rebates and the 

portion of the bid related to Part D basic 

benefits is used to determine the 

monthly prescription drug beneficiary 

premium, these amounts cannot reflect 

the utilization effect of cost-sharing 

reductions provided through 

supplemental benefits. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46891 

Plans would make an actuarial 

projection for their populations 

concerning the expected utilization of 

each supplemental benefit (both 

mandatory and optional supplemental 

benefits) and the appropriate pricing of 

such benefits. We would verify the 

reasonableness of these projections as 

part of the bid review process (in the 

same way that we would verify the 

reasonableness of plans’ projections of 

enrollment numbers and enrollment 

mix for an optional supplemental 

product). A determination that 

supplemental benefits are appropriately 

priced is essential for the integrity of the 

bidding process. A plan could overstate 

its revenue needs for covered services 

with the intention of maximizing 

payments not subject to rebates while 

under-pricing supplemental benefits to 

make the offering attractive to enrollees. 

To prevent this kind of strategy, the 

accurate pricing of Part A, Part B, and 

Part D benefits and supplemental 

benefits have equal importance in the 

bidding process. 

We propose to exercise our authority 

under section 1856(b) of the Act 

(allowing CMS to establish MA 

standards by regulation) to establish a 

rule prohibiting MA organizations from 

offering, as optional supplemental 

benefits, reductions in Part A, Part B, 

and Part D cost sharing, or 

enhancements to Medicare Parts A and 

B benefits. Under such a rule, MA 

organizations would still be permitted 

to offer non-Medicare benefits such as 

dental and optical services as optional 

supplemental benefits. We are 

concerned about the effects of allowing 

a benefit that affects the level of costsharing and utilization of benefits to be 

offered at the enrollee’s option. 

Allowing MA organizations to offer cost 

sharing-reductions and enhancements to 

Part A and Part B Medicare benefits as 

optional supplemental benefits arguably 

would be inconsistent with a multicomponent bid, where one component 

is a bid amount for all of the 

supplemental benefits a plan intends to 

offer, both mandatory and optional. 

Costs for part of the supplemental bid 

amount would be carried by all 

enrollees, while costs for part would be 

carried by those who choose the benefit. 

Also, optional supplemental benefits do 

not exist under Part D. We are exploring 

the issue of whether allowing MA–PD 

plans to include drug coverage in an 

optional supplemental benefit would 

require a request for a waiver under 

section 1860D–21(c)(1) of the Act. 

If we were to implement this 

restriction on optional supplemental 

benefits, MA organizations would still 

be able to provide choice by offering 

multiple plans within the same service 

area that have different mandatory 

supplemental benefits. We invite 

comments on this issue. 

The MMA does not alter the 

percentage of the amount paid to MA 

organizations in 2006 that is adjusted by 

the CMS–HCC risk adjustment model. 

As previously provided, 75 percent of 

the payment will be subject to risk 

adjustment, and the remaining 25 

percent will be based on the 

demographic model. Since the statute 

requires us to combine different 

approaches to adjusting capitation rates 

in 2006, we believe this raises the issue 

of whether MA organizations should be 

required to submit one or two different 

bids for each plan in order for each 

portion of the payment to be based on 

an appropriately standardized bid. 

We propose that since we must make 

blended payments in 2006 for MA 

organizations, that MA organizations 

submit a blended bid for 2006, with one 

portion being based on a beneficiary 

with a nationally average risk profile 

(that is, the ‘‘1.0 beneficiary’’) and the 

second one being based on a beneficiary 

with a nationally average demographic 

profile. We invite comment on this 

approach or others that may be feasible. 

Note that some demonstrations have an 

alternative transition schedule to 100 

percent risk adjusted payments, so these 

organizations would have to submit a 

blended bid for 2006 and 2007. 

Proposed § 422.254(b)(4) would 

implement section 1854(a)(6) of the Act 

and would address an issue arising from 

section 1852(a)(1)(B) of the Act, which 

warrant a full discussion. Section 

1854(a)(6) of the Act requires 

organizations to submit, for each MA 

plan, a bid consisting of three 

components, along with a statement of 

the actuarial basis for each of those 

components: (1) The original Medicare 

fee-for-service benefit package; (2) basic 

prescription drug coverage; and (3) any 

coverage beyond the first two 

components (supplemental health care 

benefits). 

In the case of the first component, the 

health plan’s basic A/B bid is the 

statement of the expected revenue the 

bidder requires to provide the Medicarecovered benefit package. This 

component of the aggregate bid may not 

include services not covered by 

Medicare. A simple example of what 

must be included as supplemental 

coverage rather than basic Medicare 

coverage would be routine physician 

services provided outside of the United 

States. The physician services would 

have to be included in the bid 

component referred to as ‘‘the provision 

of supplemental health care benefits’’

(section 1854(a)(6)(A)(ii)(III) of the Act), 

not in the component for the ‘‘provision 

of benefits under the original Medicare 

fee-for-service program’’ (section 

1854(a)(6)(A)(ii)(I) of the Act). Medicare 

does not cover these services, but an 

MA plan may cover them as 

supplemental services. 

A more complicated example would 

be that the ‘‘original Medicare’’

component of the bid may not include 

any inpatient hospital days that a health 

plan covers where such services would 

not be covered under original Medicare 

solely because an individual has 

exhausted the Medicare lifetime reserve 

days. To the extent that the care is 

‘‘bundled’’ as part of a benefit package 

that a particular MA plan offers to 

Medicare enrollees, in order to use the 

plan cost and utilization data as the 

basis of its bid, the health plan must 

disaggregate the hospital benefit to 

determine costs (revenue needs) 

attributable to covered versus noncovered care. As part of the bid review 

process, we would ensure that only 

Medicare-covered services are included 

in a plan bid. (Note that under the prior 

M+C program we required ‘‘unlimited 

hospital days’’ to be shown on the 

Adjusted Community Rate Proposal as 

an additional benefit.) 

Requiring that the ‘‘original Medicare’’

bid component only include covered 

care enables a fair comparison to 

determine the extent to which a plan 

can save money (or will cost more) in 

relation to a benchmark that consists 

primarily of Medicare fee-for-service 

expenditures for covered services in a 

given area. With a correct bid for this 

component, rebate dollars can be 

correctly calculated. If a health plan 

includes non-covered care in the basic 

A/B bid and this bid amount is below 

the benchmark, dollars that should have 

been returned to beneficiaries as rebate 

dollars will not be available to finance 

rebates (and dollars that should have 

been returned to the Government will 

not be available). Instead, the health 

plan will use those funds received from 

the Government to finance benefits that 

should have been classified as 

mandatory supplemental (non-covered) 

benefits. Those non-covered benefits 

included in the basic A/B bid would be 

financed at 100 percent of their cost to 

the plan, rather than having only 75 

percent of the rebate dollars available to 

finance the benefit as a mandatory 

supplemental benefit (for example). 

Another health plan in the exact same 

situation that had correctly classified 

the services as non-covered services and 

had priced them as a mandatory 

supplemental benefit will appear more 

expensive to prospective enrollees 

46892 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

because 25 percent of the cost of the 

benefit becomes a ‘‘cost’’ to the 

beneficiary. 

Actuarial equivalence of cost sharing. 

In connection with the ‘‘original 

Medicare’’ component of the bid, 

section 1852(a)(1)(B) of the Act states 

that ‘‘the term ‘benefits under the 

original Medicare fee-for-service 

program option’ means those items and 

services (other than hospice care) for 

which benefits are available under 

Medicare Parts A and B to individuals 

entitled to benefits under Medicare Part 

A and enrolled under Medicare Part B, 

with cost-sharing for those services as 

required under Parts A and B or an 

actuarially equivalent level of cost 

sharing as determined in this part’’. The 

provision regarding cost sharing is 

necessary because it reflects a feature of 

the structure of the Medicare program 

which provides that a certain share of 

the cost of covered care is to be borne 

by beneficiaries (or third parties paying 

on behalf of beneficiaries). Those costs, 

in original Medicare fee-for-service, are 

not financed by Government funds, and 

the costs would not be financed by 

Government funds in the bidding 

system (unless rebate dollars are 

available). 

We have examined a number of ways 

to incorporate this Part A/B cost sharing 

provision in the bidding process, and in 

particular how to determine whether a 

bid incorporates cost sharing that would 

be considered actuarially equivalent to 

the cost sharing of original fee-forservice Medicare. As a starting point, we 

discuss the concept of actuarially 

equivalent cost-sharing by describing a 

hypothetical plan with the original 

Medicare cost-sharing rules. We then 

discuss three methods of implementing 

the MMA provision for determining 

what level of plan cost sharing is 

actuarially equivalent to original 

Medicare: (1) The current method that 

defines original Medicare cost sharing 

as a national average per capita uniform 

dollar amount, and a possible variation 

on this approach, the localized uniform 

dollar amount; (2) the plan-specific 

approach; and (3) the proportional 

approach (including national, regional, 

or local proportions). 

One way in which a health plan could 

have a basic A/B bid for Medicare 

services that conforms to the provision 

in section 1852(a)(1)(B) of the Act is to 

design a plan that covers only Medicarecovered services and uses the same costsharing rules as Medicare (the hospital 

deductible, 20 percent coinsurance for 

outpatient services, etc.). For such a 

plan, there is no issue of actuarial 

equivalence since the plan has ‘‘cost 

sharing as required under Parts A and 

B’’ of Medicare, as specified in 

1852(a)(1)(B) of the Act. For this 

hypothetical plan, the actual dollar 

amount of the basic A/B bid may be 

quite different from the local Medicare 

fee-for-service expenditures, and from 

the dollar amount of cost sharing 

beneficiaries face in fee-for-service 

Medicare—for a number of possible 

reasons. 

Among the possible reasons for 

variation are that local fee-for-service 

cost sharing amounts reflect a mix of 

types of supplemental coverage that 

Medicare beneficiaries may have. It is 

well known that beneficiaries with 

generous supplemental coverage 

(Medigap, Medicaid, some employmentbased coverage) who do not directly face 

the expense of cost sharing have higher 

Medicare expenditures, and 

consequently higher cost sharing 

(though paid for by a third party). 

Individuals with only Medicare 

coverage have much lower expenditures 

and lower cost sharing. Expenditures of 

enrollees in the hypothetical plan with 

Medicare cost sharing may be closer to 

the level of expenditures for 

beneficiaries with no supplemental 

coverage. The private plan may also 

have lower expenditures overall because 

it has secured discounts below the 

Medicare rates from its network of 

providers, and the plan is likely to have 

utilization controls that reduce certain 

types of care or which shift care to a 

different setting or type of provider. 

This hypothetical plan’s basic A/B bid 

for the coverage of Medicare services, 

and the associated cost sharing, would 

reflect the unique features of the private 

plan, and when expressed as a dollar 

amount there would most likely not be 

a match between the plan cost sharing 

amount and the amount in fee-forservice Medicare for the service area in 

which the plan is operating. 

In reality, it is unlikely that there 

would be any plan meeting the 

requirement in section 1852(a)(1)(B) of 

the Act by imposing exactly the costsharing structure that Medicare uses. 

Hence, the law permits the use of an 

actuarial equivalence approach to 

determine the appropriate cost-sharing 

component of a basic A/B bid that 

would actuarially equal the ‘‘cost 

sharing as required under Parts A and 

B.’’ Three methods of implementing the 

actuarial equivalence standard are 

discussed below: the uniform amount, 

plan-specific amount, and proportional 

methods. 

Uniform Amount Method. The new 

section 1852(a)(1)(B) of the Act is 

similar to a provision in the law that 

continues to apply to MA plans through 

2005, dealing with the determination of 

‘‘excess amounts’’ used to fund extra 

benefits. When Medicare payments 

exceed the revenue a plan needs for 

providing the Medicare benefit, the plan 

must ‘‘return’’ the excess amount to 

enrollees in the form of extra benefits 

(or cost sharing reductions). Section 

1854(f)(1)(B) of the Act provides that: 

For purposes of this paragraph, the 

excess amount, for an organization for a 

plan, is the amount (if any) by which—

(i) The average of the capitation 

payments made to the organization 

under section 1853 for the plan at the 

beginning of contract year, exceeds 

(ii) The actuarial value of the required 

benefits described in section 

1852(a)(1)(A) under the plan for 

individuals under this part, as 

determined based upon an adjusted 

community rate described in paragraph 

(3) (as reduced for the actuarial value of 

the coinsurance, copayments, and 

deductibles under parts A and B). 

[Emphasis added.] 

The way in which this provision is 

currently implemented is through the 

determination of a uniform national 

dollar amount representing our 

projection of the monthly actuarial 

value of Medicare coinsurance and 

deductibles (that is, the amount, on 

average, of cost-sharing expenses 

beneficiaries incur in receiving 

Medicare services). All plans are 

required to use this national average 

amount as the ‘‘the actuarial value of the 

coinsurance, copayments, and 

deductibles under parts A and B,’’ to 

comply with section 1854(f)(1)(B) of the 

Act. There are a number of drawbacks 

with this uniform dollar approach, 

including the sources of variation in 

cost sharing noted above (as well as 

regional variation in cost sharing). In the 

context of a bidding system, this 

national uniform dollar approach does 

not adequately recognize differences 

among private health plans and 

differences between private plans and 

fee-for-service Medicare. 

The uniform amount approach could 

create distortions in the MA plan bids 

and have a negative impact on plans 

and on beneficiaries. In a situation in 

which the national dollar value of 

Medicare cost sharing (currently 

$113.07 per month for CY 2004) exceeds 

the appropriate amount for a particular 

health plan because the plan is very 

efficient and its expenditures are low in 

relation to those of Medicare, the plan 

bid would be depressed because of the 

assumption that $113 per month in 

revenue is collectible from enrollees. 

This would result in a greater difference 

between the plan bid and the 

benchmark, with 75 percent of that 

difference required to be rebated to 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46893 

beneficiaries. Some or all of that rebate 

money can be used to fund the cost 

sharing that beneficiaries would face, 

which in this case the Government has 

deemed to be $113. This plan would be 

forced to fund a portion of the plan’s 

own cost of providing the Medicare 

benefit with beneficiary dollars that 

otherwise would have been available for 

extra benefits. 

For example, a plan could determine 

that its total revenue needed for 

providing the Medicare benefit is $500 

per person per month—including $80 

received as enrollee cost sharing 

revenue. Assume that the plan is 

operating in a county in which the 

benchmark is $600 (exactly equal to 

local fee-for-service expenditures, and 

with cost sharing in the area at exactly 

the $113 national level). Rather than 

state that its estimated required revenue 

for the Medicare package, after cost 

sharing, is $420 ($500 less $80), the plan 

is obligated to state its bid as $387 ($500 

less $113). This affords the plan 75 

percent of $213 (or $160) for rebates. In 

order to ‘‘make itself whole’’ the plan 

needs $33 to fully fund its Medicare 

benefits, yet it will receive only $25. 

This $33 amount would be identified 

under the uniform amount approach as 

a reduction in enrollee cost sharing (in 

relation to the $113 level), and a net 

amount of $127 will remain for other 

rebate financing. If the plan reduces cost 

sharing to 0, $47 is left for other benefits 

(because $80 is the actual cost sharing 

liability for enrollees that needs to be 

‘‘bought down’’). Had the plan been 

allowed to correctly state its bid for its 

particular circumstances, the plan 

would have had 75 percent of $180 (or 

$135) for rebate purposes. If the plan 

reduces cost sharing to 0, a net of $55 

is left for other benefits (or $8 per 

person per month more than under the 

uniform amount approach). (Distortions 

also occur when less efficient plans are 

required to understate their cost sharing 

level.) 

We believe the current uniform 

amount method creates distortion under 

the MA bidding system both in the bids 

and levels of savings returned to the 

enrollee and to the Government, and 

limits the flexibility of MA plans to 

provide competitive benefits and to pass 

on cost savings to beneficiaries. 

A more feasible version of the current 

national approach would be to use a 

localized uniform amount. Under this 

method, we would publish localized 

(for example, county-level or MSAlevel) cost-sharing values to be used for 

purposes of actuarial equivalence. The 

values would be based on actual perbeneficiary FFS cost sharing, projected 

to the contract year and standardized to 

a 1.0 risk score. 

In addition to the localized uniform 

dollar amount approach, there are two 

other methods we are considering: the 

plan-specific amount and the 

proportional approach. The planspecific method for determining the 

PMPM amount of beneficiary cost 

sharing is based on the MA 

organization’s pricing and utilization 

estimates. The organization would also 

use these estimates to generate its basic 

A/B bid. In contrast, the proportional 

method is based on fee-for-service 

pricing and utilization experience, 

either national, regional, or local 

proportions. 

Plan-Specific Amount Method. A 

second approach eliminates the 

distortions caused by the uniform 

amount approach by allowing an MA 

organization to use actuarial 

assumptions and projections to 

determine the level of cost sharing that 

beneficiaries would face if the plan 

imposed the Medicare cost sharing 

structure or an actuarially equivalent 

structure. That is, whether an MA 

organization intends to offer a basic 

package or, through the use of 

mandatory supplemental benefits, 

intends to offer a plan with reduced 

cost-sharing, the organization would 

determine the basic A/B bid as if it were 

offering a plan that consists of 

Medicare-only benefits offered under 

Medicare cost sharing rules or an 

actuarially equivalent structure. A costsharing structure would be actuarially 

equivalent if the projected average costsharing as percent of the sum of average 

cost-sharing and projected average plan 

payout equals the percentage using 

Medicare’s cost sharing rules, based on 

the projected experience of the same 

group and using the same pricing 

assumptions. 

The average amount of cost-sharing 

and the average plan revenue 

requirements for the assumed basic 

A/B package would then be adjusted so 

as to reflect cost-sharing and plan 

requirements based on an enrollee with 

a national average risk profile. The 

adjusted plan revenue requirements 

would serve as the organization’s basic 

A/B bid. Thus, under a plan specific 

approach, the cost-sharing estimate and 

the basic A/B bid would be the result of 

the same estimating process enabling 

the organization to factor in any 

discounts it receives from providers, 

any utilization controls that influence 

services received, and any other planspecific factors that should be 

considered in determining a fair and 

accurate bid. 

To the extent that a plan does intend 

to use mandatory supplemental benefits, 

the question arises as to the relationship 

between the estimate of cost-sharing and 

plan revenue requirements for the 

assumed basic A/B package to the 

estimate of cost-sharing and revenue 

requirements under the integrated 

package that the plan intends to offer. 

Assume, for example, that the bidding 

organization, through the use of 

mandatory supplemental benefits 

intends to have no cost sharing at all in 

its plan and will rely on provider 

discounts and good utilization 

management to offer an efficient 

Medicare product. Because the basic 

A/B bid involves significant levels of 

cost sharing, utilization and hence plan 

revenue needs would increase from the 

estimate of plan revenue needed for 

basic A/B coverage to that for the 

planned integrated package (that is, 

basic A/B plus mandatory supplemental 

benefits). As previously discussed, this 

additional utilization resulting from 

reduced cost sharing would be included 

in the costs of mandatory supplemental 

coverage as part of the bid component 

for supplemental benefits. (Note that 

under the provisions of section 

1854(a)(6)(A) of the Act, bids are for an 

‘‘enrollee with a national average risk 

profile.’’ The actuarial determination of 

cost sharing would also be for an 

enrollee with a national average risk 

profile.) 

This method of determining the 

Medicare cost sharing amount is more 

complicated than the uniform amount 

method. However, we would not expect 

the calculation to be burdensome to MA 

organizations, since they would have to 

develop plan-specific estimates of cost 

sharing in order to price cost-sharing 

reductions provided as mandatory 

supplemental benefits. These kinds of 

actuarial estimates are necessary in 

connection with the design of any type 

of plan benefit package an MA 

organization offers or considers offering. 

While the Medicare cost sharing 

structure is complicated and varies by 

type of service provided, we would note 

that current MA plans have equally 

varied cost sharing applied to different 

services in the plans offered to Medicare 

enrollees. The plan-specific approach is 

also consistent with our position that 

additional utilization arising from 

reduced cost sharing must be priced as 

part of the mandatory supplemental 

component of the plan bid. 

Proportional Method. Another 

method of determining a Medicare level 

of cost sharing is to use a proportional 

approach. Actuarial equivalence under 

this approach would be met if the ratio 

of a plan’s cost sharing amount for the 

46894 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

basic A/B bid to the total cost of plan 

benefits equals this proportion under 

original Medicare. For example, if the 

national average actuarial value of cost 

sharing under original Medicare in a 

year were 16.8 percent of the total 

(value of cost sharing plus value of 

benefits, using the actual 1999 figure for 

Medicare), then an MA plan would have 

to offer a basic A/B bid based upon a 

plan basic cost-sharing amount that is 

16.8 percent of total costs. We would 

announce the projected percentage of 

total expenditures that represent cost 

sharing in the same way that we 

currently announce the national average 

actuarial value of Medicare cost sharing 

as part of the rate announcement for 

private health plans. 

Using a fixed national proportion is a 

variation on the uniform national dollar 

method, but it recognizes variation in 

expenditures at the health plan level. 

However, even within fee-for-service 

Medicare, there is significant variation 

by area in the cost-sharing proportion, 

ranging from 13 percent in Maryland to 

20 percent in Nebraska in 1999 

(compared to the national average of 

16.8 percent). To address the issue of 

geographic variation in cost sharing, 

which also became a concern in the 

Medicare+Choice program, we are 

considering the development of regional 

or local cost-sharing proportions. 

Using a proportional approach, plan 

pricing assumptions are built into the 

total value of the benefit package. 

However, any utilization effect within 

the plan of a Medicare-like cost-sharing 

structure is not factored in. Another 

factor that is not recognized in a straight 

national or local proportional method is 

that the mix of services within a health 

plan, and the costs associated with each 

category of services, may be different 

from the mix in fee-for-service 

Medicare. For example, plans may tend 

to favor post-acute care over acute care, 

which, if fee-for-service Medicare were 

to do the same, would alter the total cost 

sharing and the distribution of the cost 

sharing in relation to the types of 

services from which cost-sharing 

revenue is derived. 

To refine the proportional method, 

and to attempt to be more consistent 

with the letter of the law (‘‘cost sharing 

for * * * services as required under A 

and B’’), we could develop servicespecific proportions of cost sharing 

applied to the different categories of 

expenditures health plans would have 

(for example, a proportion would be 

stated for inpatient hospital care, a 

proportion for physician services, etc.). 

In order to further refine this approach, 

we would also incorporate assumptions 

about how health plans generally use 

services. We would then announce the 

(local area) service-by-service 

proportions plans would use to 

determine their actuarial equivalent of 

Medicare cost sharing. Such a local, 

adjusted proportional approach would 

be relatively easy for plans to 

implement, but it would involve an 

additional burden on us to develop 

varying percentages by area and by 

service category. Assumptions made 

about the distribution of services 

provided by private plans may not be 

consistent with the experience and 

practices of individual plans. 

We invite comment on each of the 

alternatives we are considering to 

replace the national uniform amount 

method: localized uniform dollar 

amounts; plan-specific amounts; and 

proportions (national, regional, or local). 

We would have liked to provide a 

comparison of the effects on plan bids 

of these three methods for determining 

a level of beneficiary cost sharing that 

is actuarially equivalent to original 

Medicare. This is not possible at this 

time, however, because we have not 

fully developed these options. To 

specify impacts we would need to know 

exactly what data elements we would 

collect and what formulas we would 

use. We invite comment on the details 

of these alternatives methods and how 

best to implement them. 

PACE organizations and the MMA 

bidding methodology. We believe, based 

on conference report language, that the 

Congress intended to exempt PACE 

organizations from the Title II bidding 

process, so payments for PACE plans 

would be based on MA capitation rates. 

However, this exemption does not apply 

to PACE organizations intending to offer 

Part D drug coverage to PACE enrollees. 

We expect that PACE plans would be 

required to submit bids to provide Part 

D drug benefits under Title I of the 

MMA, addressed in a separate 

rulemaking. 

Information required. Sections 

422.254(c) and (d) implement section 

1854(a)(6)(A) of the Act by setting out 

the information MA organizations must 

submit for coordinated care plans 

(including regional MA plans and 

specialized MA plans) and private feefor-service plans. Proposed § 422.254(e) 

specifies information that must be 

submitted for MSA plans. 

In addition to submitting an aggregate 

bid amount, MA organizations must 

submit the proportions of the aggregate 

bid attributable to coverage of Part A 

and Part B benefits, Part D basic 

benefits, and supplemental coverage. 

They must also identify the plan type, 

projected enrollment, and any capacity 

limits, the actuarial bases for 

determining the bid amounts and 

proportions, and information on the 

plan’s cost sharing, including the 

actuarial values of deductibles, 

coinsurance, and co-payments. 

Additional information required on 

drug coverage is specified at section 

1860D–11(b) of the Act. 

Under proposed § 422.254, for MA 

organizations required to provide a 

monthly rebate because the plan bid is 

less than the plan benchmark, the 

organization must submit information to 

us about how this rebate would be 

allocated across the options specified by 

the statute for a mandatory 

supplemental benefit: (1) Provision of 

supplemental health benefits, including 

additional health care benefits, 

reduction of cost sharing for original 

Medicare benefits and/or Part D 

benefits; and/or (2) reduction of the Part 

B, Part D, and/or mandatory 

supplemental benefit premium(s). For 

further discussion of requirements for 

rebates, see § 422.266. 

Since MA regional plans may serve 

multiple regions, and each region is a 

separate service area, we will develop 

procedures to allow MA organizations 

to file consolidated bid information for 

multi-region MA plans (including 

national plans), in order to encourage 

the offering of regional plans, in 

accordance with section 1854(a)(1)(C) of 

the Act. 

In addition to the information cited 

above, in 2006 and/or 2007, MA 

organizations offering regional plans 

must submit as a part of the bid package 

sufficient information for us to calculate 

risk corridor amounts. This information 

includes projected allowable costs (see 

discussion of subpart J) and the portion 

of the allowable costs attributable to 

administrative expenses incurred in 

providing these benefits. In addition, 

the plan must provide the total 

projected costs for providing rebatable 

integrated benefits as well as the portion 

of rebatable integrated benefits that are 

attributable to administrative expenses. 

Finally, section 1854(a)(6)(A)(iii) of 

the Act gives us the authority to require 

information in addition to that listed 

above to allow us to verify the actuarial 

bases for plan bids. We have not yet 

determined the format for initial bid 

submission, and we will provide future 

guidance on these requirements. 

Special rules for MSA plans. Section 

422.254(e)(2) implements section 

1854(a)(3) and section 1854(b)(2)(D) of 

the Act by indicating that bids are not 

required for MA MSA plans. However, 

for MSA plans MA organizations must 

submit the enrollment capacity, the 

monthly MSA premium amount, which 

is the amount of revenue the plan 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46895 

requires to offer original Medicare 

benefits, analogous to the basic A/B bid 

for other MA plans. MA organizations 

must also submit the amount of the 

deductible, and the beneficiary 

supplemental premium, if any. MSAs 

are prohibited from offering Part D 

coverage (although MSA enrollees may 

choose to enroll in a prescription drug 

plan). 

A supplemental benefit for an MSA 

plan cannot cover the MSA deductible. 

Health insurance policies for benefits 

described in section 1882(u)(2)(B) of the 

Act must not be treated as covering such 

a deductible. 

Our goal is to maximize the diversity 

of plans available in the MA program, 

and to this end we welcome any 

comments that would help us improve 

our payment methodology for MSA 

plans. 

4. Negotiation and Approval of Bids 

(§ 422.256) 

Authority to review and negotiate 

bids. The provisions in proposed 

§ 422.256 implement section 

1854(a)(6)(B) of the Act, which provides 

us with the authority to negotiate the 

monthly aggregate bid amount and the 

proportions of the aggregate bid 

attributable to basic benefits, 

supplemental benefits, and prescription 

drug benefits. The MMA grants us the 

authority to negotiate bids that is 

‘‘similar to’’ the statutory authority given 

the Office of Personnel Management 

(OPM) to negotiate with health benefits 

plans under the FEHBP program. 

Chapter 89 of title 5 gives OPM broad 

discretion to negotiate prices and levels 

of benefits. We believe that the Congress 

used ‘‘similar to’’ in the statute to 

recognize the differences between the 

two programs. For example, the OPM 

authority applies to negotiating the level 

of plan benefits, while Medicare 

benefits under Parts A and B are defined 

in law. Also, the authority to negotiate 

payment rates would seem to be limited 

for the MA program by other provisions 

of the MMA (for example, statutory 

formulas for determining benchmarks, 

premium and rebate amounts, and 

payments to plans). 

However, plans are able to modify the 

cost sharing for Medicare Parts A and B 

benefits via supplemental benefits. We 

have the authority to negotiate the level 

of the supplemental benefits as part of 

ensuring that the bid is not 

discriminatory, as described in section 

1852(b)(1) of the Act. Further, in 

situations where we have questions 

about the assumptions used for a plan 

bid, we will negotiate with the MA 

organization regarding the appropriate 

assumptions and the resulting rebate 

and/or supplemental premiums. 

As provided under § 422.256(a)(2) and 

in accordance with section 

1854(a)(6)(B)(iii) of the Act, we may not 

require: (1) Any MA organization to 

contract with a particular hospital, 

physician, or other entity or individual 

to furnish items and services under the 

Act; or (2) a particular price structure 

for payment under such a contract to the 

extent consistent with our authority. 

Also, as under current law, we do not 

have the authority to review or negotiate 

bids for private fee-for-service plans or 

any amounts submitted by MSA plans. 

Standards of bid review. Section 

422.256(b) implements section 

1854(a)(6)(B)(ii) and (iii) and section 

1854(e)(4) of the Act, which together 

establish three standards for our review 

of bids. First, the bid and proportions 

must be supported by the actuarial 

bases, which we determine based on 

information provided by the MA 

organization. 

Second, the bid amount and 

proportions must reasonably and 

equitably reflect the plan’s revenue 

requirements for providing the benefit 

package, as the term revenue 

requirements is used in section 1302(8) 

of the Public Health Service Act. We 

interpret this reference to mean that the 

Congress intends for a plan bid to reflect 

the plan’s estimated required revenue in 

providing coverage, and not other 

factors such as the relative lack of 

competition in the plan’s market area or 

the level of annual capitation rates and 

benchmarks in the service area. 

Third, proposed § 422.256(b)(3) 

implements section 1854(e)(4) of the Act 

by providing for a limitation on 

applicable cost-sharing for coordinated 

care and private fee-for-service plans: 

the actuarial value of plan cost sharing 

‘‘applicable on average’’ to plan 

enrollees cannot exceed the actuarial 

value of cost sharing 

‘‘applicable * * * on average’’ under 

original Medicare. 

We are interpreting ‘‘applicable’’ to 

mean the level of cost-sharing in effect 

after any reductions to the level of cost 

sharing that a plan can make by offering 

a mandatory supplemental benefit, as 

specified under section 1852(a)(1)(B) of 

the Act. That is, we apply this third 

standard of review, as specified under 

section 1854(e)(4) of the Act, in light of 

both the basic A/B bid and the 

application of any rebate toward 

reduced cost sharing of Medicare Parts 

A and B benefits included in the 

supplemental bid. Essentially, the 

requirement in section 1852 of the Act 

(discussed in connection with proposed 

§ 422.254(b)(4)) that the actuarial value 

of MA plan cost sharing for Medicare 

Part A and Part B benefits assumed in 

constructing the basic A/B bid must 

equal the actuarial value of original 

Medicare cost sharing would affect how 

MA organizations develop their basic 

bids. Section 1854 of the Act places a 

cap on actual enrollee cost-sharing 

liability for Medicare Parts A and B 

benefits in relation to average cost 

sharing in fee-for-service Medicare in 

the service area as estimated by us. This 

means that if a plan’s aggregate bid 

includes a mandatory supplemental 

benefit, the plan can have an actuarial 

value of cost sharing that is less than 

that under original Medicare because 

the plan rebate has been applied to a 

buy down plan cost sharing. 

There has been some confusion about 

whether an MA plan can substitute a 

premium for some portion of the cost 

sharing under original Medicare. 

Section 1854(b)(2)(A)(i) of the Act 

(which would be implemented at 

proposed § 422.262(a)(1)) mandates that 

for plans with bids less than 

benchmarks, the premium for original 

Medicare benefits must be zero. Our 

understanding is that congressional 

intent was to have the basic A/B bid be 

for a standardized package. This means 

MA organizations able to offer plans 

with Medicare-covered benefits at a 

lower cost to the beneficiary than the 

benchmark will have a plan with zero 

premium for coverage of benefits under 

original Medicare. 

However, any MA organization can 

choose to structure the benefit package 

with a mandatory supplemental benefit 

that includes a reduction in Medicare 

Part A and B cost sharing. The premium 

for this supplemental package, as well 

as the Part D or Part B premium, can be 

offset by any rebates for which the plan 

is eligible. Thus, the aggregate bid 

would consist of: (1) A basic A/B bid 

amount for benefits available for either 

zero premium or a basic premium 

depending on whether the plan’s bid is 

above or below the benchmark; (2) a 

mandatory supplemental bid amount for 

benefits available for a premium or no 

premium depending on the plan’s use of 

rebates (and an optional supplemental 

benefit if offered); and (3) a drug bid 

amount for basic benefits, also available 

at a premium or no premium depending 

on use of rebates. 

Under the previous M+C program, we 

allowed M+C organizations to reduce 

beneficiary basic premium amounts as a 

part of the ACRP process, that is, they 

were allowed to take a negative 

adjustment on their additional revenues. 

Under the MMA, this type of adjustment 

is no longer permitted for the basic bid 

for benefits under the original Medicare 

46896 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

program. In accordance with section 

1854(a)(6)(B)(ii) of the Act, plan bids 

must reasonably and equitably reflect 

plan expected revenue requirements. 

MA organizations cannot submit plan 

bids that understate their revenue 

requirements for the basic A/B bid. 

When the basic A/B bid amount exceeds 

the benchmark amount, the difference is 

required to be charged as a basic 

beneficiary premium. If an MA 

organization were able to waive the 

plan’s basic beneficiary premium, this 

would suggest that the MA organization 

had overstated the plan’s expected 

revenue requirements for basic benefits. 

In essence, we do not have the authority 

under the statute to allow MA 

organizations to waive basic beneficiary 

premiums for plans with basic A/B bids 

greater than benchmarks. 

Negotiation process. Section 

422.256(a) implements section 

1854(a)(6)(B)(i) of the Act, which 

provides us the authority to negotiate 

with MA organizations. As mentioned 

above, we have the authority to 

negotiate to ensure that the bid is not 

discriminatory; and in situations where 

we have questions about the 

assumptions used for a plan bid, we will 

negotiate with the MA organization 

regarding the appropriate assumptions 

and the resulting rebate and/or 

supplemental premiums. 

At this time, we have not completed 

development of the bidding and 

approval process. We expect to revise 

the current Adjusted Community Rate 

Proposal tool (both the Plan Benefit 

Package and the ACR spreadsheet) to 

align with MMA provisions for bid 

submission. We expect that the process 

of bid negotiation between between 

CMS and an MA organization could 

result in an agreement to adjust the bid’s 

pricing, utilization, and/or enrollment 

assumptions. The MA organization 

would resubmit the bid information for 

the plan. 

In addition, MA organizations may 

need to adjust the allocation of rebate 

dollars in a plan bid (see discussion 

below), so would also need to resubmit 

the bid. 

Rules for adjustment of rebate dollar 

allocation. As required by section 

1860D–13(a)(4) of the Act, CMS must 

publish a national average monthly bid 

amount for Part D based on an average 

of plan bid amounts. This means MA 

organizations must submit their plan 

bids (including the estimated drug 

premium amount) before knowing the 

national average monthly bid amount 

for basic coverage. Since section 

1854(b)(2)(A) of the Act requires that 

organizations with basic A/B bids below 

benchmarks charge a zero basic 

beneficiary premium, in their initial bid 

submission MA organizations will 

allocate rebate dollars to mandatory 

supplemental benefit packages (to 

ensure that all beneficiaries receive the 

full value of their rebate amount, which 

may include the provision of a Part D 

premium reduction. For example, a plan 

may have an estimated Part D monthly 

premium of $35, and offer a mandatory 

supplemental package that applies $35 

of its rebate to ‘‘buy down’’ the Part D 

premium to zero. 

Given the preliminary nature of MA 

organizations’ Part D premium 

submission, we expect that some rebate 

allocations to Part D premium 

reductions will be overestimated 

(excessive allocation) or underestimated 

(insufficient allocation). These 

misestimates will mean some portion of 

the beneficiary rebate has been credited 

where it is not needed or not enough 

has been credited to achieve the 

premium desired. For example, if a 

plan’s monthly drug premium is 

determined to be $34, which is less than 

the projected premium of $35 in its 

initial bid submission, there was an 

excessive allocation of $1 of the rebate 

to fund the Part D premium reduction. 

We would require the MA organization 

to amend its bid submission to 

reallocate the excessive $1 of rebate 

credit to other mandatory supplemental 

benefits. On the other hand, if the plan 

monthly drug premium is determined to 

be $36, which is greater than the 

projected monthly premium of $35 in 

the initial bid submission, there is an 

insufficient allocation of $1. We would 

give the MA organization the option of 

reallocating $1 of rebate from another 

mandatory supplemental benefit toward 

the Part D premium reduction in order 

to eliminate the $1.00 Part D premium 

and return to the zero premium in the 

initial bid submission. 

For this reason, we anticipate that 

some MA organizations will make 

minor technical adjustments to the 

benefit structures of their nonprescription drug bids. The adjustments 

would consist of reallocation of 

beneficiary rebate dollars in the 

mandatory supplemental benefit among 

the different categories allowed by law: 

Additional benefits, reductions in Part 

A/B cost sharing, reduction to the 

mandatory supplemental premium, and 

reductions in Part B and Part D 

beneficiary premiums. Modifications to 

Part D cost sharing could not be made, 

however, given the implications that 

such modifications would have on 

projected reinsurance dollars which 

then impacts the pricing of the bid for 

basic Part D benefits. Changes to the 

basic Part D portion of the bid would 

have implications for the national 

average monthly bid amount and, 

hence, the basic beneficiary premium 

that we would have just previously 

calculated for the year. 

Note that the bid cannot be changed 

unless mutually agreed upon by CMS 

and the MA organization representatives 

as a result of our review and negotiation 

process. An example of an appropriate 

change would be if an MA organization 

elects to allocate rebate dollars to reduce 

its estimated Part D premium to zero in 

its initial June bid submission, and the 

outcome of the national average 

premium calculation is that the plan has 

an excessive allocation of rebate dollars 

so that the Part D premium has become 

a negative amount, such as –$3.25, this 

plan would have to reallocate $3.25 to 

other mandatory supplemental benefits 

to ensure enrollees receive the full 

amount of the rebate. Conversely, if 

another MA organization also elects to 

allocate rebate dollars to have a zero 

Part D premium, and the comparison 

with the national average drug premium 

results in an insufficient allocation of 

rebate dollars so that the Part D 

premium has become $1.42, this plan 

would have the option of reallocating 

the $1.42 of beneficiary rebate dollars to 

return to a zero premium, as submitted 

in the original June bid. (Bid amounts 

must be submitted no later than the first 

Monday of June each year, beginning for 

contract year 2006). 

We also recognize that the June bid 

submission for regional MA plans will 

be based on unknown benchmarks not 

only for the drug premium but also for 

Medicare Parts A and B benefits. As 

discussed in § 422.258(c), the regionspecific benchmark amount is based, in 

part, on a weighted average of the plan 

bids for Medicare Part A and Part B 

benefits, which we cannot calculate 

until after the June bid submission. This 

means that the exact amount of a plan’s 

rebate is unknown and will shift to the 

extent that the estimated benchmark a 

plan uses to create its June basic A/B 

bid amount differs from the regionspecific non-drug benchmark we 

establish based on plan bids. Therefore, 

regional MA plans will also be allowed 

to modify cost sharing (that is, increase 

or decrease reductions in the initial June 

bid submission), other than for Part D 

benefits, and certain premiums to arrive 

at the supplemental, Part B, and Part D 

premiums originally submitted. 

We propose the following rules for the 

negotiation process concerning 

reallocation of rebate dollars due to 

excessive or insufficient allocation. 

(1) Local MA plans with 

overestimated allocations to Part D 

premium reduction must reallocate 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46897 

beneficiary rebate dollars to other 

mandatory supplemental benefits and 

can do so only for the purpose of 

achieving the original Part D premium 

in their initial bid submission. 

(2) Local MA plans with 

underestimated allocations to Part D 

premium reduction have the option of 

reallocating beneficiary rebate dollars to 

other mandatory supplemental benefits. 

However, the plan could only reallocate 

rebate dollars for the purpose of 

achieving the Part D premium in the 

initial bid submission. In this 

circumstance, plans could choose to not 

adjust the new premium or reallocate 

the appropriate amount to achieve the 

initial premium submitted. 

(3) Regional MA plans may reallocate 

beneficiary rebate dollars to achieve the 

supplemental, Part B, and Part D 

premiums in their initial bid 

submission. 

(4) Local MA plans not offering Part 

D benefits (these would only be private 

fee-for-service plans who have elected 

this option) would have all the 

necessary information upon which to 

estimate their bid amounts for their 

initial June bid submission, and, 

therefore, the MA organizations would 

not be allowed to modify their plan 

benefit structures. 

We believe that it is appropriate for 

MA organizations to only make 

technical adjustments or modifications 

during the negotiation process initiated 

by CMS in order to create a bidding 

process with integrity, to ensure that 

bids are meaningful, and to avoid the 

endless cycle of CMS benchmark 

calculation-plan benefit adjustmentCMS benchmark calculation. We invite 

comments on this issue. 

5. Calculation of Benchmarks 

(§ 422.258) 

Proposed § 422.258 would implement 

the new section 1853(j) of the Act 

(added by the MMA) by providing a 

description of how benchmarks for local 

MA plans are calculated. We will 

calculate benchmarks for each county, 

that is, MA local area. For a service area 

that is entirely within an MA local area, 

the MA area-specific non-drug monthly 

benchmark amount is equal to the 

monthly MA capitation rate for the local 

area. For a service area that is in more 

than one MA local area, the benchmark 

amount is calculated as a weighted 

average of the local MA monthly 

capitation rates. The monthly capitation 

rate for each local area is multiplied by 

the plan’s projection of the proportion 

of its enrollees that will reside in each 

local area. These enrollment projections 

would be based on information 

submitted by the local plans for bidding 

purposes, as mandated under section 

1854(a)(6)(A)(iii) of the Act. These 

products would be summed to yield the 

local area benchmark amount for that 

MA plan. 

For all calculations that follow, CMS 

will determine the number of MA 

eligible individuals in each local area, 

in each region, and nationally as of the 

reference month, which is a month in 

the previous calendar year CMS 

identifies as the most recent month for 

which data is available. 

Proposed § 422.258(b) and (c) would 

implement section 1858(f) of the Act by 

providing a description of how regional 

MA plan benchmarks are calculated. We 

would calculate benchmarks for the MA 

regional area. The benchmark amount 

for regional plans would be a blend of 

two components, the MA area-specific 

benchmark amounts and the plan bid 

amounts. The purpose of the blend 

would be to be more responsive to 

market conditions in the region by 

allowing plan bids to influence the final 

benchmark amount. This blending 

would allow a more accurate reflection 

of the actual revenue needs of the plans 

to be included in the bidding process. 

Proposed § 422.258(b)(1) would 

implement section 1858(f)(2) of the Act 

by describing the two components of the 

MA regional benchmark, the statutory 

component and the plan bid 

component. 

The statutory component would be 

based on the local area capitation rates. 

For each local area, the capitation rate 

would be multiplied by the ratio of the 

number of MA eligibles (based on the 

reference month), residing in the area to 

the number of MA eligibles (based on 

the same reference month) residing in 

the region. These products would be 

summed across all local areas in the 

region to yield the statutory component. 

The plan-bid component would be 

based on the bids of all MA plans in the 

region. For each plan offered in a region, 

we will multiply the plan’s unadjusted 

region-specific non-drug bid amount by 

the plan’s share of enrollment (as 

determined under paragraph (c)(5)) and 

then sum these products across all plans 

offered in the region. We then multiply 

this by 1 minus the statutory market 

share to determine the plan-bid 

component of the regional benchmark. 

The weighted average of plan bids for 

a region would be determined based on 

the number of regional plans offered in 

the region in a given year and the 

number of regional plans offered in the 

reference month. Section 1858(f)(5) of 

the Act, which we would implement in 

proposed § 422.258(c)(4) and (c)(5), 

addresses how to account for varying 

numbers of plans and different size 

plans in a region when determining the 

regional benchmark amount. If two or 

more regional plans were offered in the 

region in the reference month, the planbid component would be based on the 

weighted average of the plan bids, 

unadjusted for risk adjustment. Each 

plan’s bid would be multiplied by the 

ratio of the number of MA eligibles in 

the reference month enrolled in the plan 

to the number of MA eligibles in the 

reference month enrolled in all the 

plans in the region. These products 

would be summed across all plans in 

the region to yield the plan-bid 

component. 

If only a single regional plan is offered 

in the region in a year, the plan-bid 

component would be this plan’s bid. If 

there were no regional plans offered in 

the reference month, but two or more 

new regional plans are offered in the 

region in a year, we may give equal 

weight to each plan’s bid in determining 

the plan-bid amount. Alternatively, we 

may weight the bids based on each 

plan’s estimate of its projected 

enrollment, with the reasonableness of 

the projections subject to our approval. 

The MA regional benchmark would 

be the weighted average of the statutory 

component and the plan-bid 

component. The statutory component 

would be multiplied by the statutory 

national market share, which is the 

number of MA eligibles in the nation 

who were not enrolled in an MA plan 

during the reference month divided by 

the total number of MA eligibles in the 

nation. The plan-bid component would 

be multiplied by the non-statutory 

market share, which is the number of 

MA eligibles in the nation who were 

enrolled in an MA plan during the 

reference month divided by the total 

number of MA eligibles in the nation. 

These components would be added to 

yield the MA regional benchmark. 

6. Beneficiary Premiums (§ 422.262) 

Proposed § 422.262(a) would 

implement section 1854(b)(2)(A) of the 

Act, and would describe the new 

methodology for calculating the MA 

monthly basic beneficiary premium. 

This premium will now be determined 

by comparing the unadjusted plan bids 

to unadjusted benchmark amounts. 

(1) For an MA plan with an 

unadjusted statutory non-drug bid 

amount (basic A/B bid) that is less than 

the appropriate unadjusted non-drug 

benchmark amount, the basic 

beneficiary premium is zero. 

(2) For an MA plan with an 

unadjusted statutory non-drug bid 

amount (basic A/B bid) that is equal to 

or greater than the unadjusted non-drug 

benchmark amount, the basic 

46898 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

beneficiary premium is the amount by 

which (if any) the bid amount exceeds 

the benchmark amount. All approved 

premiums must be charged—that is, 

plans are not allowed to waive 

premiums. 

Proposed § 422.262(b) would 

implement section 1854(d)(4) of the Act, 

which specifies that MA enrollees must 

be charged consolidated monthly 

premiums. As intended by the Congress 

and as a part of our efforts to simplify 

the process for beneficiaries, proposed 

§ 422.262(b) states that an MA enrollee 

will pay a single premium consisting of 

the sum of all premiums a particular 

plan charges its enrollees, which will be 

one or more of the following: (1) The 

monthly basic beneficiary premium; (2) 

the monthly supplemental premium; 

and (3) the MA monthly prescription 

drug premium. In the case of an MSA 

plan, there are no basic beneficiary 

premiums since we instead make a 

deposit to the enrollee’s MSA. MSA 

plans are high deductible insurance 

policies, not managed care plans. This 

means the only beneficiary premium for 

an MSA plan would be a supplemental 

premium. 

Uniformity of premiums and costsharing. The MMA continues current 

MA regulations now in subpart G at 

§ 422.304(b) regarding uniformity of 

beneficiary premiums and cost sharing 

within MA plans. 

MA organizations offering local MA 

plans within segments of service areas 

must submit separate bids for those 

segments that will have different 

premiums and cost sharing. Section 

1858(a)(1) of the Act mandates that 

regional MA plans must provide 

uniform premiums and cost sharing 

within a region, specifying that section 

1854(h) of the Act (allowing segmented 

service areas) does not apply to regional 

MA plans. 

Section 1854(d)(1) of the Act would 

be implemented in proposed 

§ 422.262(e), describing the rules on the 

timing of payments by MA enrollees of 

their beneficiary premiums. 

Proposed § 422.262(f) would 

implement section 1854(d)(2) of the Act 

on beneficiary payment options. This 

provision gives enrollees the option, at 

their discretion, of paying their MA 

consolidated premium by: (1) Having it 

deducted directly from their Social 

Security benefits in the same manner 

that Part B premium reductions are 

handled; (2) setting up an electronic 

funds transfer; or (3) through other 

appropriate means we may identify. The 

Congress provided for other beneficiary 

payment options including payment by 

an employer. Under employment-based 

retiree coverage, payment could be 

made on behalf of an employee, a 

former employee, or a dependent. All 

premium payments deducted from 

Social Security benefits would be 

credited to the appropriate Trust Fund 

as we specify, and will be paid to the 

appropriate MA organization. We would 

consult with the Commissioner of Social 

Security and the Secretary of the 

Treasury to determine which Trust 

Funds are the appropriate ones to credit. 

The MA organization must not impose 

a charge for individuals electing to pay 

their premiums through a deduction 

from their Social Security payments. 

We would transmit the appropriate 

information (for example, name, social 

security number, consolidated monthly 

beneficiary premium owed by each 

beneficiary for each month in the year), 

and other information to the 

Commissioner of Social Security (SSA) 

as agreed to with SSA. We would 

consult with the Commissioner of Social 

Security about what information is 

appropriate to transmit. We would 

update this information, as necessary, 

during the year. We invite comments on 

the additional appropriate beneficiary 

payment options that we could institute 

as well as uses for and development of 

electronic funds transfer mechanisms to 

help beneficiaries pay their premiums. 

7. Calculation of Savings (§ 422.264) 

Under section 1854(b)(3)(A)(iii) of the 

Act, in calculating the monthly savings 

as a step in determining beneficiary 

rebate amounts for MA local plans 

beginning in 2006, the Congress gave 

the Secretary the flexibility to determine 

whether the risk adjustment factors to 

be applied to the local benchmarks and 

bids are determined on a State-wide 

basis, a plan-specific basis, or some 

other basis. 

The advantage of applying a Statewide risk adjuster to benchmarks and 

basic A/B bids is that it ensures savings 

(and rebates) are uniform for 

beneficiaries in local plans in the same 

State. That is, plans with equal basic A/ 

B bids (below the benchmark) within a 

State would have equal savings and 

rebates. This means that beneficiaries in 

equally efficient plans would not be 

either rewarded or penalized because 

they chose a plan with less healthy 

enrollees or a plan with healthier than 

average enrollees. 

However, equally efficient plans with 

less healthy populations (as compared 

to the State-wide average) would be 

disadvantaged by a State-wide risk 

adjuster because it would be more costly 

for those plans to provide supplemental 

benefits with the same value as 

provided by healthier plans. The use of 

rebate dollars to reduce premiums 

(which is a dollar-for-dollar reduction in 

any kind of plan) is different than the 

use of rebate dollars to finance extra 

benefits, which cost more for a plan 

with less healthy enrollees. The cost 

difference for plans with a less healthy 

enrollee population is based on the 

assumption that enrollees in plans with 

a higher than average risk profile would 

use more services than enrollees in 

plans with lower risk profiles. 

An additional practical complication 

of applying a State-wide risk adjustment 

factor might arise in situations where 

plans serve health care markets that 

cross State lines, since enrollees in the 

same plan who live in different States 

would be subject to different risk 

adjustment factors. 

Section 1854(b)(3)(A)(iii) also 

provides the option of applying a planspecific risk adjuster to the calculation 

of savings. This approach would 

address the above problem, in that 

among plans with equal basic A/B bids 

(below the benchmark), plans with less 

healthy enrollee populations would 

receive more rebate dollars and thus 

would be able to offer mandatory 

supplemental benefits that have close to 

the same value as plans with healthier 

enrollee populations. However, this 

would mean that plans operating at 

similar levels of efficiency, but with 

different risk profiles, would not have 

uniform beneficiary savings and rebates. 

We are reviewing options for this 

adjustment and request comments on 

these two approaches. 

In the case of States or other areas in 

which no local plans have been offered 

in the previous year, we may use 

average risk adjustment factors applied 

to comparable States or applied on a 

national basis. 

Under section 1854(b)(3)(B) of the 

Act, we would apply an average risk 

adjustment factor (State-wide or some 

other applicable risk adjustment factor) 

to determine the risk-adjusted basic A/ 

B bid and benchmark amounts for each 

local plan offered. 

Section 1854(b)(3)(C) of the Act 

addresses how to determine the amount 

of savings for each local MA plan, if 

any, by calculating the amount by 

which the risk-adjusted benchmark 

amount exceeds the risk-adjusted bid 

amount. This provision would be 

implemented in proposed § 422.264(d). 

Under section 1854(b)(4)(A)(iii) of the 

Act, for regional MA plans, the Congress 

provided us the flexibility to determine 

the basis for the risk-adjustment factors 

to be applied to regional benchmarks 

and bids. These could include average 

risk factors calculated on a regional or 

other geographic area or on a planspecific basis. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46899 

Under section 1854(4)(B) of the Act, 

we would apply an average riskadjustment factor (region-wide or some 

other applicable risk-adjustment factor) 

to determine the risk-adjusted bid and 

regional benchmark amounts for each 

regional plan offered. 

Section 1854(b)(4)(C) of the Act 

addresses how to determine the amount 

of savings for each regional plan, if any, 

by calculating the amount by which the 

risk-adjusted benchmark amount 

exceeds the risk-adjusted bid amount. 

The foregoing provisions would be 

implemented in § 422.264(d) and (e). 

8. Beneficiary Rebates (§ 422.266) 

Beneficiary rebate rule. Section 1854 

(b)(1)(C) of the Act states that an MA 

plan with savings (because the basic A/ 

B bid is less than the benchmark) must 

provide to the enrollee a monthly rebate 

equal to 75 percent of the savings 

amount for that plan for the year. The 

remaining 25 percent of the savings 

would be retained by the Medicare 

Trust Funds. If the plan basic A/B bid 

is equal to or greater than the 

benchmark, the plan has no savings and, 

thus, no rebate. 

Proposed § 422.266(b) would provide, 

as set forth in section 1854(b)(1)(C)(ii) of 

the Act, that the beneficiary rebate 

could be provided in the following 

forms: Some part or all of the rebate can 

be credited toward the provision of 

supplemental health care benefits 

(including additional health benefits not 

covered under original Medicare, a 

reduction in cost sharing for Parts A, B, 

and D benefits, and/or a reduction in the 

premium for the mandatory 

supplemental benefits); or credited 

toward the prescription drug premium 

or Part B premium. 

Proposed 422.266(b)(1) provides that 

all rebate dollars must be applied to a 

mandatory supplemental benefit. We 

interpret the provision at section 

1854(b)(1)(C)(i) of the Act that an MA 

plan must provide to enrollees a rebate 

equal to 75 percent of savings to mean 

that rebate dollars must be provided to 

all enrollees in a plan. Therefore, rebate 

dollars could not be used to fund 

optional supplemental benefits because 

this would not guarantee that the plan 

is providing every enrollee with the 

rebate dollars. 

Although rebate dollars can only be 

used to fund a mandatory supplemental 

benefit, a mandatory supplemental 

benefit may also be funded by 

beneficiary premium dollars. That is, a 

plan with a rebate may fund a 

mandatory supplemental benefit with 

rebate dollars only or with a mixture of 

rebate and premium dollars. 

The MA plan would be required to 

inform us about the form and amount of 

the rebate and/or the actuarial value of 

the supplemental health care benefits. 

Adjustments to the structure of the 

benefit package would occur during the 

process of negotiating and approving 

bids detailed in proposed § 422.256. 

If an MA organization elects to 

provide a rebate in the form of a 

reduction in the beneficiary Part B 

premium for beneficiaries in a particular 

plan, we would work with the 

Commissioner of Social Security to 

provide the necessary information to the 

Commissioner to apply a credit (as 

provided for under section 1840 of the 

Act) to reduce the amount of the Part B 

premium to be charged under section 

1839 of the Act for each enrollee in that 

MA plan. 

Under the previous M+C program, we 

permitted M+C organizations to offer 

new plans mid-year and to offer midyear benefit enhancements to existing 

benefit packages. However, in order to 

maintain the integrity of the bidding 

process, we believe that it is no longer 

appropriate to allow MA organizations 

to enter the program with a new plan or 

to offer mid-year enhancements to an 

existing plan. Allowing an MA 

organization to offer a new plan after the 

June bidding cycle would not comply 

with section 1854(a)(1)(A) of the Act, 

which requires MA organizations to 

submit a bid for any plan it intends to 

offer in its service area (or segment of 

service area for local plans). Any midyear benefit enhancements would be de 

facto adjustments to benefit packages for 

which bids were submitted earlier in the 

year based on their organization 

estimated revenue requirements. In 

essence, allowing mid-year benefit 

enhancements by an organization for a 

plan for which it submitted a bid in the 

previous June could render the bid 

meaningless. 

9. Incorrect Collection of Premiums and 

Cost-Sharing for All Years (§ 422.270) 

This section, which is identical to the 

previous language in the current MA 

regulations in subpart G at § 422.309, 

sets out procedures for situations in 

which an MA organization collects more 

than the amount the plan is allowed to 

charge its enrollees. The MA 

organization is required to refund the 

over-collections, and if the amounts 

incorrectly collected were premiums or 

included premiums, the MA 

organization may refund the enrollees 

through an adjustment to future 

premiums for all MA plan enrollees or 

a combination of a premium adjustment 

and a lump sum payment. An MA 

organization that collects amounts in 

excess of those permitted is subject to 

intermediate sanctions and civil money 

penalties under subpart O. 

Subpart G—Payments to Medicare 

Advantage Organizations 

(If you choose to comment on issues in 

this section, please include the caption 

‘‘Subpart G—Payments to Medicare 

Advantage Organizations’’ at the 

beginning of your comments.) 

As discussed above in connection 

with subpart F, we have proposed to 

revise subparts F and G in their entirety, 

and to reverse the order of the subjects 

addressed in these subparts. The current 

subpart F deals with payment rules 

while the current subpart G contains 

provisions relating to MA organizations’

submission of benefit information and 

premium rules. Proposed subpart F 

addressed the provisions for MA 

organizations to submit bids for contract 

years after 2005, as well as provisions 

governing beneficiary premiums. In 

proposed subpart G, we would 

implement new MMA provisions 

governing payments to MA 

organizations. 

The proposed regulations address 

how MA organizations continue to be 

paid on a monthly basis, but now based 

on the new methodology of plan bids 

established by the MMA. The proposed 

rules specifically provide that the 

specific amount of the payment for MA 

organizations (except MSA plans) 

depends upon the plan bid-tobenchmark comparison. The rules 

provide for an exception that payments 

for ESRD enrollees may be made outside 

of the MMA bidding methodology, but 

will be based on the new MMA 

capitation rates. 

Further, the proposed text sets forth 

the calculations for the annual 

capitation rates established by the MMA 

and details the adjustments that will be 

made to capitation rates, benchmarks, 

bids, and MA organization payments. 

The regulations in this subpart describe 

the risk adjustment methodology and 

data requirements that must be met in 

order to properly adjust payment and 

benchmark amounts for the health 

status of enrollees, and then include the 

new date for publication of annual 

capitation rates, regional benchmarks, 

and payment methodology changes. 

Finally, they set forth a variety of 

special rules, including payments for 

enrollees electing hospice, and rates for 

payments to Federally qualified health 

centers (FQHCs). 

1. Basis and Scope (§ 422.300) 

Proposed § 422.300 sets forth the basis 

and scope for the revised subpart G, 

stating that it is based on sections 1853, 

46900 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

1854, and 1858 of the Act. It also 

indicates that the regulations in this 

subpart set forth the requirements for 

making payments to Medicare 

Advantage (MA) organizations offering 

local and regional MA plans, including 

calculation of MA capitation rates and 

benchmarks, conditions under which 

payment is based on plan bids, 

adjustments to capitation rates 

(including risk adjustment), and other 

payment rules. Since we are only able 

to share risk with regional MA 

organizations, see subpart J, § 422.458 

for a description of risk corridors to be 

used by regional MA organizations in 

2006 and 2007 only. 

2. Monthly Payments (§ 422.304) 

Under the current MA program, as set 

forth at section 1853(a)(1)(A)(i) of the 

Act, an MA organization is paid a fixed 

statutorily determined administrative 

amount each month, regardless of its 

actual revenue needs of providing 

services to the Medicare population 

enrolled in its plan(s). The MMA 

replaces this methodology beginning in 

2006. We provide in proposed 

§ 422.304(a) that, with the exception of 

payments to MSA plans and payments 

for ESRD enrollees in all other plans 

(discussed below), we would make 

advance monthly payments to an MA 

organization for each enrollee for 

coverage of original fee-for-service 

benefits in the plan payment area for a 

month, using the new bidding 

methodology described here and in the 

proposed subpart G regulations text. 

The amount of our payment for an 

MA plan (except an MSA plan) depends 

on the relationship of the plan basic A/ 

B bid to the benchmark amount. Section 

422.304(a) describes two payment 

tracks. If the plan’s risk-adjusted basic 

A/B bid is less than the risk-adjusted 

benchmark, the plan’s average per 

capita monthly savings equals 100 

percent of that difference, and the 

beneficiary is entitled to a rebate of 75 

percent of this plan savings amount. 

The other 25 percent of savings remains 

in the Trust Funds (except for regional 

MA amounts used for the regional plan 

stabilization fund). We pay plans that 

have beneficiary rebates the amount of 

their aggregate bid (adjusted both for 

risk using the appropriate enrollee risk 

factor determined under our risk 

adjustment model and for intra-area 

payments variations) and the amount of 

the rebate (less any reduction in the Part 

B premium. 

If the risk-adjusted plan basic A/B bid 

is equal to or greater than the riskadjusted benchmark, the plan has no 

savings and thus no rebate, and we pay 

plans without rebates the benchmark for 

the geographic service area. This 

amount is adjusted for risk using the 

appropriate enrollee risk factor, for 

intra-area payment variations, and for 

the effects of risk adjustment on the 

enrollee basic premium. We apply a 

further adjustment to all plan payment 

amounts for variations among local 

payment rates 

Under section 1853(a)(1)(D) of the 

Act, which would be implemented in 

proposed § 422.304(b), MA plans 

offering qualified prescription drug 

coverage also receive payments for the 

direct and reinsurance subsidy 

payments for basic prescription drug 

coverage and reimbursement for 

premium and cost sharing reductions 

for low-income individuals, described at 

sections 1860D–14 and 1860D–15 of the 

Act. 

Special rules for enrollees with endstage renal disease 

Proposed § 422.304(c)(1)(i) would 

implement section 1853(a)(1)(H) of the 

Act, which instructs us to continue 

using the ESRD methodology we 

applied before the enactment of the 

MMA, specifically to establish special 

rates that are actuarially equivalent to 

rates in effect before the enactment of 

the MMA. We believe the MMA 

provided us with flexibility for 

determining ESRD payments because 

the cost and utilization patterns for 

ESRD beneficiaries are distinct from 

aged and disabled beneficiaries. We 

propose to continue paying MA 

organizations for their ESRD MA 

enrollees based on the State ESRD 

capitation rates. We would use the State 

ESRD rates calculated under the MMA 

rate setting methodology set forth in 

proposed § 422.306. We would continue 

to risk adjust the State payment rates, as 

provided at § 422.308(c). We also would 

continue to reduce payments for ESRD 

enrollees for the ESRD network fee, as 

provided in § 422.208(c)(4), as set forth 

at section 1881(b)(7) of the Act. 

However, the mandate to pay using 

pre-MMA payment rates raises a 

payment issue regarding ESRD 

enrollees. Under the previous M+C 

program, an M+C plan could offer as an 

additional benefit the reduction of some 

or all of the standard Part B premium. 

CMS reduced the monthly payment to 

the M+C organization, and 80 percent of 

this reduction was applied to reduce the 

enrollees’ Part B premiums. Twenty 

percent of this payment reduction was 

savings to the M+C program. This 80–

20 split, which was in effect before the 

MMA, applied to all M+C plan 

enrollees, including those with ESRD. It 

is analogous to the MMA requirement 

that 25 percent of the difference 

between basic A/B bid and benchmark 

be returned to the government as 

savings. 

Therefore, one option is for CMS to 

pay the risk-adjusted State rate per 

enrollee, which would be analogous to 

paying the benchmark to all plans, even 

those with basic A/B bids below the 

benchmark. Since the concept of 

splitting a payment reduction into 

government savings and plan benefit 

existed prior to the MMA, 75 percent of 

any reduction in CMS’s payments for a 

plan would be applied to the Part B 

premium for plan enrollees. 

Another option would be to consider 

the use of the State capitation rates in 

calculation of plan benchmarks as 

sufficient implementation of section 

1853(a)(1)(H) of the Act. Accordingly, 

ESRD enrollees would be fully 

incorporated into the bid process, and 

payments for all enrollees would be 

either the risk adjusted aggregate bid 

plus rebate and other relevant 

adjustments discussed below or the risk 

adjusted benchmark. (Both bid and 

benchmark amounts would reflect the 

plan’s relative weights of ESRD 

enrollees costs versus aged/disabled 

enrollee costs.) See the discussion in the 

Subpart F preamble on when to 

incorporate ESRD enrollees into the bid 

amount. We invite comments on these 

and other feasible payment approaches. 

Special rules for payments to MSA 

plans. Section 422.304(c)(2) would 

implement section 1853(a)(1)(B)(iii) of 

the Act, which contains the same rules 

for MSA plans that existed under the 

previous M+C program. The only MMA 

change in payment provisions is that 

MSA plans become local MA plans, and 

we would make payments to MA 

organizations for MSA enrollees based 

on the non-drug benchmark amount 

(instead of county rates), less 1⁄12 of the 

annual lump sum amount (if any) we 

deposit to the enrollee’s MA MSA, as 

determined under § 422.314(c). This 

payment amount is adjusted for enrollee 

risk, as set forth at § 422.308(c). 

Our goal is to maximize the diversity 

of plans available in the MA program, 

and to this end we welcome any 

comments that would help us improve 

our payment methodology for MSA 

plans. 

RFB plans. Section 422.304(c)(3) on 

special rules for religious and fraternal 

benefit (RFB) society plan enrollees is 

unchanged from the current MA 

regulation, now in subpart F at 

§ 422.250(a)(2)(iii), allowing us to make 

payment adjustment reflecting the 

actuarial characteristics and utilization 

patterns of enrollees. 

Payment areas. Proposed § 422.304(d) 

would implement section 1853(d) of the 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46901 

Act, which changes the definition of 

payment area to account for the new 

MA regional plan program. Under the 

previous M+C program, a payment area 

was defined as a county or equivalent 

area defined by the Secretary (with the 

exception of ESRD enrollees, for whom 

the payment area was a State). The 

MMA establishes two general types of 

payment areas: (1) For MA local plans, 

the payment area is an MA local area 

(defined as a county or equivalent 

specified by CMS); and (2) for MA 

regional plans, the payment area is an 

MA region. The payment area for ESRD 

enrollees continues to be a State. 

Section 422.304(e) implements 

section 1853(d)(4) of the Act, which 

permits a State’s chief executive to 

request that we use alternative payment 

areas. This provision retains the same 

language as the previous M+C 

provision, with the exception that the 

statute specifies this option applies only 

to local MA plans. No State has availed 

itself of this option since its enactment 

in 1998. (Note that the terminology used 

in the statute to refer to statistical areas 

is inconsistent with new definitions and 

designations of metropolitan areas 

published by the Office of Management 

and Budget in June of 2003. The terms 

‘‘consolidated metropolitan statistical 

area’’ and ‘‘primary MSA’’ are no longer 

used. There are now metropolitan 

statistical areas and metropolitan 

divisions of such areas, a change which 

is reflected in the text of the proposed 

rule.) 

3. Annual MA Capitation Rates 

(§ 422.306) 

For years before 2004, payments to 

MA organizations were based on the 

highest of three amounts: (1) A ‘‘blended 

rate’’ based on a blend of national and 

local data on Medicare’s costs for 

providing services to beneficiaries not 

enrolled in an MA plan, (2) a ‘‘floor 

amount,’’ based on an amount specified 

in statute, subject to an update factor, 

and (3) an amount representing the 

previous year’s rate updated by a 

minimum percentage increase. The 

MMA replaces the ‘‘highest of three 

rates’’ methodology in several phases. 

For 2004, the MMA specified a 

transitional methodology, where the 

county and State rates were the ‘‘highest 

of four rates’’: the floor amount rate, 

blend rate, minimum percentage 

increase rate (which was redefined to be 

the higher of 102 percent of the previous 

year’s rate or the previous year’s rate 

increased by annual MA growth 

percentage), and the 100 percent of feefor-service (FFS) costs rate introduced 

by the MMA. For the next phase, the 

MMA specified that beginning with 

2005, annual capitation rates will be 

minimum increase rates except for years 

when we rebase the FFS rate; in 

rebasing years, the rate is the higher of 

the minimum increase rate and the FFS 

rate. The MMA requires us to rebase the 

FFS rates no less than every 3 years; that 

is, at least every 3 years a ‘‘higher of two 

rates’’ methodology is in effect. 

Hence, proposed § 422.306(a) would 

implement the revised version of 

section 1853(c)(1)(C) of the Act, which 

defines the minimum percentage 

increase rate. As noted above, the 

minimum percentage increase rate is 

modified to be the greater of 102 percent 

of the prior year’s rate or the prior year’s 

rate increased by the national per capita 

MA growth percentage. 

The MMA also provides that no less 

than every 3 years, we must assign 100 

percent of local per capita FFS costs as 

the county rate in those counties where 

this amount is higher than the minimum 

percentage increase rate. The new FFS 

rate is defined as the adjusted average 

per capita cost (AAPCC) for the MA 

local area, as determined under section 

1876(a)(4) of the Act, based on 100 

percent of FFS costs for individuals who 

are not enrolled in an MA plan for the 

year, with the following adjustments: (1) 

Standardized for the county risk profile 

relative to the nationally average 

beneficiary; (2) adjusted to exclude costs 

of direct graduate medical education; 

and (3) adjusted to include our estimate 

of costs for VA and DOD military 

facility services to Medicare-eligible 

beneficiaries. 

We must recalculate the AAPCC rate 

no less than once every 3 years. The 

statute gives us the authority to 

determine how often to ‘‘rebase’’ the rate 

book within this 3-year window. We 

intend to announce our intention 

annually in the 45-Day Advance Notice 

regarding whether we will rebase the 

rate book for the upcoming year. 

4. Adjustments to Capitation Rates, 

Benchmarks, Bids, and Payments 

(§ 422.308) 

The annual capitation rates described 

above will be adjusted under provisions 

set forth in proposed § 422.308. 

Language in proposed § 422.308(a) 

remains the same as that currently in 

subpart F of the current regulations 

governing MA payments. Under section 

1853(c)(1)(C) of the Act, the MMA 

makes only one change to how we must 

apply the national growth percentage 

each year to increase the minimum 

percentage increase rate. As we provide 

in proposed § 422.308(b), no adjustment 

can be made for changes in prior years’

estimates of the national growth 

percentage for years before 2004. 

Risk adjustment. Proposed 

§ 422.308(c) would implement section 

1853(a)(1)(C) of the Act, which requires 

us to adjust the payment amount for an 

MA plan to take into account the health 

status of the plan’s enrollees. In order to 

ensure that MA organizations are paid 

appropriately for their plan enrollees 

(less or more healthy), we would apply 

these adjustment factors to all types of 

plans (with the exception of MA RFB 

plans, discussed at § 422.304(c)(3)). In 

2006, 25 percent of our payment to MA 

organizations for aged and disabled 

enrollees will be based on current 

demographic factors, and 75 percent 

based on the CMS–HCC risk adjustment 

model. In 2007 and succeeding years, 

100 percent of payment will be riskadjusted. Note that for ESRD MA 

enrollees, payments to MA 

organizations are 100 percent risk 

adjusted under the CMS–HCC ESRD risk 

adjustment model, effective January 1, 

2005. Also, for PACE organizations, the 

transition blends are one year behind 

that for MA organizations. Therefore, 

PACE organizations will receive 100 

percent risk adjusted payments in 2008 

and succeeding years. 

The demographic adjustment factors 

for aged and disabled enrollees are age, 

sex, institutional status, Medicaid 

status, and working aged status. The 

demographic adjustment factors for 

ESRD enrollees are age and sex factors. 

Under the CMS–Hierarchical Condition 

Category (HCC) risk adjustment 

payment methodology, there are CMS–

HCC models for three different 

populations: community-based, longterm institutionalized, and ESRD 

beneficiaries. Currently, the CMS–HCC 

factors in these models include age, sex, 

original reason for entitlement, 

Medicaid status, and disease factors. A 

plan-level working aged adjustment is 

applied to the risk-adjusted portion of 

the payment. The statute continues to 

provide us the authority to add to, 

modify, or substitute for risk adjustment 

factors if the changes will improve the 

determination of actuarial equivalence. 

Additional factors would enable us to 

pay more accurately for different types 

of beneficiaries, that is, the healthier 

and less healthy MA enrollees. 

Adjustment for intra-area variations. 

Proposed § 422.308(d)(1) would 

implement section 1853(a)(1)(F)(i) of the 

Act, which requires us to adjust 

payments for local and regional MA 

plans to account for variations in ‘‘local 

payment rates’’ within each region the 

plan is serving. 

Proposed § 422.308(d)(2) would 

implement section 1853(a)(1)(F)(ii) of 

the Act, which requires us to adjust 

payments for a local MA plan serving 

46902 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

more than one county to account for 

variations in ‘‘local payment rates’’

within the plan’s service area. 

This adjustment relating to risk 

adjustment recognizes that costs in 

some portions of a plan’s service area 

could be higher than those in lower-cost 

areas covered by the plan. Plans serving 

both low-cost and high-cost areas will 

have bids and benchmarks reflecting 

costs averaged across these areas, since 

these are weighted by a plan’s projected 

enrollment. Those plans whose actual 

enrollment reflects a greater proportion 

of residents in higher-cost areas than 

was projected for enrollment when 

calculating the plan bid may see 

payments coming in below cost 

projections. 

Although the statutory language 

referring to adjustments for intra-area 

variations is similar for regional plans 

(section 1853(a)(1)(F)(i) of the Act) and 

local plans (section 1853(a)(1)(F)(ii) of 

the Act), we are interpreting the phrase 

‘‘variation in local payment rates’’ to 

mean that there could be different 

reasons for the variation in payment 

rates in regional versus local plans. For 

example, regional MA plans could have 

significant variation in their payment 

areas because they are required to cover 

at least one State, thereby being 

compelled to include urban and rural 

areas in one region. These areas could 

have significantly different provider 

practice and beneficiary utilization 

patterns, wage indices, and other factors 

that affect the cost of providing services 

to plan enrollees. 

Therefore, we may apply different 

methodologies to regional and local 

plan payments to adjust for rate 

variations within a plan’s service area. 

Also, we are assuming the statutory 

language would allow approaches other 

than adjusting back to county capitation 

rates. 

We are reviewing options for this 

adjustment other than making 

adjustments based on county rates. One 

option would be to apply an index 

based on local fee-for-service rates 

compared to the national fee-for-service 

average. Another possibility is an index 

that reflects input price differences, 

such as some indicator of local wage 

rates to a national average. We may 

apply separate adjustments to regional 

and local plans. 

In deciding how to proceed, we will 

review Medpac’s upcoming study on 

MA payments, required by the MMA, 

which will include an analysis of the 

bases for variation in costs among 

different areas, including differences in 

input prices, utilization, and practice 

patterns. We also invite public 

comments on the best approach to this 

adjustment. 

Adjustment relating to risk 

adjustment. Proposed § 422.308(e) 

would implement section 1853(a)(1)(G) 

of the Act, which requires us to adjust 

payments to plans with basic A/B bids 

above their benchmarks to ensure that 

plans are not advantaged or 

disadvantaged by the method of paying 

based on bid-to-benchmark 

comparisons. Under the bidding 

method, the beneficiary basic premium 

is the difference between unadjusted 

(‘‘1.0 beneficiary’’) bid and benchmark, 

yet the payment is the risk adjusted 

benchmark. If the MA organization 

received this premium and its risk 

adjusted payment from CMS, the 

combined payments would not match 

its revenue needs since the basic 

premium is not risk adjusted. Therefore, 

the impact that risk adjustment would 

have had on the basic premium will be 

incorporated into our payment to the 

organization. Without this adjustment, a 

plan with a higher-than-average risk 

score would receive a total payment 

(beneficiary premium plus Government 

contribution) that was less than the 

plan’s bid, which represents the plan’s 

estimated revenue requirements (in 

addition to member cost sharing). 

Conversely, a plan with a lower-thanaverage risk score would receive a total 

payment that exceeded its bid. 

Proposed § 422.308(e)(1) specifies that 

for each regional plan, payments are 

adjusted so the sum of the monthly 

payment and any basic beneficiary 

premium equals the bid adjusted for 

enrollee risk factors and the adjustment 

for intra-area variations in payments in 

proposed § 422.308(d)(1). Note that the 

formula as stated at section 

1853(a)(1)(G)(ii) of the Act also 

references the adjustment discussed in 

the previous paragraph—for intraregional variations in local payment 

rates. 

Proposed § 422.308(e)(2) specifies that 

for each local plan, payments are 

adjusted so the sum of the monthly 

payment and any basic beneficiary 

premium equals the bid adjusted for 

enrollee risk factors. We note that, in 

contrast to the language for regional 

plans at section 1853(a)(1)(G)(ii) of the 

Act, the formula for local plans does not 

include a reference to the intra-area 

variation described in proposed 

§ 422.308(d)(1). We believe this is an 

unintended omission for local plans, 

since section 1853(a)(1)(F) of the Act 

mandates this adjustment for both 

regional and local plans serving more 

than one county. 

This adjustment must be applied after 

risk adjusting the payment for the 

individual MA enrollee’s health status 

and after taking into account 

adjustments for intra-area variation in 

local payment rates under § 422.304(d). 

Adjustment of payment to reflect the 

number of enrollees. Proposed 

§ 422.308(f) would implement section 

1853(a)(2)(A) of the Act, which is 

unchanged by MMA. We therefore are 

proposing to retain the existing 

implementing regulatory language 

currently found in Subpart F. This 

provision requires us to make 

retroactive payment adjustments to 

account for any difference between the 

actual enrollees and the enrollees upon 

which we based advanced monthly 

payment. 

Adjustment for national coverage 

determination (NCD) services and 

legislative changes in benefits. Section 

1853(c)(7) of the Act requires that when 

a national coverage determination 

(NCD) or legislative change in benefits 

is established and we project this will 

result in a significant increase in costs, 

we must appropriately adjust payments 

to reflect these new significant costs. In 

the final rule titled ‘‘Modifications to 

Managed Care Rules,’’ published August 

22, 2003 at 68 FR 50840, we amended 

the MA regulations to refine the 

definition of ‘‘significant’’ cost and 

interpret appropriate adjustment of 

payments to include a new ‘‘NCD 

adjustment factor’’ effective for CY 2004 

that was to be added to the county rates 

in those counties receiving a 2 percent 

minimum update rate. 

Since all capitation rates under the 

MMA now automatically build in the 

annual national MA growth percentage, 

there is no longer a need to implement 

the NCD adjustment factor. Therefore, 

we are proposing to reverse the 

regulatory change established by the 

August 22, 2003 final rule, to eliminate 

this adjustment factor. Proposed 

§ 422.308(g) reflects this change. See the 

preamble discussion for § 422.109 for 

additional information on this issue. 

Section 1858(c) of the Act provides 

for temporary risk corridors for 

adjusting payments to regional plans, 

and proposed § 422.308(h) specifies data 

submission requirements to implement 

risk corridor payments. At the end of 

contract year 2006 and/or 2007, and 

before a date we specify, MA 

organizations offering regional plans 

must submit sufficient information for 

us to calculate risk corridor amounts 

(see the discussion of regional plan risk 

corridors in proposed § 422.458 below). 

This information includes actual 

allowable costs for the relevant contract 

year and the portion of allowable costs 

that are attributable to administrative 

expenses incurred in providing these 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46903 

benefits. In addition, the MA 

organization would be required to 

provide the total cost for providing 

rebatable integrated benefits, as well as 

the portion of rebatable integrated 

benefits costs that are attributable to 

administrative expenses. 

5. Risk Adjustment Data (§ 422.310) 

Proposed § 422.310 reflects changes 

we made in the methodology for risk 

adjusting MA payments, under which 

we moved from the collection of 

extensive encounter data to collecting 

targeted risk-adjustment data. The riskadjustment data that are referenced in 

this section are data that are used in the 

application of the current riskadjustment model. Originally enacted in 

the BBA, section 1853(a)(3)(B) of the Act 

provides us with the authority to collect 

traditional Medicare data in a standard 

format, but allows MA organizations to 

submit data in alternative formats. This 

data collection authority is retained in 

the MMA. In addition, under this same 

authority, we believe that we may also 

collect data regarding other enrollee 

characteristics such as functional 

limitations if the data are used in the 

risk adjustment model. 

The language in § 422.310 is similar to 

that used in subpart F of the current MA 

regulations at § 422.257. The following 

summarizes the highlights of those 

provisions. Under our data collection 

authority, § 422.310 specifies that each 

MA organization must submit to us all 

data necessary (as stipulated under this 

section) to characterize the context and 

purpose of each service provided to a 

Medicare enrollee by a provider, 

supplier, physician, or other 

practitioner. The BBA gave us the 

authority to collect data regarding 

inpatient hospital services and other 

services as we deemed necessary. The 

BIPA affirmed the collection of 

ambulatory data. Under section 

1853(a)(1)(C) of the Act, beginning for 

payments in calendar year 2006, we will 

use these data to determine the risk 

adjustment factors to be applied to the 

basic A/B bid and the benchmark 

amounts upon which the payments and 

monthly savings for an organization are 

based. We may also use the data for 

other purposes, such as quality 

improvement studies and program 

integrity functions. 

We have implemented a streamlined 

process for MA organizations to submit 

risk-adjustment data. MA organizations 

may submit risk-adjustment data that 

conform to the requirements for 

equivalent fee-for-service data. 

Alternatively, organizations may submit 

data according to an abbreviated format 

as specified by us. The purpose of the 

abbreviated format is to reduce the data 

submission burden on MA 

organizations. 

In addition, our current practice is to 

collect a data, a sample of medical 

records, for conducting validation 

studies of the risk adjustment data CMS 

receives. MA organizations will still be 

required to submit a sample of medical 

records in a manner specified by CMS 

to support the validation studies. We do 

not use medical records data for any 

other purpose. 

The risk adjustment data must be 

submitted according to the timeframes 

specified by CMS. A reconciliation 

process will be allowed to account for 

late data submissions. Data that we 

receive after the final deadline for a 

payment year will not be accepted for 

purposes of the reconciliation. 

6. Announcement of Annual Capitation 

Rates, Regional Benchmarks, and 

Methodology Changes (§ 422.312) 

Proposed § 422.312 would implement 

section 1853(b) of the Act, which was 

revised by MMA to change the date for 

CMS’ announcement of annual 

capitation rates to no later than the first 

Monday in April of each year. In 

addition, we must announce before the 

beginning of each annual, coordinated 

election period the non-drug benchmark 

amounts for each MA region and MA 

regional plan for which a bid is 

submitted. We must announce regional 

benchmarks after the plan bids are 

submitted in June, since per the new 

section 1858(f)(5) of the Act, the 

regional benchmark calculation 

includes a plan bid component based on 

regional plans that bid in June and also 

participated in the MA program in the 

previous year. 

The deadline for our release of the 

Advance Notice of Methodological 

Changes was similarly changed by 

MMA to no later than 45 days before the 

first Monday in April. 

7. Special Rules for Beneficiaries 

Enrolled in MA MSA Plans (§ 422.314) 

Proposed § 422.314 would implement 

section 1853(e)(2) and (3) of the Act, 

which sets forth special rules for how 

we should make payments to enrollees’

medical savings accounts. The MMA 

did not amend the payment provisions 

in section 1853(e) of the Act, so these 

provisions are similar to the provisions 

at § 422.262 in subpart F of the current 

MA regulations. 

In general, we deposit into the 

individual’s MA MSA account at the 

beginning of a calendar year a lump sum 

equal to the annual difference between 

the monthly MSA premium (analogous 

to a plan bid) and the monthly 

benchmark amount. The premium filed 

by the organization offering the MA 

MSA plan is uniform for all enrollees 

enrolled in the MA MSA plan. This 

results in a uniform amount being 

deposited in enrollees’ MSAs in a given 

service area, since the uniform premium 

amount will be subtracted from the 

uniform benchmark amount for every 

enrollee in the plan service area. 

While monthly premiums are uniform 

within a plan, the advance monthly 

payments we make to an MA 

organization for each enrollee in the 

plan are risk adjusted under 

§ 422.308(c), as discussed in connection 

with proposed § 422.304(c)(2) on special 

rules for payments for MSA enrollees. 

As noted above, we invite comments on 

improved methods for making payments 

to MSA plans. 

8. Special Payment Rule for Federally 

Qualified Health Centers (§ 422.316) 

MMA added a new section 1853(a)(4) 

of the Act, which provides for a new 

payment methodology for FQHCs that 

contract with MA organizations. Under 

this methodology, the FQHCs will 

receive a ‘‘wrap-around payment’’ from 

us representing the difference (if any) 

between what they are paid by an MA 

organization, including beneficiary cost 

sharing, and 100 percent of their 

‘‘reasonable costs’’ of providing care to 

patients served at the centers who are 

enrolled in an MA plan. 

Section 1857(e)(3) of the Act, also 

added by MMA, requires that MA 

organizations that contract with FQHCs 

pay the FQHCs an amount that is not 

less than the level and amount of 

payment they would make for the 

services if furnished by an entity 

providing similar services that was not 

an FQHC. This is designed to avoid an 

agreement between an MA organization 

and an FQHC to pay and agree to an 

artificially low rate, with the knowledge 

that the FQHC would receive 

supplemental payments from us 

resulting in a total of 100 percent cost 

reimbursement. 

9. Special Rules for Coverage That 

Begins or Ends During an Inpatient 

Hospital Stay (§ 422.318) 

The MMA amended section 1853(g) of 

the Act, which puts forth special 

payment rules for situations where a 

beneficiary’s coverage by an MA plan 

begins or ends while the beneficiary is 

a hospital inpatient. The MMA 

amendment expands the list of hospital 

facilities covered under this provision to 

include those that have come under a 

Medicare prospective payment system 

since the Balanced Budget Act. In 

addition to ‘‘subsection (d)’’ hospitals, 

46904 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

three other types of facilities are now 

included: rehabilitation hospitals, 

distinct part rehabilitation units, and 

long-term care hospitals. These changes 

are reflected in proposed § 422.318, 

which otherwise retains existing 

language from subpart F applicable only 

to subsection (d) hospitals. 

10. Special Rules for Hospice Care 

(§ 422.320) 

Proposed § 422.320 revises the 

existing MA special rules for hospice 

care to reflect the new bidding and 

payment methodology in sections 1853 

and 1854 of the Act, and the creation of 

a prescription drug benefit under Part D. 

Previously, no payment was made to an 

MA organization on behalf of a 

Medicare enrollee who had elected 

hospice care under § 418.24 except for 

the portion of the payment applicable to 

the additional benefits. Now the MA 

organization will be paid the portion of 

the payment attributable to the 

beneficiary rebate for the MA plan plus 

the amount of the subsidies related to 

basic prescription drug coverage for 

plans that offer prescription drug 

coverage. 

Note that for PACE organizations, 

PACE enrollees must elect either their 

PACE plan or the hospice benefit as 

their provider of Medicare services. An 

enrollee who elects to enroll in hospice 

is thereby disenrolled from the PACE 

benefit. However, PACE plans do 

provide a service similar to hospice 

known as ‘‘end-of-life-care.’’

11. Source of Payment and Effect of MA 

Plan Election on Payment (§ 422.322) 

With the exception of a new provision 

addressing payments for Part D benefits, 

proposed § 422.322 is identical to 

§ 422.268 in subpart F of the current MA 

regulations at § 422.268. Section 

422.322(a)(2) has been added to reflect 

the creation of subsidized prescription 

drug coverage under Part D. As required 

by section 1853(f) of the Act, subsidy 

payments to MA–PD organizations for 

basic drug coverage under this title are 

included in the payments described in 

§ 422.322(a)(2) (which are made from 

the Medicare Prescription Drug Account 

in the Federal Supplementary Medical 

Insurance Trust Fund). 

12. Payments to MA Organizations for 

Graduate Medical Education Costs 

(§ 422.324) 

These provisions are identical to the 

current MA provisions in subpart F at 

§ 422.270, and require us to make 

payments to MA organizations for Direct 

Graduate Medical Education costs that 

MA organizations incur in dealings with 

non-hospital provider settings, under 

specified conditions. 

Subpart I—Organization Compliance 

With State Law and Preemption by 

Federal Law 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart I—Organization 

Compliance with State Law and 

Preemption by Federal Law’’ at the 

beginning of your comments.) 

The MMA amended section 

1856(b)(3) of the Act relating to Federal 

preemption of State law. Before this 

amendment, section 1856(b)(3) of the 

Act provided for two types of 

preemption, general and specific. 

Section 1856(b)(3)(A) of the Act 

provided that State laws that were 

inconsistent with M+C rules were 

preempted. Section 1856(b)(3)(B) of the 

Act provided that, even if a State law 

did not conflict with an M+C standard, 

it was preempted if it addressed one of 

four specified areas (benefit 

requirements, including cost-sharing 

rules; requirements relating to the 

inclusion or treatment of providers; 

requirements concerning coverage 

determinations and related appeals and 

grievance processes; and requirements 

relating to marketing materials and 

summaries and schedules of benefits 

concerning M+C plans). 

Thus, the presumption was that a 

State law was not preempted if it did 

not conflict with an M+C requirement, 

and did not fall into one of the four 

specified categories. MMA reversed this 

presumption, providing that State laws 

are presumed to be preempted unless 

they fall into two specified categories. 

Specifically, section 1856(b)(3) of the 

Act now states that ‘‘the standards 

established under this section shall 

supersede any State law or regulation 

(other than State licensing laws or State 

laws relating to plan solvency).’’ The 

reason for such broad preemption 

authority is that the Congress intended 

that the MA program, as a Federal 

program, operate under Federal rules. 

There has been some confusion in 

recent court cases with respect to the 

preemption of State laws. Therefore, 

this broad preemption would apply 

prospectively, that is, it would not affect 

previous and ongoing litigation related 

to preemption of State laws. 

Furthermore, we believe the Congress 

broadened this authority to facilitate the 

operation of regional PPOs, which may 

have service areas that cross State lines. 

We note that the Conference Report 

makes it clear that the Congress 

intended to broaden the scope of 

preemption through this change. Thus, 

we believe that the exception for State 

laws that relate to ‘‘State licensing’’ must 

be limited to State requirements for 

becoming State licensed, and would not 

extend to any requirement that the State 

might impose on licensed health plans 

that—absent Federal preemption—must 

be met as a condition for keeping a State 

license. 

If a State requirement could be 

considered to relate to State licensing 

simply because the State could revoke a 

health plan’s license for a failure to 

meet the requirement, this would mean 

that States could impose virtually any 

requirement they wished to impose 

without the requirement being 

preempted. This would extend even to 

State laws that were specifically 

preempted under the pre-MMA version 

of section 1856(b)(3) of the Act, such as 

benefit requirements, rules regarding the 

inclusion and treatment of providers, 

and rules regarding coverage decisions 

and related grievances and appeals. 

Because we believe that it is clear that 

the Congress intended to broaden the 

scope of Federal preemption, not to 

narrow it, we also believe that the 

exception for laws relating to State 

licensing must be limited to 

requirements for becoming State 

licensed (such as filing articles of 

incorporation with the appropriate State 

agency, or satisfying State governance 

requirements), and not extended to rules 

that apply to State licensed health 

plans. 

Upon review of this regulation, we do 

not believe that the language in existing 

paragraph (c) of § 422.402 is necessary. 

Section 422.402(c) currently states that 

nothing in this section may be 

construed to affect or modify ‘‘any other 

law or regulation that imposes or 

preempts a specific State authority.’’ We 

do not believe that this paragraph has 

any real effect, since the real issue 

would be whether the preemption in 

section 1856(b)(3) of the Act is 

controlling on the matter. This analysis 

would be unaffected by language in a 

regulation implementing section 

1856(b)(3) of the Act. We therefore are 

proposing to remove the current 

§ 422.402(c). 

We therefore propose to revise 

§ 422.402 to clearly state that the MA 

standards supersede State law and 

regulation with the exception of 

licensing laws and laws relating to plan 

solvency. Accordingly, with the 

exceptions of State licensing laws or 

State laws related to plan solvency, 

State laws do not apply to MA plans 

offered by MA organizations. 

MMA also amended section 1854(g) of 

the Act, which prohibits States from 

imposing taxes on premiums paid to 

MA Organizations by us. Section 232 of 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46905 

the MMA amended section 1854(g) of 

the Act to provide that States are also 

expressly prohibited from imposing a 

premium tax, or similar type of tax, on 

premiums paid by beneficiaries or third 

parties on behalf of beneficiaries to MA 

organizations. We have incorporated 

this clarification at § 422.404(a). 

Subpart J—Special Rules for MA 

Regional Plans 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart J—Special Rules for 

MA Regional Plans’’ at the beginning of 

your comments.) 

We are proposing a new Subpart J 

which would implement the provisions 

in the new section 1858 of the Act. 

Section 1858 of the Act sets forth the 

special rules that apply to new regional 

MA plans. We note that the regional MA 

plans would have many similarities 

with local MA plans. For example, both 

regional and local MA plans would be 

subject to the same process of bidding 

against a ‘‘benchmark’’ amount. In the 

case of regional plans, however, the 

benchmark amount would be regionwide, based on a weighted average of 

the benchmark amounts for the payment 

areas in the region in question, and 

(unlike local plans) including plan bids 

as a determinant of the benchmark. This 

methodology is set forth in sections 

1853 and 1854 of the Act, and would be 

implemented in subparts F and G of part 

422, as discussed in the discussions of 

those two subparts above. 

The Congress has also provided for a 

number of unique financial and 

administrative incentives designed to 

support the introduction of regional 

PPO plans. These incentives would 

assist plans as they enter this new line 

of business and learn the market 

dynamics of serving beneficiaries across 

larger geographic areas. We have placed 

many of the special regional PPO 

requirements and incentives in subpart 

J. 

However, there are certain provisions 

relevant to regional MA plans that are 

not located in subpart J that we also 

note below to assist the reader in 

identifying the unique features of MA 

regional plans, which are required to be 

structured as preferred provider 

organizations (PPOs). 

To encourage the formation of 

regional plans, a two-year moratorium is 

established on new local preferred 

provider plans from January 1, 2006 

until December 31, 2007. PPOs that 

exist prior to this date (including 

demonstration PPOs) can continue and 

expand enrollment in their existing 

service area (See § 422.451). Regional 

MA PPO plans also would have certain 

mandatory features to encourage 

beneficiary enrollment. For example, 

MA regional plans, to the extent they 

use deductibles, would have a single 

deductible for all original Medicare feefor-service benefits (Part A and Part B) 

received through providers in the plan’s 

provider network (‘‘preferred 

providers’’). 

In addition, beneficiaries in regional 

plans would have an annual 

catastrophic cap on their out-of-pocket 

spending for both in-network and outof-network costs of Part A and B 

benefits. (See section 1858(b) of the Act 

which is implemented in § 422.112 of 

subpart C of this proposed rule.) Note 

that both the single deductible and the 

annual cap on out-of-pocket spending 

would be part of a cost sharing structure 

in which the aggregate actuarial value of 

the cost sharing across the enrolled 

population of the plan is equivalent to 

the aggregate level of Medicare FFS cost 

sharing. That is, on average enrollees in 

MA regional plans are paying the same 

level of cost sharing as they would if the 

plan’s cost sharing structure were the 

same as Medicare’s, but individual 

enrollees with higher than average 

health care costs may be paying less in 

actual cost sharing than they would 

under Medicare’s cost sharing structure 

because of the catastrophic cap. 

A network adequacy fund would also 

be implemented that would assist 

regional plans in forming adequate 

networks, particularly in rural areas. 

This fund would provide enhanced 

payments for certain essential hospitals 

that accept enrollees in regional PPOs. 

(See section 1858(h) of the Act, which 

is implemented in § 422.112 of subpart 

C of this proposed rule.) 

As discussed in more detail below, 

the new subpart J would contain 

regulations that address: (1) The 

provision in section 1858(a) of the Act 

for the establishment of MA regions, 

including the principal factors we must 

balance in selecting these regions; (2) 

the availability of a temporary waiver of 

the State licensure requirement; (3) the 

MA regional plan risk corridors; and (4) 

the availability of a stabilization fund 

for MA regional PPO plans. 

1. Establishment of the MA regions 

(§ 422.455) 

In this proposed section we would 

implement section 1858(a) of the Act, 

which requires us to establish the 

regions that would constitute the service 

areas for the regional MA plans. Under 

the statutory requirements of section 

1858(a) of the Act, MA regional plans 

would be required to serve an entire 

region. We would announce the MA 

regions by January 1, 2005. The regional 

plan would become operational on 

January 1, 2006. The statute also 

specifies that the MA regions should 

maximize the availability of regional 

plans for Medicare beneficiaries, 

particularly those residing in rural 

areas, regardless of their health status. 

The statute also requires that we 

establish between 10 and 50 regions 

within the 50 States and the District of 

Columbia. To assist us in developing the 

MA regions, we must conduct a market 

survey and analysis, including an 

examination of current insurance 

markets. We may periodically review 

MA regions and, based on the review, 

revise the regions. An MA regional plan 

may be offered in more than one region, 

including all regions. 

In the MMA Conference Agreement, 

the Congress has also provided some 

general suggestions for us in 

establishing the MA regions. To the 

extent possible, the conferees suggest 

that each region include at least one 

State, that the regions not divide States 

across regions, and include multi-State 

Metropolitan Statistical Areas in a 

single region. 

At this point, we would propose also 

to consider the following factors in 

selecting the MA regions: 

• The number of eligible Medicare 

beneficiaries residing in each region. 

• The regional payment rates would 

be reasonably similar. 

• To the extent possible each region 

would contain a balance between rural 

and urban areas. 

• Consideration would also be given 

to the inclusion of health care market 

areas within regions. 

• To the extent possible, PPO regions 

should be the same as drug regions. 

Due to the requirement to conduct a 

market analysis, we are not proposing 

specific regions at this time. We are 

interested in receiving comments 

regarding how we can best address the 

considerations discussed above in 

selecting the regions in order to meet 

our goal of maximizing beneficiary 

access to MA regional PPO plans. We 

are also interested in comments related 

to other factors we should consider in 

defining regions. Our objective is to 

obtain broad public comment on the 

supporting information and analysis 

that will be used by us to inform our 

selection of the regions. We held a 

public meeting in Chicago, Illinois on 

July 21, 2004 to discuss options for PPO 

and PDP regions. The meeting materials 

containing preliminary regional PPO 

and PDP options may be found at http:// 

www.cms.hhs.gov/medicarereform/ 

mmaregions. 

46906 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

2. Risk Sharing (§ 422.458) 

Section 1858(c) of the Act provides 

that Medicare will share risk with MA 

regional plans for contract years 2006 

and 2007 if plan costs are above or 

below a specific risk corridor. Risk 

sharing is intended to encourage plans 

to enter the regional market and to 

provide assistance to these plans during 

the start-up phase of their business. 

Section 1858(c) of the Act defines 

which plan costs (‘‘allowable costs’’) and 

plan revenues (‘‘target amount’’) we may 

consider to determine risk-sharing 

payments to regional MA plans. Under 

section 1858(c)(1)(D) of the Act, a subset 

of supplemental benefits called 

‘‘rebatable integrated benefits’’ must be 

included on both the cost and revenue 

sides of risk corridor calculations. 

Proposed § 422.258(a) defines rebatable 

integrated benefits as those non-drug 

supplemental benefits that are funded 

through beneficiary rebates (described at 

§ 422.266(b)(1)) and that we determine 

are: (1) Additional health benefits not 

covered under the original Medicare 

program option; and (2) benefits that 

require expenditures by the plan. We 

discuss in more detail below what 

supplemental benefits may be 

considered rebatable integrated benefits. 

Proposed § 422.258(a) would 

implement section 1858(c)(1)(C) of the 

Act by defining allowable costs for an 

MA regional plan as the total amount of 

costs incurred in a year in providing 

benefits covered under the original 

Medicare fee-for-service program option 

for all enrollees and in providing 

rebatable integrated benefits as defined 

in this paragraph), reduced by the 

portion of those costs attributable to 

administrative expenses incurred in 

providing these benefits. 

Proposed § 422.258(a) would 

implement section 1858(c)(2)(D) of the 

Act by defining the target amount for an 

MA regional plan as the total amount of 

payments made to the organization for 

enrollees in the plan for the year (which 

means payments attributable to the bid 

for benefits under the original Medicare 

fee-for-service program option as 

defined in § 422.100(c)(1), the total of 

the MA monthly basic beneficiary 

premium collectable for those enrollees 

for the year, plus the total amount of 

rebatable integrated benefits), reduced 

by the amount of administrative 

expenses assumed in the portion of the 

bid attributable to benefits under 

original Medicare fee-for-service 

program option and rebatable integrated 

benefits. 

Proposed § 422.258(b)(2) implements 

section 1858(c)(1)(B) of the Act by 

requiring that MA regional plans notify 

us, before that date in the succeeding 

year as we specify, of each plan’s total 

allowable costs. As mentioned above, 

rebatable integrated benefits are the only 

supplemental benefits that can be 

included in a plan’s allowable costs. We 

would have discretion to evaluate 

whether certain rebatable benefits 

should be included in allowable costs 

for risk corridor calculations. (Note that 

rebatable integrated benefits must be 

offered as mandatory supplemental 

benefits because, as discussed in 

subpart F, rebate dollars cannot be used 

to fund optional supplemental benefits.) 

Rebatable integrated benefits. 

Premium reductions funded by rebates 

(that is, reductions in the Part B, Part D, 

and/or supplemental premiums) would 

not be considered rebatable integrated 

benefits because premium reductions do 

not involve expenditures by the plan; 

they represent foregone revenue. 

However, any rebate-funded additional 

health benefits not covered by original 

Medicare would be considered rebatable 

integrated benefits. 

We invite comment on the issue of 

whether reductions in cost sharing 

funded by rebate dollars should be 

considered rebatable integrated benefits. 

One approach is to consider cost sharing 

reductions as an expense to the plan 

and thus not foregone revenue, that is, 

if the enrollee pays a smaller share of 

provider costs, the plan pays a larger 

share. The second approach is to define 

a supplemental benefit as a rebatable 

integrated benefit only if it would not 

have an impact on the utilization of 

basic benefits. This approach is parallel 

with the Part D prescription drug 

benefit, where CMS does not share risk 

beyond the basic benefit. Under this 

second approach, then, we would not 

share risk on non-Medicare benefits 

with utilization effects on Parts A, B, 

and D benefits. That is, cost sharing 

reductions would not be rebatable 

integrated benefits. 

If we take the first approach, an issue 

arises. For mandatory supplemental 

benefits that are non-Medicare benefits 

and require expenditures by the plan yet 

are only partly funded by rebate dollars, 

we would consider whether and how to 

include only the rebate-funded portion 

of the costs and revenues in the risk 

corridor calculation, as a rebatable 

integrated benefit. We invite comment 

on this issue, including any concerns 

about the burden of identifying the 

relevant portions of costs and payments. 

If we take the second approach, a 

different issue arises. Since the pricing 

of supplemental benefits includes the 

utilization effect of cost-sharing 

reductions on benefits under the 

original Medicare fee-for-service 

program, the target amount would not 

reflect these costs. However, unless an 

adjustment is made, allowable costs 

would include the utilization effect of 

the supplemental benefits. Therefore, 

we would require that allowable costs 

be reduced by an estimate of the 

utilization effect of supplemental 

benefits. We would assume that any 

such adjustment would be consistent 

with the assumptions used in originally 

pricing the supplemental benefits. 

We invite comment on approaches for 

determining what supplemental benefits 

are considered to be rebatable integrated 

benefits. 

Payment Adjustments 

Proposed § 422.358(c) would 

implement section 1858(c)(2) of the Act 

relating to payment adjustments. There 

would be no payment adjustment if the 

allowable costs for the plan are at least 

97 percent, but do not exceed 103 

percent, of the target amount for the 

plan. 

If allowable costs for the plan are 

more than 103 percent but not greater 

than 108 percent of the target amount 

for the plan for the year, we would 

increase the total monthly payments 

made to the organization by 50 percent 

of the difference between allowable 

costs and 103 percent of the target 

amount. If allowable costs for the plan 

are greater than 108 percent of the target 

amount, we would increase the total 

monthly payments to the plan by an 

amount equal to the sum of: (1) 2.5 

percent of the target amount; and (2) 80 

percent of the difference between 

allowable costs and 108 percent of the 

target. 

Conversely, if the allowable costs for 

the plan are less than 97 percent, but 

greater than or equal to 92 percent of the 

target amount, we would reduce the 

total monthly payment to the plan by 50 

percent of the difference between 97 

percent of the target amount and the 

allowable cost. 

If the allowable costs for the plan are 

below 92 percent of the target, we 

would reduce the total monthly 

payments to the organization by the sum 

of: (1) 2.5 percent of the target amount; 

and (2) 80 percent of the difference 

between 92 percent of the target and the 

allowable costs. 

Disclosure of Information 

Proposed § 422.358(d) would 

implement section 1858(c)(3) of the Act 

relating to disclosure of information. 

Each contracting MA plan must provide 

the information that we deem necessary 

to carry out this section. While we have 

the right to inspect and audit all books 

and records pertaining to information 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46907 

provided under this section, the 

information disclosed or obtained for 

purposes of this section may only be 

used to carry out this section. 

3. State Licensing Waiver 

Proposed § 422.458(e) would 

implement section 1858(d), of the Act 

setting forth organizational and 

financial requirements, including the 

provision for a temporary waiver of the 

MA State licensing requirement. In 

order to facilitate the offering of MA 

plans in regions encompassing multiple 

States, we may temporarily waive State 

license requirements. 

MA organizations ordinarily must be 

State licensed to bear risk in each State 

within a region. However, if an MA 

organization offering an MA regional 

plan is organized and licensed under 

State law in at least one State in the 

region but has not met the licensing 

requirements in other States in the 

region, under section 1858(d) of the Act, 

we may temporarily waive the State 

licensing requirement in the other 

States. We would waive the State 

licensing requirement to allow sufficient 

time for the processing of the 

application by the State or States where 

an application is pending. 

This waiver can only be granted if the 

organization demonstrates to us that it 

has filed the necessary application to 

meet the other State’s requirements. If 

an organization is granted a waiver, the 

organization would select the licensing 

rules of one State in the region and 

apply those rules to the States in which 

the organization did not have State 

licensure until the organization is 

licensed in all the States. In the event 

that the waivered MA organization’s 

State licensure application is denied, we 

would extend the waiver until the end 

of the year or a shorter period as we 

determine is appropriate to provide for 

a transition for the enrollees in the plan 

or plans offered by the organization. 

4. Stabilization Fund 

Proposed § 422.438(f) would 

implement the provisions in section 

1858(e) of the Act providing for the 

creation of a Regional Stabilization 

Fund. During the past several years, a 

number of organizations have 

withdrawn from the Medicare+Choice 

program due to changing market 

conditions and an inflexible statutory 

payment formula. Plans’ costs were 

rising at a faster rate than Medicare 

payment rates. We had no discretion 

under the law to respond quickly to 

these market changes, resulting in plan 

withdrawals that have affected millions 

of beneficiaries. 

The Congress has authorized an MA 

Regional Plan Stabilization Fund in 

order to promote greater stability in the 

regional program and provide us with a 

tool to respond to market fluctuations. 

The Fund can be used to provide 

incentives for plan entry in each region 

and plan retention in MA regions with 

below average MA penetration. Initially, 

$10 billion would be available for 

expenditures from the Fund beginning 

on January 1, 2007, and these start-up 

funds would only be available until 

December 31, 2013. 

Funds would be drawn from the 

Federal Hospital Insurance Trust Fund 

and the Federal Supplementary Medical 

Insurance Trust Fund in a proportion 

that reflects the relative weight that the 

benefits under Parts A and B represent 

of the actuarial value of the total benefit. 

Additional funds would be available in 

an amount equal to 12.5 percent of 

average per capita monthly savings from 

regional plans that bid below the 

benchmark. The additional funds would 

be deposited on a monthly basis into a 

special account in the Treasury. The 

Fund is designed to allow us to respond 

to market conditions on a temporary 

basis. If the Fund is used for either plan 

entry or retention for 2 consecutive 

years, we would report to the Congress 

on the underlying market conditions in 

the regions. These reports would give 

the Congress time to respond to the 

market conditions through changes to 

the regions or the underlying payment 

system. 

The funds would be available in 

advance of appropriations to MA 

regional plans in accordance with 

specified funding limitations. The total 

amount projected to be expended from 

the Fund in any year may not exceed 

the amount available in the Fund as of 

the first day of that year. If the use of 

the stabilization fund results in 

increased expenditures under Title 

XVIII, the increased expenditures would 

be counted as expenditures from the 

Fund. We would only obligate funds if 

the Chief Actuary of CMS, and the 

appropriate budget officer, certify that 

there are sufficient funds at the 

beginning of the year to cover all the 

obligations for that year. We would take 

steps to ensure that sufficient funds are 

available to make the payments for the 

entire year, which may include 

computing lower payment amounts or 

limitations on enrollment in MA 

regional plans receiving the payments. 

Expenditures from the Fund would first 

be made from amounts made available 

from the initial funding. 

5. Plan Entry Funding 

Plan entry incentives are available for 

either a one-year national bonus 

payment or multi-year adjustments in 

regional payments; however, in no case 

can there be a regional payment 

adjustment if there is a national bonus 

for that year. In order to encourage the 

offering of plans in all regions, the 

national bonus payment would be 

available to an MA organization that 

elects to offer a regional plan in each 

MA region in a year, but only if a 

national plan is not offered in the 

previous year. 

Funding is only available for a single 

year, but more than one organization 

can receive the incentive in the same 

year. The national bonus payment 

would: (1) Be available to an 

organization only if it offers plans in 

every MA region; (2) be available to all 

MA regional plans of the organization 

regardless of whether any other MA 

regional plan is offered in any region; 

and (3) be equal to 3 percent of the 

benchmark amount otherwise 

applicable for each MA regional plan 

offered by the organization, subject to 

funding limitations. If a national bonus 

payment is not made, a regional 

payment adjustment can be made. The 

regional payment adjustment is an 

increased payment for an MA regional 

plan offered in an MA region that did 

not have any MA regional plans offered 

in the previous year. 

We would determine the adjusted 

payment amount based solely on plans’

bids in the region, and the adjusted 

payment amount would be available to 

all plans offered in the region. The 

amount can be based on the mean, 

mode, median or other measure of the 

bids and may vary from region to region, 

but the payment amount would not be 

determined through a method that 

limits the number of plans or bids in the 

region. We expect that such an 

adjustment would represent a fixed 

percentage of the relevant measure of 

plan bids in the region. Such a payment 

adjustment would be treated as a change 

to the benchmark amount in that region 

for purposes of calculating individual 

plan payments and beneficiary rebates. 

6. Regional Payment Adjustment 

Subject to funding limitations, we 

would determine the period of time that 

funds are available for regional payment 

changes to encourage plan entry. If 

funding would be provided for a second 

consecutive year under this provision, 

we would submit a report to the 

Congress describing the underlying 

market dynamics in the region and 

recommending changes to the payment 

46908 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

methodology. Multi-year funding may 

be made available to all MA plans 

offered in a region. If this multi-year 

increased amount is made available to 

MA plans in a region, funding would 

not be available for plan retention in the 

region in the following year. Regional 

payment adjustments would not be 

taken into account when computing the 

underlying benchmark for the 

subsequent year. 

7. Plan Retention Funding 

In addition to using the Fund to 

encourage plans to enter regions that 

might otherwise go unserved, we may 

also use the fund to encourage plans to 

remain in regions if market conditions 

are causing plan withdrawals. 

Incentives for plan retention could take 

the form of an increased payment to 

plans in regions that meet specific 

requirements. The requirements are: (1) 

One or more plans inform us that they 

are going to discontinue service in the 

region in the succeeding year; (2) we 

determine that if those plans were not 

offered, fewer than two MA 

organizations will be offering MA 

regional plans in the region in the year; 

(3) for the previous year, we determine 

that the proportion of beneficiaries 

enrolled in MA regional plans in the 

region is less than the national average 

of MA regional plan enrollment; (4) 

funds have not already been awarded 

for 2 consecutive years. 

Any additional payment amount 

would be treated as if it were an 

addition to the benchmark amount 

otherwise applicable, but would not be 

taken into account in the computation 

of the benchmark for any subsequent 

year. 

If plans receive funding under this 

part for a second year, we would submit 

a report to the Congress that describes 

the underlying market dynamics in the 

region and includes recommendations 

concerning changes in the payment 

methodology otherwise provided for 

MA regional plans. 

The incentive for plan retention 

payment would be an amount 

determined by the Secretary that does 

not exceed the greater of: (1) 3 percent 

of the benchmark amount applicable in 

the region; or (2) an amount that, when 

added to the benchmark, results in a 

ratio such that the additional amount 

plus the benchmark for the region 

divided by the adjusted average per 

capita cost (AAPCC) equals the 

weighted average of benchmarks for all 

regions divided by the AAPCC. 

Subpart K—Application Procedures and 

Contracts for Medicare Advantage 

Organizations 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart K—Application 

Procedures and Contracts for Medicare 

Advantage Organizations’’ at the 

beginning of your comments.) 

Proposed changes to the existing MA 

provisions concerning applications and 

contracts are discussed below. We 

realize, however, that the programmatic 

changes contained in this proposed rule 

may require additional changes to 

existing MA contracting provisions that 

could reduce the administrative burden 

and increase the effectiveness of these 

provisions. We are studying this issue, 

requesting comments and will 

implement the appropriate changes in 

the final rule. 

We are proposing that the application 

requirements and evaluation and 

determination procedures from subpart 

A (§ 422.6 and § 422.8) be incorporated 

into subpart K. As a result, the subpart 

K title would be changed to 

‘‘Application Procedures and Contracts 

for Medicare Advantage Organizations.’’

The application requirements from 

subpart A would be added as § 422.501 

and the evaluation and determination 

procedures would be included as 

§ 422.502, with mostly nomenclature 

changes. The one exception is a change 

to the compliance program requirements 

at § 422.502(b)(3)(iv)(G). We believe that 

mandatory reporting of potential fraud 

by government contractors is critical, 

especially in light of the corporate fraud 

scandals that occurred over the past 

several years. It is also in keeping with 

the Sarbanes-Oxley Act of 2002, under 

which the Securities and Exchange 

Commission adopted new regulations 

designed to make corporate compliance 

and disclosure requirements stronger 

and more effective. In short, we believe 

that the self-reporting requirements 

included in this rule are keeping with 

the change in the legal, regulatory, and 

business climates since the compliance 

program requirements were first 

implemented. We propose adding the 

following text to § 422.502(b)(3)(iv)(G): 

If the MA organization discovers from 

any source evidence of misconduct 

related to payment or delivery of health 

benefits under the contract, it must 

conduct a timely, reasonable inquiry 

into that misconduct. If, after reasonable 

inquiry, the MA organization has 

determined that the misconduct may 

violate criminal, civil, or administrative 

law, the MA organization must report 

the existence of the misconduct to the 

appropriate Government authority 

within a reasonable period, but not 

more than 60 days after the 

determination that a violation may have 

occurred. If the potential violation 

relates to Federal criminal law, the civil 

False Claims Act, Federal Anti-Kickback 

provisions, the civil monetary penalties 

authorities (primarily under section 

1128A and 1857 of the Social Security 

Act), or related statutes enforced by the 

HHS Office of Inspector General, the 

report must be made to that Office. The 

MA organization must conduct 

appropriate corrective actions (for 

example, repayment of overpayments, 

disciplinary actions against responsible 

employees, etc.) in response to the 

potential violation referenced above. 

The existing § 422.501 would be 

redesignated as § 422.503, the existing 

§ 422.502 would be redesignated as 

§ 422.504, and the existing § 422.504 

would be redesignated as § 422.505. 

We also propose to add a new 

paragraph (1) To what would now be 

§ 422.503(b), clarifying that the 

completion of an application as 

described in § 422.501 is a condition 

necessary to contract as an MA 

organization. The current paragraphs (1) 

through (5) would be re-designated as 

paragraphs (2) through (6). 

We propose technical corrections to 

what would now be § 422.503(b)(4)(ii) 

and § 422.503(b)(4)(vi)(F). In 

§ 422.503(b)(4)(ii), we replaced the word 

‘‘plan’’ with the word ‘‘implement.’’ In 

§ 422.503(b)(4)(vi)(F), we replaced the 

word ‘‘provisions’’ with the word 

‘‘procedures.’’ We also propose technical 

corrections to newly redesignated 

§ 422.503(b)(6) and § 422.503(b)(6)(i). 

The current language states ‘‘The M+C 

organization’s contract must not have 

been terminated by CMS under 

§ 422.510 within the past 2 years unless 

* * *.’’ Section 1857(c)(4) of the Act, 

however, which is implemented in this 

provision, applies to plans that elect to 

non-renew their contracts, not plans 

terminated by us. We accordingly 

propose to revise the newly 

redesignated § 422.503(b)(6) 

introductory text to read ‘‘The MA 

organization’s contract must not have 

been non-renewed under § 422.506 

within the past 2 years unless * * *.’’

Although newly redesignated 

§ 422.503(b)(6)(i) already refers to the 

MA organization initiating the end of 

the contract, it uses the term 

‘‘terminated’’ and we propose to change 

it to ‘‘non-renew,’’ which is the term 

used in the regulations. We would 

revise § 422.503(b)(6)(i) accordingly. 

We are proposing several technical 

corrections to § 422.504 (formerly 

§ 422.502). The first corrections would 

be to proposed § 422.504(e)(4). We 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46909 

propose to clarify that paragraph (e)(4) 

introductory text provides that ‘‘HHS, 

the Comptroller General, or their 

designee’s right to inspect, evaluate, and 

audit extends through 6 years from the 

end of the final contract period * * *’’

The previous language was not clear 

that this provision applied after CMS 

and the MA organization severs their 

relationship. In paragraph (e)(4)(ii) we 

propose to add ‘‘allegation of’’ to clarify 

our use of the word fraud. In paragraph 

(e)(4)(iii) we propose to add ‘‘or similar 

fault’’ after the word ‘‘fraud.’’ We 

propose to remove § 422.504(f)(2)(vii) 

since MSAs are no longer 

demonstrations. Section 

422.504(f)(2)(viii) would be 

redesignated as § 422.504(f)(2)(vii). We 

propose to revise § 422.504(i)(3)(ii) by 

removing § 422.504(i)(3)(ii)(A) ‘‘The 

M+C organization oversees and is 

accountable to CMS for any functions or 

responsibilities that are described in 

these standards.’’ It is not necessary for 

this provision to be included in 

contracts between MA organizations 

and providers. The MA organization is 

already held accountable for adhering to 

and otherwise fully complying with all 

terms and conditions of its contract with 

us through what would now be 

§ 422.504(i)(1), ‘‘MA organization 

relationship with related entities, 

contractors, and subcontractors.’’ In 

addition, there is no statutory 

requirement that this provision appear 

in contracts between MA organizations 

and downstream providers. 

Based on the bidding process and 

establishment of benchmarks, we 

propose to no longer allow an MA 

organization’s contract to be effective at 

any time other than the first of the 

contract year. 

We are proposing to move the 

notification date for nonrenewal of 

contracts in § 422.506(a)(2)(i) and 

§ 422.506(a)(3) to the first Monday in 

June to match the bid submission date. 

We are also proposing to move the 

notification date for nonrenewal of 

contracts in § 422.506(a)(2)(i) and 

§ 422.506(a)(3) to the first Monday in 

June to match the bid submission date. 

We are also proposing a clarifying 

change to § 422.506(a)(2)(ii) by adding 

‘‘prior to issuance’’ after the existing 

‘‘CMS approval.’’

We are proposing to revise 

§ 422.510(a)(4) by adding the phrase 

‘‘There is credible evidence’’ in front of 

the existing language about an MA 

organization that committed or 

participated in fraudulent or abusive 

activities. We have also added the word 

‘‘false’’ in front of ‘‘fraudulent.’’

We are proposing technical and 

clarifying changes to § 422.520, ‘‘Prompt 

payment by MA organization.’’ The 

phrase ‘‘from non-contracted providers’’

would be added to § 422.520(a)(3) to 

clarify that this provision was intended 

to refer only to claims from noncontracted providers (versus contracted 

providers). Claims by contracted 

providers are addressed in § 422.520(b). 

We also propose to add a new 

§ 422.520(b)(2), providing that the MA 

organization is obligated to pay 

contracted providers according to the 

terms of the contract between the MA 

organization and the provider. Finally, 

we are proposing that a new paragraph 

(d) be added clarifying that a CMS 

decision not to conduct a hearing under 

paragraph (c) of § 422.520 does not 

disturb any potential remedy under 

State law for the non-contracted 

provider, or affect the provider’s rights 

to pursue payment as provided under 

section 1866(a)(1)(O) of the Act. Section 

1866(a)(1)(o) of the Act establishes that 

Medicare participating providers who 

do not have a contract establishing 

payment amounts agree to accept, as 

payment in full for covered services 

provided to MA beneficiaries, an 

amount equal to the amount the 

provider would have collected under 

fee-for-service Medicare if the 

beneficiary was not enrolled in an MA 

plan. 

Finally, we are proposing a new 

§ 422.527, addressing payments to 

Federally Qualified Health Centers 

(FQHC). MMA added a new section 

1857(e)(3)(A) of the Act, which applies 

only to FQHCs and requires that the 

contract between CMS and MA 

organizations include a provision that 

any written arrangements between an 

MA organization and an FQHC include 

a level of payment that would be equal 

to what the MA organization would pay 

other providers for similar services. 

Under such a contract, the FQHC must 

accept this payment as payment in full, 

except for cost sharing allowed by the 

contract, and the supplemental Federal 

payment now provided for in section 

1833(a)(3)(B) of the Act, which was 

added by MMA. We believe that the 

statute did not intend to require MA 

organizations to contract with FQHCs. 

The intent of the statute was to establish 

payment terms between MA 

organizations and FQHCs. If an MA 

organization chooses to contract with an 

FQHC, the payment terms would be as 

described in § 422.527. 

Subpart L—Effect of Change of 

Ownership or Leasing of Facilities 

During Term of Contract 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart L—Effect of Change of 

Ownership or Leasing of Facilities 

During Term of Contract’’ at the 

beginning of your comments.) 

We are studying the modification of 

existing change of ownership provisions 

in order to reduce the administrative 

burden of these requirements and to 

increase the effectiveness of these 

provisions. We request comments 

regarding how these provisions can be 

modified to accomplish these objectives. 

In particular, we seek comments 

regarding: the situations which 

constitute a change of ownership, how 

these provisions should be applied to 

large companies with multiple business 

units, the notification requirements 

related to a change of ownership, the 

novation agreement provisions, and the 

provision related to the leasing of 

facilities. 

Subpart M—Grievances, Organization 

Determinations, and Appeals 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart M—Grievances, 

Organization Determinations, and 

Appeals’’ at the beginning of your 

comments.) 

1. Introduction 

The MMA did not make any revisions 

to the statutory requirements in sections 

1852(f) and (g) of the Act regarding MA 

grievances and appeals. Thus, this 

proposed rule generally proposes to 

maintain the existing regulatory 

requirements in subpart M of part 422, 

which implement these statutory 

requirements. However, in addition to 

making the minor changes needed to 

conform these subpart regulations to 

MMA terminology and other provisions, 

we also have undertaken a review of the 

existing MA grievance and appeal 

requirements to identify needed 

refinements. Also, as discussed at the 

end of this section of the preamble, we 

are proposing changes to the part 417 

regulations, which apply only to section 

1876 cost contractors and section 1833 

health care pre-payment plans (HCPPs), 

that would establish uniform grievance 

and appeal procedures for all Medicare 

managed care plans. 

2. Background 

Section 1852(f) of the Act provides 

that an MA organization must provide 

meaningful procedures for hearing and 

resolving grievances between the 

organization (including any other entity 

or individual through which the 

organization provides health care 

services) and enrollees in its MA plans. 

Section 1852(g) of the Act addresses 

the procedural requirements concerning 

coverage (‘‘organization’’) 

46910 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

determinations and reconsiderations 

and other appeals for MA organizations. 

As discussed in detail below, only 

disputes concerning ‘‘organization 

determinations’’ are subject to the 

reconsideration and other appeal 

requirements under section 1852(g) of 

the Act. In general, organization 

determinations involve whether an 

enrollee is entitled to receive a health 

service or the amount the enrollee is 

expected to pay for that service. All 

other disputes are subject to the 

grievance requirements under section 

1852(f) of the Act. For purposes of this 

regulation, a reconsideration consists of 

a review of an adverse organization 

determination (a decision that is 

unfavorable to the MA enrollee, in 

whole or in part) by either the MA 

organization itself or an independent 

review entity. We use the term ‘‘appeal’’

to denote any of the procedures that 

deal with the review of organization 

determinations, including 

reconsiderations, hearings before 

administrative law judges (ALJs), 

reviews by the Medicare Appeals 

Council (MAC) and judicial review. For 

the grievance, organization 

determination, and appeal 

requirements, an MA organization must 

establish procedures that satisfy these 

requirements with respect to each MA 

plan that it offers. These requirements 

generally are the same for each type of 

plan—including coordinated care plans 

such as HMOs and PPOs, non-network 

MSA plans, and PFFS plans. 

Sections 1833(a)(1)(A) and 

1876(a)(5)(B) of the Act reference 

reasonable cost reimbursement contracts 

for HCPPs and HMO/CMPs. Section 

1876(c)(5) of the Act sets forth the 

procedures HMO/CMP organizations 

must follow with regard to grievances, 

organization determinations, and 

appeals. Section 417.840 of our 

regulations requires HCPPs to apply the 

administrative review procedures set 

forth for HMO/CMPs. Section 1869 of 

the Act provides the right to a hearing 

and to judicial review for any individual 

dissatisfied with a determination 

regarding his or her Medicare benefits. 

3. General Provisions, Grievances, and 

Organization Determinations (§ 422.560 

through § 422.576) 

MMA amended section 1852(g)(5) of 

the Act to incorporate the provisions of 

section 1869(b)(1)(E)(iii) of the Act, 

which was added by MMA. This new 

clause provides for inflation 

adjustments to the ‘‘amount in 

controversy’’ required to pursue a 

hearing and judicial review. It makes 

these provisions applicable in 

determining the amount in controversy 

under section 1852(g)(5) of the Act ‘‘in 

the same manner as they apply to the 

dollar amounts specified in section 

1869(b)(1)(E)(i).’’ Although other 

provisions in section 1869 of the Act do 

not apply to MA appeals, the existing 

MA regulations incorporate regulations 

implementing section 1869 of the Act in 

implementing the appeals provisions in 

section 1852(g) of the Act. Specifically, 

the existing MA regulations incorporate 

42 CFR part 405, subparts G and H, and 

20 CFR part 404, subparts J and R. Since 

we will be implementing revisions to 

section 1869 of the Act in a separate 

rulemaking creating a new subpart I of 

part 405, we propose to revise the crossreferences for MA appeals at 

§ 422.560(a)(3), § 422.561, and § 422.562 

accordingly. We note that when 

revisions are made to the section 1869 

regulations implementing the MMA 

changes in the way the amount in 

controversy is determined, these revised 

provisions will apply to MA appeals. 

As noted above, section 1852(g) of the 

Act requires an MA organization to 

establish procedures for hearing and 

resolving disputes between the 

organization and its Medicare enrollees 

concerning organization determinations. 

In accordance with section 1852(g)(1) 

of the Act, § 422.566 begins by 

specifying that an MA organization 

must have a procedure for making 

timely organization determinations 

regarding the benefits an enrollee is 

entitled to receive and the amount, if 

any, that an enrollee must pay for a 

health service. Section 422.566(b) lists 

actions that are organization 

determinations, and we are proposing to 

explicitly specify in that section that a 

reduction of services constitutes an 

organization determination that an 

enrollee may appeal. We fully recognize 

that reductions of care are a natural 

outcome of medical services, 

particularly when an enrollee is 

progressing along an expected care 

continuum. When this issue was raised 

in past rulemaking vehicles, 

commenters stated that routine 

notifications in reduction of care 

situations would confuse enrollees, 

perhaps causing them to believe that 

something was wrong in common 

situations where the discontinuation of 

services was fully planned and 

appropriate. We agreed to consider this 

issue in future rulemaking. The 

approach proposed here basically 

clarifies existing policy, under which 

reductions in service were always 

appealable issues. Notice requirements 

would apply whenever an enrollee 

disputes the reduction. Under those 

circumstances, MA organizations would 

consider the disputed discontinuation 

of service a new request for an 

organization determination under 

§ 422.566. A request for a new 

organization determination allows the 

enrollee to receive notice, appeal rights, 

and access to the MA appeals system 

under § 422.570 and § 422.584. 

Standard timeframes and notice 

requirements for organization 

determinations (§ 422.568) 

The only substantive change we are 

proposing in § 422.568 is the 

elimination of the practitioner’s notice 

requirement currently set forth in 

§ 422.568(c). This section requires that 

at each patient encounter with an MA 

enrollee, a practitioner must notify the 

enrollee of his or her right to receive, 

upon request, a detailed written notice 

from the MA organization regarding any 

decision to deny services to an enrollee. 

This provision has proven problematic 

to implement and impossible to 

monitor. Instead of requiring 

practitioners to provide notices to 

enrollees at each patient encounter, we 

would propose instead to require MA 

organizations to provide specific 

information in the plan’s Evidence of 

Coverage about enrollees’ rights when 

they are denied services in physician 

office settings. 

We are also proposing to modify 

§ 422.570(d)(2)(ii) and § 422.572(b) to 

require that an MA organization must 

inform an enrollee of the right to file an 

‘‘expedited’’ grievance if the enrollee 

disagrees with the MA organization’s 

decision not to expedite a request for an 

expedited organization determination. 

This is a right that already was 

established under the grievance 

provision at § 422.564(d)(2); thus, we 

are merely making a conforming change. 

Timeframe and notice requirements for 

expedited organization determinations. 

Section 422.572(c) now requires that 

if an MA organization first notifies an 

enrollee of its expedited determination 

orally, it must mail written confirmation 

to the enrollee within 3 calendar days 

of the oral notification. The regulations 

concerning determinations made within 

standard timeframes do not require a 

written follow-up for favorable 

determinations. We propose in this 

regulation to revise this provision to 

eliminate the requirement that oral 

notice be followed up with written 

confirmation in cases of fully favorable 

determinations. Notice would be 

required only for decisions that are fully 

or partly adverse to the enrollee. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46911 

4. Requests for Reconsiderations 

(§ 422.582) 

The only substantive change we are 

proposing regarding standard 

reconsiderations pertains to the manner 

in which a party to an organization 

determination would request an appeal. 

Proposed § 422.582(a)(1) would allow a 

party to request a standard 

reconsideration orally or in writing. We 

have received several requests to modify 

our policy on the basis that the appeals 

process would be more convenient and 

accessible for enrollees, and enable MA 

organizations to provide better customer 

service. 

Currently, § 422.584(e) specifies that 

when an MA organization grants a 

request for an expedited 

reconsideration, it must give notice in 

accordance with § 422.590(d). Proposed 

§ 422.584(e) would require an MA 

organization to give notice in 

accordance with the broader provision 

of § 422.590 since there are notice 

requirements other than those contained 

in § 422.590(d). 

As we proposed above for expedited 

organization determinations under 

§ 422.570(d)(2)(ii), proposed 

§ 422.590(a) and § 422.590(d)(2) would 

require an MA organization to inform an 

enrollee of the right to file an 

‘‘expedited’’ grievance if the enrollee 

disagrees with the MA organization’s 

decision not to expedite a request for an 

expedited reconsideration. This is a 

right that already was established under 

the grievance provision at 

§ 422.564(d)(2); thus, we are merely 

making a conforming change. 

5. Administrative Law Judge (ALJ) 

Hearings, Appeals to the Medicare 

Appeals Council, and Judicial Review 

(§ 422.600 through § 422.612) 

If the independent reviewer’s 

reconsidered determination is not fully 

favorable to the enrollee, any of the 

parties listed in § 422.574 have a right 

to request a hearing before an ALJ, 

assuming that the required minimum 

amount in controversy is met. (Note that 

the MA organization does not have a 

right to request a hearing before the 

ALJ.) If the ALJ hearing does not result 

in a favorable determination, any party 

(including the MA organization) may 

request that the Appeals Council review 

the ALJ decision. Following the 

administrative review process, any party 

(including the MA organization) is 

entitled to judicial review of the final 

determination if the amount remaining 

in controversy meets the required 

threshold. As mentioned above 

generally, the MMA made revisions to 

provisions in section 1869 of the Act 

that address the amount in controversy 

required for ALJ and judicial review. 

Specifically, these changes provide for 

an inflation adjustment to these 

amounts, based on changes to the 

Consumer Price Index. MMA also 

amended section 1852(g)(5) of the Act to 

provide that these revised provisions of 

section 1869 also apply for purposes of 

MA appeals. These changes will be set 

forth in an upcoming final rule in new 

subpart I of part 405. We propose to 

revise § 422.600 to cross-reference these 

revised regulations, and make revisions 

to § 422.612 to reflect the fact that the 

amount in controversy is now subject to 

change. 

The regulatory provisions at 42 CFR 

part 405, subparts G and H, and 20 CFR 

part 404, subpart J, concerning 

reopenings of appeals and Departmental 

Appeals Board review also historically 

have been cross-referenced in the 

managed care and M+C appeals 

regulations. Like other provisions of 

section 1869 of the Act that will be 

implemented in an upcoming final rule 

in a new subpart I of part 405, we 

propose to modify the cross-references 

for MA appeals at § 422.608 and 

§ 422.616(a). 

6. Noncoverage of Inpatient Hospital 

Care—Notice and QIO Review 

(§ 422.620 and § 422.622) 

Under § 422.620(a), when an MA 

organization has authorized coverage of 

the inpatient admission of an enrollee, 

either directly or by delegation (or the 

admission constitutes emergency or 

urgently needed care), the MA 

organization (or hospital that has been 

delegated the authority to make the 

discharge decision) must provide a 

written notice of noncoverage when the 

beneficiary disagrees with the discharge 

decision, or the MA organization (or the 

hospital that has been delegated the 

authority to make the discharge 

decision) is not discharging the 

individual but no longer intends to 

continue coverage of the inpatient stay. 

Section 422.620(b) now specifies that 

an MA organization (or, by delegation, 

the hospital) must obtain the 

concurrence of the physician 

responsible for the enrollee’s in-patient 

care before issuing a notice of 

noncoverage to an enrollee. However, 

since publication of our April 4, 2003 

final rule that eliminated routine 

discharge notices in hospitals, an 

enrollee’s right to receive a notice of 

noncoverage is linked to physician 

concurrence only to the extent that the 

physician must concur with the MA 

organization’s decision to discharge the 

enrollee or change the enrollee’s level of 

care. Under § 422.620(a), an MA 

organization must issue a notice of 

noncoverage when an enrollee disagrees 

with an MA organization’s decision to 

discharge the enrollee or discontinue 

coverage of the inpatient stay. Under 

§ 422.620(b) of that final rule, we 

inadvertently failed to include a 

corresponding change that physician 

concurrence is necessary for discharging 

the enrollee rather than for issuing the 

notice. Therefore, we propose to revise 

the regulations to clarify that an MA 

organization’s obligation to provide a 

notice of noncoverage when an enrollee 

objects to being discharged is not 

contingent upon physician concurrence. 

We also are proposing to revise 

§ 422.620(c) to require that if an MA 

organization lowers the enrollee’s level 

of care in an inpatient hospital setting, 

for example, from acute to skilled, but 

the enrollee is not discharged from the 

facility, the MA organization must 

specify the enrollee’s new level of care 

in the notice. This change is consistent 

with § 422.620(a)(1)(ii), which requires 

the MA organization to provide a notice 

to the enrollee when it is not 

discharging the enrollee, but no longer 

intends to continue coverage of the inpatient stay. 

7. Advance Beneficiary Notices in the 

MA Program 

As Medicare choices have expanded, 

the relationships among providers, 

enrollees, and managed care 

organizations have evolved and become 

more complicated, often allowing for 

greater flexibility and choice in making 

decisions about care. Open access 

managed care arrangements, where 

enrollees seek services outside their 

provider network, or vary their provider 

choices through tiered cost-sharing 

arrangements, challenge the constraints 

of more traditional ‘‘gatekeeper 

oriented’’ coordinated care models. 

Increasingly, MA organizations, 

providers, and enrollees have asked for 

clarification of Medicare appeal rules 

when disputes arise about care provided 

outside the traditional coordinated care 

model. We recognize that this is a 

complex issue, touching upon many 

other regulations that come into play 

during an appeal process. Those 

regulations might include, but are not 

limited to, prompt pay provisions, 

claims procedures, and poststabilization requirements. Frequently, 

an appeal dispute involves whether the 

enrollee understood that the services in 

question might not be authorized by the 

MA plan or covered by Medicare. 

In other cases, enrollees may wish to 

access services from a particular 

network provider, regardless of whether 

the plan would cover the care, leaving 

46912 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the provider in an uncertain situation 

should the plan eventually deny 

approval for the care. 

Nevertheless, to address these types of 

issues, we are soliciting comments on 

whether to permit or require network 

and non-network providers to furnish a 

type of advance beneficiary notice 

(ABN) for use when managed care 

enrollees access non-Medicare covered 

services. 

We are also requesting public 

comments about whether managed care 

providers should be permitted or 

required to furnish an ABN-like 

document to alert MA enrollees to their 

possible liability for out of network 

services that would otherwise be 

payable by the MA plan if proper 

referral was obtained. Alternatively, we 

could require unaffiliated non-network 

providers to seek organization 

determinations from the enrollee’s MA 

organization before providing Medicare 

covered services. Note that this would 

not include Medicare excluded services, 

but would include services that would 

be otherwise offered through the 

enrollee’s managed care plan. 

We believe that ABN-like notices 

could serve a role in these situations, by 

clarifying potential liability issues. On 

the other hand, we are cognizant of the 

possible burden and potential confusion 

associated with such notices. Therefore, 

rather than propose to require any ABNs 

or other related notices at this time, we 

believe it is preferable to first assess 

whether commenters believe such an 

approach is warranted. Thus, we 

welcome comments on these issues, as 

well as alternative recommendations. 

8. Appeal Procedures for Cost HMO/ 

CMPs and HCPPs 

As discussed in detail above, the 

MMA specifies that, with respect to 

appeal and grievance procedures, the 

same statutory provisions that currently 

apply to the MA program will continue 

to apply to MA organizations in the 

future. These provisions, which have 

been in effect since 1998, were in turn 

largely based on the grievance and 

appeal requirements that had applied to 

managed care organizations that 

contract with us under section 1876 of 

the Act (as well as to health care 

prepayment plans that are paid under 

section 1833(a)(1)(A) of the Act). For 

example, the requirements under 

section 1852(g)(3) of the Act, concerning 

expedited organization determinations 

and reconsiderations essentially 

incorporated the expedited procedures 

that were issued in our April 30, 1997 

final rule with comment (62 FR 23368). 

(That final rule established expedited 

processes for organization and 

reconsidered determinations, and 

clarified that the definition of an 

organization determination included 

discontinuations of service.) 

However, because the BBA provided 

for the temporary continuation of these 

so-called ‘‘cost plans,’’ we chose not to 

eliminate or revise the part 417 appeals 

regulations that applied to these plans. 

Instead, we opted to leave these 

regulations, found in subpart Q of part 

417, in place until the availability of 

cost-based contractors expired in 2002, 

as provided by the BBA. Since that time 

though, the BBRA subsequently 

extended the sunset of the cost plans 

through 2004, and the policy of parallel 

regulations has been the source of 

continuing confusion during the past 6 

years, particularly in the complicated 

and evolving world of appeal policy. 

The regulations implementing the 

BBA provisions creating the M+C 

program, which were set forth in 1998 

under new part 422, would now apply, 

as amended, to MA organizations under 

this proposed rule. Under the MMA, 

however, the conferees provided in 

section 234 for a potentially indefinite 

extension of reasonable cost contracts, 

thus eliminating any certainty regarding 

the previously scheduled sunset of these 

contractors. (Cost HMO and CMPs will 

be allowed to operate until 2008, and 

could operate indefinitely after that date 

if there are not two MA plans of the 

same type, that is, two local or two 

regional non-PFFS plans operating in 

the cost contract’s service area.) 

Therefore, we believe it is appropriate to 

revisit the issue of whether these 

nonrisk plans should be required to 

comply with the part 422 grievance and 

appeal requirements. 

Note that on October 25, 2002, we 

solicited comments on whether HCPPs 

and the remaining cost HMOs/CMPs 

should follow the MA appeals and 

grievance procedures under subpart M 

of part 422. This proposal took into 

account that the MA appeals processes 

provide enhanced enrollee protections, 

such as shorter timeframes for appeals 

decision making and streamlined notice 

procedures. We received comments both 

supporting and opposing applying the 

part 422 regulations to cost HMO/CMP 

organizations. Since that time, based 

both on the comments we received and 

further study of the issue, we have 

concluded that it would be appropriate 

for organizations offering cost plans to 

follow the same procedures that would 

apply to MA organizations, as set forth 

in subpart M of this proposed rule. 

Again, this decision is also informed by 

the MMA’s reliance on the existing 

statute’s appeals procedures as the basis 

for the MA program, as well as the 

indefinite extended existence of these 

plans. 

Therefore, we are proposing under 

§ 417.600(b) that the same rights, 

procedures, and requirements relating to 

beneficiary appeals and grievances set 

forth in subpart M of part 422 of this 

chapter also apply to organizations 

offering Medicare cost plans. In 

proposing this change, we have taken 

into account that a key difference 

between cost plans and M+C plans is 

that virtually all organizations offering 

cost plans employ a billing option 

available under § 417.532(c)(1) that 

reduces a cost plan’s financial liability 

for certain Medicare-covered services. 

Under this billing methodology, 

hospitals and skilled nursing facilities 

(SNFs) that furnish services to cost plan 

members can obtain direct 

reimbursement from Medicare fiscal 

intermediaries for these services. For 

services paid for under this 

methodology, the claims appeal 

procedures available under original 

Medicare regulations (subpart I, part 

405) would be the appropriate recourse 

when a Medicare fiscal intermediary 

denies a claim. However, for other 

services, including any service or 

payment denial resulting from an 

organizational determination under a 

cost plan, as defined in § 417.606, 

enrollees would appeal through the cost 

plan’s appeal process. The plan appeal 

procedures would also apply in the rare 

situation when a fiscal intermediary 

approved a claim for hospital or SNF 

services, but the cost plan refused to pay 

the covered portion of enrollee cost 

sharing associated with the services. As 

discussed above, this process would 

follow the same rules that apply to other 

MA organizations, as set forth in subpart 

M of part 422. 

Although the appeals procedures set 

forth in part 417 and part 422 are largely 

similar, it is important to note that there 

have been some recent changes to the 

part 422 regulations that would apply to 

cost plans for the first time under this 

proposal. These changes primarily 

involve § 422.620, § 422.624, and 

§ 422.626 of subpart M and were set 

forth in the April 4, 2003 final rule, 

‘‘Improvements to the Medicare+Choice 

Appeals and Grievance Procedures,’’

also known as the Grijalva regulation. 

(See 68 FR 16652.) The changes set forth 

in that final rule established new notice 

and fast-track appeal procedures for 

enrollees when an MA organization 

decides to terminate coverage of its 

provider services. We are expecting to 

publish a final rule establishing parallel 

notice and appeal provisions for original 

Medicare beneficiaries. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46913 

The effect of this proposed rule would 

be to ensure that all Medicare 

beneficiaries enjoy the same notice and 

appeal rights in cases of terminations of 

Medicare services furnished by 

hospitals, SNFs, home health agencies, 

and comprehensive outpatient 

rehabilitation facilities. Absent these 

proposed changes, the new notice and 

fast-track review procedures would 

apply for all MA enrollees, and for all 

original Medicare beneficiaries, but 

would not apply to members of cost 

plans. This scenario would be confusing 

and unfair not only for beneficiaries, but 

also for the providers who are 

responsible for distributing the service 

termination notices. Thus, we believe 

that establishing a level playing field for 

all Medicare beneficiaries and providers 

is the only appropriate policy. 

9. Federal Preemption of Grievances and 

Appeals 

Under preemption provisions in the 

BBA that applied to the M+C program, 

State laws or standards that were stricter 

than Federal M+C standards generally 

were not preempted unless they 

conflicted with, or otherwise precluded 

compliance with, Federal M+C 

requirements. However, as noted above 

in the discussion of subpart I, the BBA 

also provided for specific preemption of 

State standards in three specified areas: 

benefit requirements (rules regarding 

cost-sharing and rules regarding 

marketing materials describing benefits 

were later added to this category), rules 

regarding the inclusion or treatment of 

providers (for example, ‘‘any willing 

provider laws’’), and rules regarding 

coverage, along with related appeals and 

grievance mechanisms. In the M+C 

regulations, we interpreted the last 

category to preempt only appeals and 

grievance mechanisms that addressed 

the issue of whether services were 

covered. Thus, general ‘‘grievance’’

mechanisms addressing issues other 

than coverage were only preempted to 

the extent they were inconsistent with, 

and prevented compliance with, M+C 

requirements. 

As noted in our discussion of subpart 

I above, section 232(a) of the MMA 

changes the presumption from one in 

which State laws are not preempted 

unless they conflict with Federal laws 

or fall into specified categories to one in 

which State standards are presumed 

preempted unless they are licensing or 

solvency laws. In light of the 

comprehensive nature of the appeals 

process already established, we do not 

believe that the new preemption 

standard would have any effect on 

coverage appeals provisions. Because 

our regulations provide for doing so, we 

would continue to defer to State law on 

the issue of authorized representatives 

of enrollees in the appeals process. We 

do not believe that the Congress 

intended for the Secretary to regulate 

matters such as this that he is not 

equipped to address (for example, 

spousal rights, powers of attorney, or 

legal guardianship). Often, authorized 

representative matters are non-Federal 

issues. 

We are concerned, however, that with 

State grievance requirements now 

preempted, we may need to reexamine 

our Federal grievance requirements. 

Since 1997, we have engaged in a 

significant rulemaking activity 

concerning the extent to which the 

Secretary should regulate health plans’

grievance procedures. (Issues not related 

to whether services are covered, or how 

much an enrollee has to pay for 

services.) We solicited comments on 

this issue in the M+C interim final rule 

on June 26, 1998 (63 FR 35030), as well 

as the M+C final rule on June 29, 2000 

(65 FR 40169). The preamble to the 

interim final rule alerted the public that 

we would establish a grievance 

procedure through proposed 

rulemaking, and sought comments on 

ways to make it meaningful. Until 

publication of that proposed rule, M+C 

organizations by default were subject 

only to the general Federal requirement 

that M+C organizations have grievance 

mechanisms in place, and any State 

requirements that applied to complaints 

unrelated to coverage determinations. 

On January 24, 2001, we developed a 

proposed rule that recommended 

establishing more specific grievance 

provisions (66 FR 7593). In the 

proposed rule, we proposed that M+C 

organizations would notify enrollees of 

their decisions as expeditiously as the 

case required, but no later than 30 

calendar days after receiving a 

complaint. In conjunction with the time 

frame, we also proposed that the M+C 

organization be permitted to extend the 

time frame by up to 14 calendar days if 

the enrollee requested the extension, or 

if the organization justified a need for 

additional information and the delay 

was in the interest of the enrollee. We 

also proposed that grievances made 

orally would be responded to orally or 

in writing, unless the enrollee 

specifically requested a written 

response. If grievances were made in 

writing, then the response would need 

to be in writing. In addition, we 

proposed that M+C organizations would 

be required to describe the enrollee’s 

right to seek a review by a Quality 

Improvement Organization (QIO) if the 

grievance involved a quality of care 

issue. For any complaint involving the 

QIO, the organization would be required 

to cooperate with the QIO in resolving 

the complaint. We further proposed a 

72-hour expedited grievance process for 

complaints about certain procedural 

matters in the appeals process. The 

proposed grievance procedures 

concluded with the requirement that 

organizations would have a system to 

track and maintain records on all 

grievances. 

Taking into account the various 

comments that we received, we 

published a final rule on April 4, 2003 

that only required an expedited 

grievance process for complaints 

involving appeals, and recordkeeping 

(68 FR 16652). We agreed with several 

commenters that the regulations did not 

need to be too prescriptive because 

‘‘many States have processes to address 

complaints that involve issues other 

than coverage, and State grievance 

procedures, unlike appeal procedures, 

are not specifically preempted by 

Federal rules’’ (68 FR 16652 and 16661). 

We further reasoned that we should 

‘‘allow M+C organizations the flexibility 

needed to maintain current procedures 

that comply with State requirements.’’

See id. 

In light of section 232(a) of the MMA, 

which provides that the standards 

established under the MA program 

supersede State law or regulation with 

respect to MA plans, we once again 

solicit comments on whether we should 

adopt the above provisions proposed in 

January 2001 that did not make it into 

the April 2003 final rule. Such 

provisions would include the method 

for filing and the notification and time 

frames associated with grievances. We 

also solicit comments on whether we 

should impose, as a Federal MA 

requirement, that MA organizations 

meet State grievance requirements. Such 

a requirement would have the effect of 

restoring the status quo before the 

enactment of the MMA. 

We also have considered how the 

changes made by section 232(a) of the 

MMA apply, if at all, to State tort or 

contract law that could affect MA 

organizations. Our previous position 

under the M+C program was that State 

tort or contract remedies may be 

available to enrollees whose coverage 

determination disputes go through the 

Medicare appeals process. We continue 

to believe that generally applicable State 

tort, contract, or consumer protection 

law would not be preempted under 

section 232(a). First, we believe that 

section 232(a) was intended to preempt 

State standards governing health plans, 

not generally applicable State laws, 

such as labor laws, employment law, tax 

laws, etc. that incidentally could have 

46914 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

applicability to MA organizations. We 

believe that contract laws and tort laws 

fall in this category, as they do not 

apply to the organization based on its 

status as a health plan, but instead 

apply generally. Even specific types of 

tort laws, such as malpractice law, 

apply generally to all medical 

practitioners, not to health plans 

specifically. 

We also note that tort law, and often 

contract law, generally are developed 

based on case law precedents 

established by courts, rather than 

statutes enacted by legislators or 

regulations promulgated by State 

officials. We believe that the Congress 

intended to preempt only the latter type 

of State standards. 

Under principles of Federalism, and 

Executive Order 13132 on Federalism, 

which generally requires us to construe 

preemption narrowly, we believe that an 

enrollee should still have State remedies 

available in cases in which the legal 

issue before the court is independent of 

an issue related to the organization’s 

status as a health plan or MA 

organization. 

10. Employer Sponsored Benefits and 

Appeals 

When an employer, by contracting 

with an MA plan, provides health care 

benefits in addition to those covered 

under Part C of Title XVIII of the Social 

Security Act to their retirees, such 

employer may have established a group 

health plan governed by both title I of 

the Employee Retirement Income 

Security Act of 1974 (ERISA), as 

amended, and State law (to the extent 

such State law is not preempted by 

ERISA). In addition, when MA plans 

offer benefits covered under Part C, they 

also would fall under the requirements 

of part 422 of our proposed regulations, 

with respect to Part C benefits. 

In drafting these rules, we consulted 

with the Department of Labor (DOL), 

employer groups, and the health plan 

industry in trying to eliminate 

unnecessary Federal regulation of 

claims and appeals issues that impact 

matters within the jurisdiction of both 

DOL and DHHS. Based on our 

experience, we have reason to believe 

that some Medicare eligible individuals 

may receive integrated health care 

benefits, that is, Part C benefits through 

an MA plan and supplemental benefits 

through an ERISA-covered plan. For 

example, an employer-sponsored plan 

may pay the cost-sharing amount for a 

covered item or treatment offered by an 

MA plan. Clearly, if the enrollee had a 

dispute about Part C coverage, he or she 

could file an appeal with the MA plan. 

If the enrollee’s dispute involved only 

the amount of cost sharing paid by the 

employer-sponsored plan, he or she 

would file an appeal in accordance with 

the procedures of the ERISA covered 

plan. In some cases, however, the 

dispute might involve independent 

coverage decisions under both Part C 

and the ERISA plan, possibly 

necessitating parallel appeal procedures 

on the same case. In this regard, we are 

soliciting comments on whether, and to 

what extent, the application of parallel 

procedures in this context might be a 

problem for plans, employers, and/or 

eligible individuals. We also are 

soliciting suggestions for addressing 

problems, if any, resulting from the 

application of parallel procedures. 

Subpart O—Intermediate Sanctions 

(If you choose to comment on issues 

in this section, please include the 

caption ‘‘Subpart O—Intermediate 

Sanctions’’ at the beginning of your 

comments.) 

We are proposing a technical 

correction to § 422.752(a)(8). ‘‘Entity’’

was inadvertently left out of the 

regulation text. We are proposing that 

paragraph (a)(8) introductory text would 

read ‘‘Employs or contracts with an 

individual or entity who is excluded 

from participation in Medicare under 

section 1128 or 1128A of the Act (or 

with an entity that employs or contracts 

with such an individual or entity) for 

the provision of any of the following.’’

III. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 60-day notice in the Federal 

Register and solicit public comment 

before a collection of information 

requirement is submitted to the Office of 

Management and Budget (OMB) for 

review and approval. In order to fairly 

evaluate whether OMB should approve 

an information collection, section 

3506(c)(2)(A) of the PRA requires that 

we solicit comment on the following 

issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

The collection requirements 

referenced in sections one and two 

below are currently approved under 

OMB approval number 0938–0753 

(CMS–R–0267, Medicare Plus Choice 

Program Requirements Referenced in 42 

CFR 422.000 through 422.700), with a 

current expiration date of October 31, 

2005. 

Section one below outlines the 

collection requirements referenced in 

this regulation that have not been 

modified by the proposed regulatory 

changes. Section number two references 

requirements in this regulation that 

have been technically revised, but do 

not affect the currently approved burden 

estimates. Table three below references 

new collection requirements. 

It should be noted that all of the 

collection requirements summarized 

and discussed below are open for public 

comment and will be submitted to OMB 

for approval. 

Section 1—Currently Approved 

Collection Requirements Not Affected 

by Proposed Regulation 

Section 422.54 Continuation of 

Enrollment for MA Local Plans 

(b) The intent by an enrollee to no 

longer reside in an area and 

permanently live in another area must 

be verified by the plan through 

documentation that establishes 

residency, such as a driver’s license, 

voter registration. 

(c)(2) The enrollee must make the 

choice of continuing enrollment in a 

manner specified by CMS. If no choice 

is made, the enrollee must be 

disenrolled from the plan. 

Section 422.60 Election process 

(b)(1) MA organizations may submit 

information on enrollment capacity of 

plans. 

(c)(1) The plan election must be 

completed by the MA eligible 

individual (or the individual who will 

soon become eligible to elect an MA 

plan) and include authorization for 

disclosure and exchange of necessary 

information between the U.S. 

Department of Health and Human 

Services and its designees and the MA 

organization. Persons who assist 

beneficiaries in completing forms must 

sign the form, or through other 

approved mechanisms, indicate their 

relationship to the beneficiary. 

(e)(3) The MA organization must give 

the beneficiary prompt notice of 

acceptance or denial in a format 

specified by CMS. 

(e)(4) If the MA plan is enrolled to 

capacity, it must explain the procedures 

that will be followed when vacancies 

occur to the potential enrollee. 

(e)(5) Upon receipt of the election, or 

for an individual who was accepted for 

future enrollment from the date a 

vacancy occurs, the MA organization 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46915 

transmits, within the timeframes 

specified by CMS, the information 

necessary for CMS to add the 

beneficiary to its records as an enrollee 

of the MA organization. 

(f)(3) Upon receipt of the election 

from the employer, the MA organization 

must submit the enrollment within 

timeframes specified by CMS. 

Section 422.66 Coordination of 

Enrollment and Disenrollment Through 

MA Organizations 

(f)(2) Upon receipt of the election 

from the employer, the MA organization 

must submit a disenrollment notice to 

CMS within timeframes specified by 

CMS. 

Section 422.506 Nonrenewal of 

Contract 

(a)(2)(ii) Each Medicare enrollee, at 

least 90 days before the date on which 

the nonrenewal is effective. This notice 

must include a written description of 

alternatives available for obtaining 

Medicare services within the service 

area, including alternative MA plans, 

Medigap options, and original Medicare 

and must receive CMS approval prior to 

issuance. 

Section 422.568 Standard Timeframes 

and Notice Requirements for 

Organization Determinations 

(a) When a party has made a request 

for a service, the MA organization must 

notify the enrollee of its determination 

as expeditiously as the enrollee’s health 

condition requires, but no later than 14 

calendar days after the date the 

organization receives the request for a 

standard organization determination. 

(c) If an MA organization decides to 

deny service or payment in whole or in 

part, or if an enrollee disagrees with an 

MA organization’s decision to 

discontinue or reduce the level of care 

for an ongoing course of treatment, the 

organization must give the enrollee 

written notice of the determination. 

Section 422.590 Timeframes and 

Responsibility for Reconsiderations 

(d)(2) When the MA organization 

extends the timeframe, it must notify 

the enrollee in writing of the reasons for 

the delay, and inform the enrollee of the 

right to file an expedited grievance if he 

or she disagrees with the MA 

organization’s decision to grant an 

extension. The MA organization must 

notify the enrollee of its determination 

as expeditiously as the enrollee’s health 

condition requires but no later than 

upon expiration of the extension. 

Section 422.600 Right to a Hearing 

(a) If the amount remaining in 

controversy after reconsideration meets 

the threshold requirement established 

annually by the Secretary, any party to 

the reconsideration (except the MA 

organization) who is dissatisfied with 

the reconsidered determination has a 

right to a hearing before an ALJ. 

Section 422.608 Medicare Appeals 

Council (MAC) Review 

Any party to the hearing, including 

the MA organization, who is dissatisfied 

with the ALJ hearing decision, may 

request that the MAC review the ALJ’s 

decision or dismissal. 

Section 422.612 Judicial Review 

(b) Any party, including the MA 

organization, may request judicial 

review (upon notifying the other parties) 

of the MAC decision if it is the final 

decision of CMS and the amount in 

controversy meets the threshold 

established in paragraph (a)(2) of this 

section. 

(c) In order to request judicial review, 

a party must file a civil action in a 

district court of the United States in 

accordance with section 205(g) of the 

Act. See part 405, subpart I of this 

chapter for a description of the 

procedures to follow in requesting 

judicial review. 

Section 2—Currently Approved 

Collection Requirements Technically 

Modified by Proposed Regulation: Not 

Affecting Burden 

Section 422.50 Eligibility To Elect an 

MA Plan 

(a)(5) Completes and signs an election 

form or another CMS approved election 

method and gives information required 

for enrollment. 

Section 422.66 Coordination of 

Enrollment and Disenrollment Through 

MA Organizations 

(b)(1)(i) Elect a different MA plan by 

filing the appropriate election with the 

MA organization. 

(b)(1)(ii) Submit a request for 

disenrollment to the MA organization in 

the form and manner prescribed by CMS 

or file the appropriate disenrollment 

request through other mechanisms as 

determined by CMS. 

(b)(3)(ii) Provide enrollee with notice 

of disenrollment in a format specified 

by CMS. 

(b)(3)(iii) In the case of a plan where 

lock-in applies, include in the notice a 

statement. 

(d)(5) The individual who is 

converting must complete an election as 

described in § 422.60(c)(1). 

Section 422.74 Disenrollment by the 

Medicare Advantage Organization 

(c)(1) A notice must be provided to 

the individual before submission of the 

disenrollment transaction to CMS. 

(d)(1)(i) The MA organization can 

demonstrate to CMS that it made 

reasonable efforts to collect the unpaid 

premium amount. 

(d)(1)(ii) The MA organization 

provides the enrollee with notice of 

disenrollment that meets the 

requirements set forth in paragraph (c) 

of this section. 

(d)(2)(ii) The beneficiary has a right to 

submit any information or explanation 

that he or she may wish to submit to the 

MA organization. 

(d)(3)(iii) The MA organization must 

document the enrollee’s behavior, its 

own efforts to resolve any problems, as 

described in paragraphs (d)(2)(i) through 

(d)(2)(ii) of this section and any 

extenuating circumstances. 

Section 422.111 Disclosure 

Requirements 

(d)(2) For changes that take effect on 

January 1, the plan must notify all 

enrollees 15 days before the beginning 

of the Annual Coordinated Election 

Period defined in section 1851(e)(3)(B) 

of the Act. 

(e) The MA organization must make a 

good faith effort to provide notice of a 

termination of a contracted provider at 

least 30 calendar days before the 

termination effective date to all 

enrollees who are patients seen on a 

regular basis by the provider whose 

contract is terminating, irrespective of 

whether the termination was for cause 

or without cause. When a contract 

termination involves a primary care 

professional, all enrollees who are 

patients of that primary care 

professional must be notified. 

Section 422.112 Access to Services 

(a)(1)(i) Maintain and monitor a 

network of appropriate providers that is 

supported by written agreements and is 

sufficient to provide adequate access to 

covered services to meet the needs of 

the population served. These providers 

are typically used in the network as 

primary care providers (PCPs), 

specialists, hospitals, skilled nursing 

facilities, home health agencies, 

ambulatory clinics, and other providers. 

(a)(1)(ii) MA regional plans, upon 

CMS pre-approval, can use methods 

other than written agreements to 

establish that access requirements are 

met. 

46916 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Section 422.152 Quality Improvement 

Program 

(b)(3)(i) Plans must measure 

performance using the measurement 

tools required by CMS, and report its 

performance to CMS. The standard 

measures may be specified in uniform 

data collection and reporting 

instruments required by CMS. 

(b)(3)(ii) Make available to CMS 

information on quality and outcomes 

measures that will enable beneficiaries 

to compare health coverage options and 

select among them, as provided in 

§ 422.64(c)(10). 

(d)(5) The organization must report 

the status and results of each project to 

CMS as requested. 

(e)(2)(i) MA organizations offering an 

MA regional plan or local PPO plan as 

defined in this section must measure 

performance under the plan using 

standard measures required by CMS and 

report its performance to CMS. The 

standard measures may be specified in 

uniform data collection and reporting 

instruments required by CMS. 

(f)(i) and (iii) For all types of plans 

that it offers, an organization must 

maintain a health information system 

that collects, analyzes, and integrates 

the data necessary to implement its 

quality improvement program and make 

all collected information available to 

CMS. 

Section 422.570 Expediting Certain 

Organization Determinations 

(d)(2)(ii) The plan must inform the 

enrollee of the right to file an expedited 

grievance if he or she disagrees with the 

MA organization’s decision not to 

expedite. 

Section 422.572 Timeframes and 

Notice Requirements for Expedited 

Organization Determinations 

(c) If the MA organization first notifies 

an enrollee of an adverse expedited 

determination orally, it must mail 

written confirmation to the enrollee 

within 3 calendar days of the oral 

notification. 

Section 422.582 Request for a 

Standard Reconsideration 

(a) A party to an organization 

determination must ask for a 

reconsideration of the determination by 

making an oral or written request to the 

MA organization that made the 

organization determination or to an SSA 

office. 

(c)(2) If the 60-day period in which to 

file a request for reconsideration has 

expired, a party to the organization 

determination may file a request for 

reconsideration with the MA 

organization or the SSA. 

Section 422.620 How Enrollees of MA 

Organizations Must Be Notified of 

Noncovered Inpatient Hospital Care 

(c) A written notice of non-coverage 

must be issued no later than the day 

before hospital coverage ends. The 

written notice must include the 

elements set forth in this section. 

As noted above, while the 

requirements in this section have been 

modified, the associated burden has not 

changed. 

Section 3—New/Revised Collection 

Requirements Proposed in This 

Regulation: Affecting Burden 

Section 422.80 Approval of Marketing 

Materials and Election Forms 

(a)(3) The MA plan meets the 

performance requirements established 

by CMS to allow the plan to file 

designated marketing materials with 

CMS 5 days before their distribution. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to submit the 

designated marketing materials to CMS 

five days prior to distribution. 

We estimate it will take 350 plans 

approximately 12 hours to provide the 

materials to CMS on an annual basis. 

Section 422.101 Requirements 

Relating to Basic Benefits 

(d)(4) MA regional plans are required 

to track the deductible (if any) and 

catastrophic limits in paragraphs (d)(1) 

through (d)(3) of this section based on 

incurred out-of-pocket beneficiary costs 

for original Medicare covered services, 

and are also required to notify members 

when the deductible (if any) or a limit 

has been reached. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to notify members 

when the deductible (if any) or a limit 

has been reached. While this 

requirement is subject to the PRA, we 

believe this requirement meets the 

requirements of 5 CFR 1320.3(b)(2), and 

as such, the burden associated with this 

requirement is exempt from the PRA. 

Section 422.106 Coordination of 

Benefits With Employer Group Health 

Plans and Medicaid 

(d)(1) To facilitate the offering of MA 

plans by employers, labor organizations, 

or the trustees of a fund established by 

one or more employers or labor 

organizations (or combination thereof) 

to furnish benefits to the entity’s 

employees, former employees (or 

combination thereof) or members or 

former members (or combination 

thereof), of the labor organizations, 

those MA plans may request, in writing, 

from CMS, a waiver or modification of 

those requirements in this part that 

hinder the design of, the offering of, or 

the enrollment in, those plans by those 

individuals. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to submit a 

waiver to CMS. We estimate that on an 

annual basis it will take plans 2 hours 

to submit the waiver to CMS. However, 

we do not anticipate more then nine 

waiver requests on an annual basis. As 

such, this requirement is not subject to 

the PRA as stipulated under 5 CFR 

1320.3(c). 

Section 422.111 Disclosure 

Requirements 

(f)(10) The names, addresses, and 

phone numbers of providers from whom 

the enrollee may obtain in-network 

coverage in other areas. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to notify member 

of the names, addresses, and phone 

numbers of providers from whom the 

enrollee may obtain in-network 

coverage in other areas. While this 

requirement is subject to the PRA, we 

believe this requirement meets the 

requirements of 5 CFR 1320.3(b)(2), and 

as such, the burden associated with this 

requirement is exempt from the PRA. 

Section 422.112 Access to Services 

(c) An MA regional plan may seek, 

upon application to CMS, to designate 

a hospital as an essential hospital as 

defined in section 1858(h) of the Act 

that meets the conditions set forth in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to submit the 

required materials to CMS. We estimate 

that on an annual basis it will take 100 

plans 8 hours to submit the materials to 

CMS. 

Section 422.254 Submission of Bids 

(a)(1) No later than the first Monday 

in June, each MA organization must 

submit to CMS an aggregate monthly bid 

amount for each MA plan (other than an 

MSA plan) the organization intends to 

offer in the upcoming year in the service 

area (or segment of such an area if 

permitted under § 422.262(c)(2)) that 

meets the requirements in paragraph (b) 

of this section. With each bid submitted, 

the MA organization must provide the 

information required in paragraph (c) of 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for the plan to submit the 

required bid materials to CMS. 350 MA 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46917 

organizations offering 400 plans 100 

hours per plan bid submission to CMS 

for a total annual burden of 40,000 

hours. 

(b) For MSA plans, MA organizations 

must submit the following information: 

the monthly MSA premium, the plan 

deductible amount, and the beneficiary 

supplemental premium, if any. Since 

CMS does not review or approach MSA 

plan submissions, we estimate that the 

submission burden is half that for other 

MA plans. Under the M+C program, no 

MSA plans were offered. We estimate 

that under the MA program 5 

organizations will offer an MSA plan 

and require 50 hours for submission of 

the above information, for a total annual 

burden of 250 hours. 

Section 422.270 Incorrect Collections 

of Premiums and Cost-Sharing 

(b) An MA organization must agree to 

refund all amounts incorrectly collected 

from its Medicare enrollees, or from 

others on behalf of the enrollees, and to 

pay any other amounts due the enrollees 

or others on their behalf. 

The burden associated with this 

requirement is the time and effort 

necessary for the MA organization to 

provide written assurance to CMS that 

they will refund all amounts incorrectly 

collected from its Medicare enrollees or 

representatives. We estimate that on an 

annual basis it will take 350 MA 

organizations 30 minutes to submit a 

written agreement to CMS. 

Section 422.304 Monthly Payments 

(e)(2) A State’s chief executive may 

request, no later than February 1 of any 

year, a geographic adjustment of the 

State’s payment areas, as outlined in 

this section, for MA local plans for the 

following calendar year. 

The burden associated with this 

requirement is the time and effort 

necessary for a State to provide a 

written request for geographic 

adjustment to CMS. Under the M+C 

program, we received inquiries from 2 

states and requests from none. Thus, we 

estimate that on an annual basis we may 

receive 2 State submissions. As such, 

this requirement is not subject to the 

PRA as stipulated under 5 CFR 

1320.3(c). 

Section 422.310 Risk Adjustment Data 

(b) Each MA organization must 

submit to CMS (in accordance with 

CMS instructions) all data necessary to 

characterize the context and purposes of 

each service provided to a Medicare 

enrollee by a provider, supplier, 

physician, or other practitioner. CMS 

may also collect data necessary to 

characterize the functional limitations 

of enrollees of each MA organization. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to submit the 

required risk adjustment data to CMS. 

We estimate that on an annual basis it 

will take 350 MA organizations 121 

hours each to submit the required data 

to CMS. 

(d)(1) MA organizations must 

electronically submit data that conform 

to the requirements for equivalent data 

for Medicare fee-for-service when 

appropriate, and to all relevant national 

standards. Alternatively, MA 

organizations may submit data 

according to an abbreviated format, as 

specified by CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to submit the 

required risk adjustment data to CMS. 

The estimate for submission of the 

abbreviated format data is included in 

the above estimate. 

(e) MA organizations and their 

providers and practitioners will be 

required to submit medical records for 

the validation of risk adjustment data, as 

required by CMS. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to submit the 

required validation data to CMS. We 

estimate that on average 350 MA 

organizations will each submit 29 

medical records to CMS, requiring 1 

hour per record, for a total annual 

burden of 9800 hours. 

Section 422.314 Special Rules for 

Beneficiaries Enrolled in MA MSA Plans 

(b) An entity that acts as a trustee for 

an MA MSA must Register with CMS, 

certify that it is a licensed bank, 

insurance company, or other entity 

qualified, under sections 408(a)(2) or 

408(h) of the IRS Code, agree to comply 

with the MA MSA provisions of section 

138 of the IRS Code of 1986; and 

provide any other information that CMS 

may require. 

The burden associated with this 

requirement is the time and effort 

necessary for an entity to certify and 

submit the required materials to CMS as 

outlined in this section. We estimate 5 

MA organizations will submit the 

required information on an annual 

basis. As such, this requirement is not 

subject to the PRA as stipulated under 

5 CFR 1320.3(c). 

Section 422.320 Special Rules for 

Hospice Care 

(a) An MA organization that has a 

contract under subpart K of this part 

must inform each Medicare enrollee 

eligible to select hospice care under 

§ 418.24 about the availability of 

hospice care if a Medicare hospice 

program is located within the plan’s 

service area, or it is common practice to 

refer patients to hospice programs 

outside that area. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to disclose to each 

Medicare enrollee about the availability 

of hospice care. We estimate that on an 

annual basis it will take 350 plans 1.14 

hours to distribute the required 

materials to enrollees. While this 

estimate may appear low, we believe 

that this disclosure requirement will be 

standardized and incorporated into the 

plans marketing material routinely 

disseminated to enrollees. 

Section 422.458 Risk Sharing With 

Regional MA Organizations for 2006 

and 2007 

(d)(1) Each MA organization offering 

an MA regional plan must provide CMS 

with information as CMS determines is 

necessary to implement this section. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to submit the 

required information to CMS. We 

estimate that on an annual basis it will 

take 30 to 100 plans, 40 hours to submit 

the required information to CMS. 

(d)(2) Pursuant to the existing 

§ 422.502(d)(1)(iii) (section 

1857(d)(2)(B) of the Act), CMS has the 

right to inspect and audit any books and 

records of the organization that pertain 

to the information regarding costs 

provided to CMS under paragraph (b)(2) 

of this section. 

This requirement is exempt from the 

PRA as stipulated under 5 CFR 1320.4. 

Section 422.501 Application 

Requirements 

(b)(1) In order to obtain a 

determination on whether it meets the 

requirements to become an MA 

organization and is qualified to provide 

a particular type of MA plan, an entity, 

or an individual authorized to act for 

the entity (the applicant) must complete 

and submit a certified application, in 

the form and manner required by CMS, 

that meets the requirements set forth in 

this section. 

The burden associated with this 

requirement is the time and effort 

necessary for a plan to submit the 

required application to CMS. We 

estimate that on an annual basis it will 

take 350 plans 40 hours to submit the 

required application to CMS. 

If you comment on these information 

collection and recordkeeping 

46918 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

requirements, please mail copies 

directly to the following: 

Centers for Medicare and Medicaid 

Services Office of Strategic Operations 

and Regulatory Affairs, Attn: John 

Burke (CMS–4069–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–4069–P], 

Christopher_Martin@omb.eop.gov. 

Fax (202) 395–6974. 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

V. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impacts of this 

rule under Executive Order 12866 

(September 1993, Regulatory Planning 

and Review), the Regulatory Flexibility 

Act (RFA) (September 16, 1980, Pub. L. 

96–354), section 1102(b) of the Social 

Security Act, the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4) and 

Executive Order 13132 on Federalism. 

Executive Order 12866 directs 

agencies to assess all costs and benefits 

of available regulatory alternatives and 

if regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety effects, distributive impact 

and equity). A regulatory impact 

analysis (RIA) must be prepared for any 

proposed rule with an effect on the 

economy of $100 million or more in any 

one year. While we do not believe that 

this proposed rule will have 

independent effects of this magnitude, 

the Medicare Advantage program taken 

as a whole will have effects that far 

exceed this threshold. Since this rule, 

once issued in final form, will be the 

most significant step in implementing 

the MA program, we are classifying it as 

an economically ‘‘significant’’ rule for 

purposes of E.O. 12866 and as a ‘‘major’’

rule for purposes of the Congressional 

Review Act (5 U.S.C., section 804(2)). 

Accordingly, we have prepared this 

RIA, combined with an Initial 

Regulatory Flexibility Analysis ((IRFA), 

pursuant to the Regulatory Flexibility 

Act), in which we analyze the overall 

effects of the Medicare Advantage 

program, including effects not 

addressed in this rulemaking (for 

example, rate increases that went into 

effect in March, 2004). Although the 

MMA is a highly detailed statute that 

delineates most important provisions of 

the MA program, there are alternatives 

available to us in implementing several 

important provisions of the statute. We 

analyze in detail those areas for which 

regulatory alternatives are available. 

Although we have included or 

summarized most of the required 

analysis in this section of the preamble, 

the explanation of the basis for the 

proposed rule and analysis of some 

regulatory options are presented 

elsewhere in the preamble. We note that 

the preamble to the companion 

rulemaking concerning the Part D drug 

benefit also contains an RIA and IRFA, 

and some effects of the legislation (for 

example, on Medigap plans) are 

analyzed in more detail in that 

preamble. 

The Prescription Drug, Improvement, 

and Modernization Act of 2003 (MMA) 

provides for increasing the role of 

private plans in providing Medicare 

benefits to beneficiaries. The statute 

made changes to the payment system 

that increase Medicare payment rates to 

private plans as of 2004, and for 

subsequent years. A new private plan 

option is introduced, the regional 

Medicare Advantage plan, structured as 

a preferred provider organization (PPO), 

which will be required to offer services 

over a wide geographic area. To 

encourage the formation of such plans, 

the MMA provides financial incentives 

above and beyond the payment rate 

increases applicable to all plans. There 

are other financial incentives discussed 

in what follows and elsewhere in the 

preamble. In addition to increased 

payments to plans, the MMA will 

provide benefits to beneficiaries and to 

entities (such as employers and States) 

that would otherwise be financially 

responsible for the cost of beneficiaries’

medical care. The benefits to 

beneficiaries and plans are the result of 

transfer payments from the Federal 

Government which we project will total 

$24.8 billion in the period 2004 to 2009 

(as a result solely of the Title II 

provisions of the MMA), as described in 

more detail in what follows. 

The main purpose of this proposed 

rule is to implement the statutory 

provisions of Title II of the MMA, which 

deal with the Medicare Advantage 

program. Insofar as the proposed rule 

implements provisions of the law, we 

are providing a general discussion of the 

impact of the law and our basis for 

projections of the impact. These impact 

projections reflect the statutory scheme 

in its entirety, not just the relatively 

minor effects attributable to 

discretionary provisions in our 

proposed regulations. Although the 

statute prescribes Medicare Advantage 

rules and procedures in considerable 

detail, it specifically affords CMS 

discretion to make decisions on a 

number of issues regarding how the law 

will be implemented. The preamble and 

this impact analysis—particularly the 

section dealing with alternatives 

considered—discuss these types of 

issues in greater detail. The proposed 

rule also introduces changes to 

Medicare private health plan 

requirements which, in most cases, are 

intended to streamline the 

administration of the program and make 

contracting less burdensome for health 

plans while not impinging on the rights 

of enrollees. (Note that this analysis 

does not extend beyond the year 2009; 

that is, the Comparative Cost 

Adjustment (CCA) demonstration 

program of subtitle E of the MMA is not 

discussed. The CCA regulations will be 

proposed at a later date.) 

1. Objectives of the Proposed Rule 

The primary goal of the MMA is to 

expand the health plan choices 

available to Medicare beneficiaries. 

There is also the expectation that 

private plan enrollment will increase. 

The expansion of health plan choice is 

envisioned as occurring at many levels: 

areas of the country that previously did 

not have private plans available should 

see new plans enter the market; areas 

where there are plans should see an 

increase in the number of competing 

plans; and beneficiary choice should be 

enhanced by the introduction of new 

types of plans, including specialized 

plans, and, most importantly, regional 

plans that are structured as preferred 

provider organizations. In keeping with 

the overall objectives of the law, the rule 

seeks to implement the law in ways that 

will promote plan participation (and, as 

a consequence, lead to increased 

enrollment in private plans). The 

introduction of regional plans and the 

choice of the PPO model for such plans 

are designed to lead to greater plan 

participation. 

Regional Plans. The introduction of 

regional plans, and the payment policies 

that apply to such plans, attempt to 

address both the payment issues 

affecting plan participation and the 

structural issues that have prevented 

greater access to plans. There were two 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46919 

primary motivating factors in the 

decision to use a regional PPO approach 

as one of the means of achieving the 

MMA goals of increased plan 

participation and increased beneficiary 

enrollment in private plans. One factor 

is that the regional approach requires 

plans to serve extensive geographic 

areas specified by CMS. This is a 

departure from the practice of allowing 

private plans to pick and choose the 

counties in which to offer Medicare 

plans, which will continue to be the 

policy for local MA plans. The regional 

service area approach seeks to ensure 

that areas not heretofore served by 

private plans in Medicare—particularly, 

rural counties—will have private, 

coordinated care plan options available 

(see the MMA conference report 

discussion of section 201 at pp. 90–91). 

The PPO Model. The other motivating 

factor in choosing the regional approach 

relates to the choice of the PPO model 

as the structure for regional plans. The 

choice of this model is partly a 

consequence of the decision to require 

coverage of large geographic areas. 

Other types of health plans, such as 

plans that rely exclusively on networks 

of employed or contracted providers (for 

example, the more traditional health 

maintenance organization models) have 

had difficulty forming viable networks 

in rural areas. The cost of the 

infrastructure required in the operation 

of such a model has also acted as a 

barrier to serving areas in which 

enrollment levels would be too low to 

warrant the necessary level of 

investment. Another factor in choosing 

the PPO model reflects consumer 

preference as seen in the commercial 

sector, where the PPO model is the 

model of choice in the employmentbased health care market. PPOs are 

preferred over HMOs by consumers 

because of their less restrictive provider 

access, and PPOs are preferred over 

indemnity FFS plans because they do 

employ managed care techniques and 

differential cost sharing to control costs, 

and there is quality assurance. 

Promoting Competition. One of the 

purposes of the MMA is to promote plan 

competition, which in turn is expected 

to lead to greater efficiency among plans 

and more benefits for enrollees. Certain 

features of the MMA that promote plan 

participation are of limited duration in 

the expectation that plan entry will 

occur: for example, though plan 

payments increased effective March of 

2004, the provision by which the 

Government receives 25 percent of the 

savings that plans can achieve does not 

take effect until 2006. Similarly, many 

of the incentives provided to regional 

plans (such as risk sharing, and the 

entry and retention bonuses) are timelimited. In highly competitive markets 

where multiple plans are available to 

beneficiaries, there is strong evidence 

that competition among plans leads to 

improved benefits for enrollees and 

promotes greater plan efficiency. In an 

analysis of Medicare health plan benefit 

premiums and offerings, Pizer and Frakt 

found that ‘‘the effects of competition 

are comparable in importance to the 

effects of payment rates. The finding 

that more intense competition increases 

benefits and reduces premiums, 

although predictable from a theoretical 

standpoint, empirically confirms that it 

is possible for the Medicare Program to 

increase benefits without increasing 

spending or shifting additional costs to 

beneficiaries. Conversely, reduced 

competition would have the reverse 

effect. We acknowledge that 

competition and spending are related by 

the fact that lower payments can be 

expected to induce plan exit, thereby 

undermining competition. Nevertheless, 

this research shows that the Federal 

Government has a strong institutional 

interest in safeguarding and promoting 

interplan competition in the M+C 

Program, independent of its policy on 

payment rates.’’ (Steven D. Pizer, and 

Austin B. Frakt, ‘‘Payment Policy and 

Competition in the Medicare+Choice 

Program,’’ Health Care Financing 

Review, fall 2002, volume 24, number 

1.) 

General Impact. In general, the law 

and regulations will have a positive 

impact on beneficiaries. Transfer 

payments from the Federal Government 

will go towards the provision of 

additional benefits to enrollees of health 

plans and reduced out-of-pocket costs, 

including reduced Part B and Part D 

premiums for these enrollees. The law 

will result in increased revenue for 

participating private plans for the 

provision of the basic Medicare benefit 

and the provision of additional benefits. 

This will help improve the availability 

of health plan choices for beneficiaries. 

We also anticipate a positive impact for 

employers and unions as sponsors of 

retiree coverage, as discussed in more 

detail below. 

There are revenue effects on States 

arising directly from the law (the 

prohibition on premium taxes) and 

arising indirectly as a result of 

beneficiary movement towards private 

plans and away from traditional fee-forservice Medicare with Medigap 

coverage. The latter effect is relevant to 

Medigap insurers. The effects on States 

and insurers are discussed more fully in 

what follows. 

2. Provisions of the Law 

The MMA introduces major changes 

in the payment rules for private plans. 

These changes are discussed in detail in 

the preamble text for subparts F and G 

of these proposed regulations. For local 

plans, the MMA increased Medicare 

Advantage payment rates beginning in 

2004, by using county fee-for-service 

rates (minus direct medical education 

payments) as a minimum payment level 

and rebasing the rates periodically, by 

removing a budget neutrality limitation 

on payment at a national/local blended 

rate, and by providing for higher yearly 

payment rate increases (while 

maintaining minimum payment rate 

increases). 

Payment to plans are risk adjusted for 

health status (in addition to risk 

adjustment for demographic factors 

such as age), with 30 percent of 

payment being subject to health status 

risk adjustment in 2004, 50 percent in 

2005, 75 percent in 2006, and 100 

percent in 2007 and thereafter. Note that 

CMS is currently implementing health 

status risk adjustment in a ‘‘budgetneutral’’ manner and will continue to do 

so in 2005. The difference in payment 

between the total health status-adjusted 

payment rates and the rates adjusted 

only by demographic factors continues 

to be paid to the health plan ‘‘sector,’’

but the funds are distributed among 

plans based on the relative health status 

of each plan’s enrollees. 

Through 2005, there is no change to 

the payment rules related to how plans 

must use any excess funds (Medicare 

payments greater than the amount a 

health plan requires to provide the 

Medicare benefit). Currently such funds 

must be returned to enrollees in the 

form of reduced cost sharing, or the 

provision of extra (non-Medicare) 

benefits. Plans also have the option of 

using the excess funds to reduce all or 

a portion of an enrollee’s Part B 

premium, but in that case, the 

Government retains 20 percent of the 

reduction in plan payments while 

reducing the Part B premium that is 

usually collected through a beneficiary’s 

Social Security payment. Another 

option for the disposition of excess 

funds is to make deposits to a 

‘‘stabilization fund’’ to be used in a 

subsequent contract year for reductions 

in cost sharing or for financing of extra 

benefits—an option that the MMA 

eliminates as of the end of the 2005 

contract year. 

Currently and through 2005, the 

determination of whether there are 

excess funds is done through the 

‘‘adjusted community rate’’ approval 

process (a CMS review of proposed 

46920 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

benefits and premiums and the revenue 

required to provide the benefit package). 

The MMA does away with the ACR 

review process and instead institutes a 

bidding process. As of 2006, plans will 

present bids that are to be compared 

against benchmarks to determine 

whether enrollees will receive rebates or 

be required to pay a premium to the 

health plan. For local plans, the 

benchmark is based on what today are 

county payment rates. For regional 

plans, the benchmark represents a 

weighting of these same county rates 

and the actual plan bids. CMS will 

evaluate the bids for reasonableness and 

actuarial soundness, and can negotiate 

over the bid amounts and proposed 

supplemental benefits. In 2006 and 

thereafter, to the extent that the bid is 

less than the benchmark, that difference 

(comparable to the current ‘‘excess 

funds’’) determines plan rebates. The 

Government retains 25 percent of this 

difference, and the remaining 75 percent 

is to be used for beneficiary ‘‘rebates,’’

which can take the form of extra 

benefits, reduced cost sharing, reduced 

health plan premiums for supplemental 

benefits, or reduced Part B and/or Part 

D premiums. To the extent that the plan 

bid is greater than the benchmark, that 

difference becomes the premium the 

plan must charge enrollees for ‘‘basic’’

benefits. 

The limitation on cost sharing for 

Medicare services that previously 

existed is modified in the MMA. Prior 

to the MMA, for coordinated care plans, 

the combination of the actuarial value of 

cost sharing for Medicare-covered 

services, plus any premium or portion 

of a premium representing a charge in 

lieu of Medicare cost sharing, could not 

exceed the average level of cost sharing 

that beneficiaries face in fee-for-service 

Medicare. As of 2006, premium 

amounts that are in lieu of cost sharing 

are not counted in determining whether 

the limit is exceeded (which is the rule 

as it is currently applied to private feefor-service plans). In addition, the 

comparison is made to local values of 

cost-sharing in fee-for-service Medicare 

rather than to the current use of national 

values. 

The MMA also makes structural 

changes in the Medicare private plan 

contracting program. The most 

important of these statutory changes is 

the introduction of regional MA plans 

that will be structured as PPOs, and 

which would first become available in 

2006. While local plans may choose the 

counties in which they wish to operate 

as Medicare Advantage plans, regional 

plans must cover an entire region. 

Regions will be designated by CMS after 

a market analysis (as discussed later and 

in the preamble text for subpart J). To 

facilitate the ability of regional plans to 

operate in multiple States, plans can 

meet Federal solvency and licensure 

requirements for a period of time 

pending an organization’s meeting such 

requirements for each State (see the 

preamble text for subpart J). In the first 

two years of formation of regional plans, 

there is a moratorium imposed on the 

formation or expansion of local plans 

that operate as PPOs. 

Regional plans have various 

incentives to participate, including: 

• Sharing risk with the Government 

in 2006 and 2007, 

• Access, beginning in 2007 through 

the end of 2013, to a ‘‘stabilization fund’’

of $10 billion (plus half of the 25 

percent of regional plan rebate dollars 

that would otherwise go to the 

Government). The stabilization will be 

used to encourage plan entry (including 

a bonus for plans operating in the entire 

Nation) or to prevent plans from 

discontinuing contracts; 

• Inclusion of plan bids in 

determining benchmark amounts (as 

opposed to the benchmarks for local 

plans, which are comprised only of the 

local MA payment rates); and 

• Access to additional funding 

payable to ‘‘essential’’ hospitals (as 

described in the subpart G preamble 

text). 

Other structural changes affecting 

Medicare health plans include 

provisions for plans that can exclusively 

serve special needs individuals, special 

treatment of enrollees with end-stage 

renal disease (paid outside of the 

bidding system—see subpart G), 

authority for direct contracting between 

CMS and employers or unions for 

coverage of retirees—see § 422.106), and 

removal of certain limitations that had 

been imposed on medical savings 

account plans. There are also provisions 

calling for the termination of costreimbursed contracts with health plans 

if certain conditions are met (subpart J). 

In the following section we list those 

areas in which CMS will exercise 

discretion through this rulemaking, 

either because the law entails a choice 

of options or because we have elected to 

exercise regulatory discretion. 

3. Regulation Required in the Law 

Designation of Regions. The most 

important feature of the MA program 

that the statute leaves to the discretion 

of CMS is to determine the boundaries 

for the regions in which regional MA 

plans will operate. Following a market 

analysis, CMS will designate between 

10 and 50 regions, using certain 

guidelines stated in the MMA (as 

discussed in the preamble text for 

subpart J). Some of the issues relating to 

the configuration of regions are 

discussed later in the section on 

alternatives considered. The impact of 

the configuration of regions cannot be 

fully evaluated until the regions are 

designated. The estimates contained in 

this analysis (shown in Table 2, for 

example) are for illustrative purposes 

and are based on the assumption that 

there would be 15 regions. 

Statewide Versus Plan-Specific Risk 

Adjustment. CMS is given the authority 

to use a statewide, area-wide, or a planspecific, risk adjustment methodology 

for determining rebates. The effects of 

each and the factors to consider in 

choosing one or the other approach are 

discussed in the alternatives considered 

section below. 

4. CMS Regulatory Discretion 

The statute spells out in detail most 

major and many minor parameters of 

Medicare reform. However, in certain 

matters, the statute describes a structure 

or uses terminology that is open to 

interpretation but which is a necessary 

component of the statutory scheme. 

There are also other areas where we 

believe further interpretation is needed, 

or where there appear to be internal 

inconsistencies in the statute that need 

to be resolved. The following issues are 

of this nature, and each is noted here 

briefly, with some of the issues 

discussed in further detail in the section 

on alternatives considered. 

Actuarial Value of Medicare Cost 

Sharing. When plans present bids for 

Medicare-covered services the bid may 

include only Medicare-covered services 

and must reflect cost sharing at 

Medicare levels or with ‘‘actuarially 

equivalent’’ cost sharing. The options 

for defining ‘‘actuarially equivalent’’ in 

this context are discussed in detail in 

the preamble text of subsection F (where 

the uniform, plan-specific, and 

proportional amount methods of 

determining actuarial equivalence are 

discussed). 

Treatment of Induced Demand as a 

Supplemental Cost. To the extent that 

CMS decides to use the ‘‘plan-specific’’

approach to determining cost sharing 

that is actuarially equivalent to that of 

traditional Medicare, an additional issue 

arises. If a plan proposes, through a 

supplemental benefit, to lower cost 

sharing included in the base package 

(the portion of the bid which is used to 

determine whether rebates or a basic 

premium apply), we propose that the 

additional expenditures arising from the 

induced demand caused by the cost 

sharing reduction be included in the 

cost of the supplemental benefits rather 

than in the cost of the base package. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46921 

That is, because cost sharing reduces 

utilization of services, and plan bids for 

the basic package are determined using 

the cost sharing structure of fee-forservice Medicare, if cost sharing is 

reduced below Medicare levels, the 

result is higher utilization of services, 

and higher expenditures. We believe 

these expenditures should not be 

included as part of the bid for the basic 

Medicare package. The additional 

expenditures would not have arisen if 

the cost sharing were at Medicare levels 

or at an actuarially equivalent level. In 

other words, the additional 

expenditures do not comprise a part of 

the bid for the basic benefit package as 

it is defined in the statute. We propose 

that the portion of utilization 

expenditures that result from the 

reduced cost sharing would be ‘‘paid 

for’’ entirely as a supplemental benefit. 

This requirement, consistent with a 

parallel requirement for Part D drug 

coverage, assures that the determination 

of whether rebates or a premium is 

applicable is based on an ‘‘apples-toapples’’ comparison of a specific set of 

benefits reflecting a specific cost sharing 

structure. 

Prohibiting Use of Rebate Dollars for 

the Purchase of Optional Supplemental 

Benefits. As stated in the preamble text 

for subpart F, a bidding system in which 

there is the possibility of rebate funds 

that must be spread over the entire 

enrolled population of a plan is difficult 

to implement if the rebates can be used 

to finance optional supplemental 

benefits that enrollees may decline. 

Because each enrollee should receive 

the same level of rebate value as any 

other enrollee of the same plan, 

enrollees would have to be offered a 

menu of options to fashion a 

combination of rebate possibilities to 

arrive at the dollar amount of rebate that 

the enrollee is entitled to. (This issue is 

discussed more fully in the preamble 

and the ‘‘alternatives considered’’

section of this impact analysis.) 

Intra-Area Geographic Adjustment to 

Payments. The statute specifies that ‘‘if 

applicable’’ (1853(a)(1)(B)(i)), CMS 

‘‘shall adjust’’ payments ‘‘in a manner to 

take into account variations in MA local 

payment rates’’ (1853(a)(1)(F) for 

regional plans and for local plans 

operating in more than one local 

payment area. CMS is requesting 

comment on the ways in which such 

adjustments can be made. (This issue is 

also discussed in the ‘‘alternatives 

considered’’ section.) 

5. Provisions of the Proposed Rules Not 

Based on Specific MMA Changes 

As discussed throughout the 

preamble, we have made a concerted 

effort to improve, and wherever possible 

simplify and reduce the burden of, 

existing regulations. In general, as 

previously noted, these provisions 

reduce the burden on health plans while 

enhancing beneficiary protections or not 

adversely affecting the rights of 

enrollees. Among the changes that are 

being made that are not a result of the 

MMA statutory provisions are (a) New 

beneficiary protections related to 

coverage of services when network 

providers can see patients on a ‘‘pointof-service’’ basis (§ 422.105); (b) 

revisions to the rules limiting 

beneficiary cost sharing related to 

emergency episodes (§ 422.113); (c) the 

elimination of requirements on MA 

plans that are duplicative of activities 

already conducted by CMS regarding 

information about beneficiary health 

care coverage options (elimination of 

§ 422.111(f)(4) and (f)(6), and portions of 

(f)(7)); (d) the elimination of certain 

access to care provisions (changes made 

at § 422.112); (e) use of alternative 

election mechanisms other than forms 

(§ 422.50(a)(5)), and alternative notice 

options (§ 422.60(e)); (f) allowing MA 

organizations to submit requests to 

restrict enrollment for capacity reasons 

at any time during the year (§ 422.60(b)); 

(g) providing more flexibility in the 

procedures for disenrolling beneficiaries 

for failure to pay premiums 

(§ 422.74(d)(1)) and rules related to 

disenrollment due to disruptive 

behavior (§ 422.74(d)(2)); (h) formal 

adoption of a ‘‘file and use’’ approach to 

approval of marketing materials 

(§ 422.80) for contractors that have 

demonstrated a record of compliance 

with marketing rules; (i) changes in 

requirements regarding information 

plans provide to enrollees about 

participating providers (§ 422.111(b)(3), 

for example); and, in § 422.133 , 

extending the right under section 

1852(l) of the Act for admission to a 

‘‘home skilled nursing facility’’ in the 

event that a health plan admits an 

enrollee to a skilled nursing facility 

without a prior qualifying hospital stay. 

In addition, various changes are made in 

subpart D that are consistent with a 

‘‘quality improvement’’ approach to 

quality standards. 

B. Basis for Estimating Impacts 

The extent of the impact of the MMA 

will depend on whether the goals of the 

law are realized. We believe that the 

payment changes and structural changes 

of the MMA will lead to higher levels 

of plan participation, and, as a 

consequence, enrollment in private 

plans will increase over the next several 

years. We expect the absolute level of 

private plan enrollment to increase 

because of the greater availability of 

plans, and we expect the rate of 

enrollment in private plans 

(‘‘penetration’’) to increase because 

plans will be able to offer plan designs 

that will meet the needs of Medicare 

beneficiaries, and MA organizations will 

be able to offer generous benefit 

packages that Medicare beneficiaries 

will find attractive. However, there is a 

great deal of uncertainty involved in 

making projections of plan participation 

and beneficiary enrollment levels. The 

factors contributing to uncertainty 

include uncertainty about market 

decisions made by health plans might 

make, how changes in health care 

markets and costs will affect plan 

participation and beneficiary 

enrollment, whether MA plan offerings 

will satisfy the enrollment preferences 

of Medicare beneficiaries, how MA 

plans will fare in competition with the 

new PDP plans, and other factors. For 

the MMA, the designation of MA 

regions and how the marketplace will 

react to the regional designations is also 

a factor contributing to uncertainty. 

The uncertainty inherent in 

attempting to make projections of what 

might transpire in the health care 

marketplace is illustrated by the 

projections that were made for earlier 

legislation that brought about a major 

reform of Medicare health plan 

contracting, the Balanced Budget Act of 

1997 (BBA). The BBA sought to expand 

the availability of private plans 

throughout the United States 

(particularly to rural areas), with the 

expectation that the generous benefit 

packages that Medicare plans had been 

offering would continue to be offered 

and would be available to more 

beneficiaries. It was also assumed that 

the new types of plans introduced in the 

BBA—such as provider-sponsored 

health plans—would proliferate. For 

example, in the impact analysis for the 

regulations implementing the 

Medicare+Choice program enacted in 

the BBA (Federal Register, vol. 63, no. 

123, June 26, 1998), it was noted the 

Congressional Budget Office had 

projected that by 2002 there would be 

125 provider-sponsored organizations 

enrolling one million Medicare 

beneficiaries, and that in particular ‘‘a 

significant portion of the enrollment 

[would] be in rural areas.’’ The actual 

outcome was that only a handful of 

PSOs were formed, and, with regard to 

projections of increased enrollment 

because of the BBA, what actually 

occurred was a decline in enrollment 

due in part to payment changes made by 

the BBA and also due to changes in the 

46922 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

overall health care marketplace that 

affected Medicare health plans. 

Recent Plan Participation and 

Enrollment Trends. As of June 2004 

about 11 percent of beneficiaries are 

enrollees of Medicare risk-bearing 

private plans. This figure compares to a 

historical high of about 16 percent 

‘‘penetration’’ (percent enrolled) 

achieved in 1999. The reduced 

penetration is partly a function of 

reduced access to plans. As of January 

2004, about 61 percent of Medicare 

beneficiaries had access to a private 

coordinated care plan (and 75 percent 

had access to a private plan if private 

fee-for-service plans are included among 

the types of available plans). In 1998 

(the year in which the highest access 

level was attained), 74 percent of 

beneficiaries had access to at least one 

Medicare+Choice plan (there were no 

private fee-for-service plans in 1998). 

Although the national access figure is 

61 percent in 2004, 75 percent of 

Medicare beneficiaries residing in 

metropolitan counties have access to at 

least one MA coordinated care plan, but 

only 14 percent of the residents of nonmetropolitan counties—where about 23 

percent of all Medicare beneficiaries 

reside—have access to a coordinated 

care plan. In terms of plan participation, 

at the end of 1998, there were 346 

Medicare risk contracts, a number that 

has declined to 145 coordinated care 

plan contracts as of March 2004 (though 

some of the decline is attributable to 

consolidations within a State). Because 

in 1999 seventy-two percent of 

beneficiaries resided in a county in 

which there was at least one M+C 

coordinated care plan, the penetration 

rate in areas in which plans were 

available was an effective rate of 22 

percent (with the ‘‘effective’’ penetration 

being the penetration only among those 

beneficiaries residing in areas in which 

there were operating plans). As of 2004, 

the effective penetration rate is 17 

percent, with 4.6 million enrollees and 

a 61 percent level of availability of 

plans. This decline in ‘‘effective 

penetration’’ is partly the result of a 

decline in generosity of plan benefit 

offerings as statutorily set payments did 

not keep pace with plan costs. For 

example, while in 1999, 61 percent of 

the Medicare population (85 percent of 

those with access) lived in a county in 

which there was a Medicare+Choice 

plan with no plan premium, by 2003 the 

figure declined to 29 percent of 

beneficiaries living in a county with a 

zero premium plan (50 percent of those 

with access). (On the decline in benefits 

and rise in cost sharing in private plans, 

see, for example, Marsha Gold and Lori 

Achman, ‘‘Average Out-of-Pocket Health 

Care Costs for Medicare+Choice 

Enrollees Increase 10 Percent in 2003,’’

Commonwealth Fund Issue Brief 

number 667, August 2003, available at 

http://www.cmwf.org, as well earlier 

studies of a similar nature cited therein). 

Issues in Predicting Beneficiary 

Behavior. At the individual beneficiary 

level, there are a number of reasons why 

Medicare beneficiaries choose to enroll 

in private plans. Generally MA plans 

have significantly lower cost sharing 

compared to traditional fee-for-service 

Medicare, and private plans have been 

able to offer additional benefits not 

covered by Medicare (in particular, 

outpatient drugs). Hence, private plans 

have proven to be very attractive to 

certain lower-income and minority 

individuals (see, for example, Maggie 

Murgolo, ‘‘Comparison of Medicare Risk 

HMO and FFS Enrollees,’’ Health Care 

Financing Review, fall 2002, volume 24, 

number 1; and Kenneth E. Thorpe and 

Adam Atherly, ‘‘Medicare+Choice: 

Current Role And Near-Term 

Prospects,’’ Health Affairs web 

exclusive, July 17, 2002). The cost of 

Medigap policies in a particular area 

also appear to influence 

Medicare+Choice enrollment (Catherine 

G. McLaughlin, Michael Chernew, Erin 

Fries Taylor, ‘‘Medigap Premiums and 

Medicare HMO Enrollment,’’ Health 

Services Research, December, 2002). 

The relationship between beneficiary 

income levels and the tendency to 

enroll in MA plans is shown in Figure 

1, which illustrates how lower-income 

individuals are more likely to enroll in 

MA plans. (The lowest income groups 

include beneficiaries eligible for 

Medicaid, who face certain difficulties 

in enrolling in MA plans (see Edith G. 

Walsh and William D. Clark, ‘‘Managed 

Care and Dually Eligible Beneficiaries: 

Challenges in Coordination,’’ Health 

Care Financing Review, fall 2002, 

volume 24, number 1), and who would 

not have the same incentives to join MA 

plans as beneficiaries with no Medicaid 

coverage.) Thus, to the extent that the 

MMA increases beneficiary choices by 

making MA plans available in 

geographic areas where there are 

currently no plans, we would expect to 

see lower-income beneficiaries in such 

areas elect to enroll in plans that would 

offer benefit packages that reduce their 

out-of-pocket expenses substantially 

and provide them with extra benefits 

that they would otherwise not receive or 

would have to pay for out-of-pocket. On 

average, prior to the MA reforms, 

beneficiaries enrolled in M+C plans had 

yearly out-of-pocket medical expenses 

in 2003 that were $667 lower than 

expenses for beneficiaries in fee-forservice Medicare (with no coverage 

supplementing Medicare, such as 

subsidized retiree coverage or Medigap 

coverage). (See Gold and Achman, 

previously cited, figure 5, page 6). The 

MA reforms are expected to increase the 

opportunities for lower cost-sharing and 

improved benefits for such 

beneficiaries. Beneficiaries in poorer 

health, in particular, would find MA 

plans to be an attractive option: in May 

2004, such beneficiaries enrolled in MA 

plans had annual out-of-pocket costs 

that were estimated to be $1900 less 

than beneficiaries in poor health 

covered by fee-for-service Medicare 

with no supplemental coverage (based 

on unpublished CMS data on out-ofpocket costs). 

BILLING CODE 4120–01–P 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46923 

BILLING CODE 4120–01–C 

One population group that has 

disproportionately lower rates of 

enrollment in Medicare private plans 

are disabled Medicare beneficiaries. 

Table 1 illustrates that while the 

disabled, a growing segment of the 

Medicare population, comprised 14 

percent of the Medicare population in 

areas with Medicare+Choice plans in 

2002, only seven percent of M+C plan 

enrollees were disabled (based on 

Medicare Current Beneficiary Survey 

Data for 2002). However, the M+C 

private fee-for-service plan option 

attracts a higher proportion of the 

disabled, with 17 percent of private feefor-service (PFFS) plan enrollees being 

under 65 as of March 2004. This 

relatively high rate of enrollment of the 

disabled in PFFS likely reflects a 

demand for supplemental coverage in 

the face of less availability of Medigap 

coverage for Medicare beneficiaries 

under age 65. According to a September 

2002 study, only 14 percent of disabled 

Medicare beneficiaries reside in States 

in which there is Medigap open 

enrollment for the disabled (Becky 

Briesacher, Bruce Stuart, Jalpa Doshi, 

and Sachin Kamal-Bahl, Medicare’s 

Disabled Beneficiaries: The Forgotten 

Population In The Debate Over Drug 

Benefits, Commonwealth Fund and 

Henry J. Kaiser Family Foundation, 

publication #573, September 2002). The 

enrollment level of the disabled in PFFS 

plans would also appear to indicate that 

the disabled are willing to enroll in 

private plans when there are not 

restrictions on the providers they can 

use, even without the inducement of 

extra benefits or reduced premiums 

(which are generally not a feature of 

private fee-for-service plans). If a 

preference for broader networks is the 

reason for the willingness to enroll in 

PFFS plans, then the regional PPOs that 

the MMA seeks to promote may be an 

attractive option for disabled Medicare 

beneficiaries in that enrollees will have 

out-of-plan coverage and, in addition, 

are likely to have extra benefits 

available. The MMA authority for 

specialized plans for special needs 

individuals may also facilitate the 

enrollment of a higher proportion of the 

disabled in private plans. (On the 

disabled and their experience with 

access to care in Medicare HMOs, see 

Marsha Gold, Lyle Nelson, Randall 

Brown, Anne Ciemnecki, Anna Aizer, 

and Elizabeth Docteur ‘‘Disabled 

Medicare Beneficiaries In HMOs,’’

Health Affairs, September/October 1997, 

particularly pages 155–157). 

With regard to minorities and their 

enrollment in private plans, in 2002 

Hispanics were more likely to choose 

Medicare+Choice enrollment (as 

compared to non-Hispanic AfricanAmericans and non-Hispanic whites, as 

illustrated in Table 1). Any changes to 

the program that would increase the rate 

of private plan enrollment among the 

disabled would be likely also to result 

in higher minority enrollment levels in 

MA plans. This is because minorities 

make up a far greater percent of the 

disabled as compared to their 

distribution among the aged, as shown 

in Table 1. Thus, the overall high M+C 

enrollment rates in 2002 for Hispanics 

reflects the very high enrollment rates 

among aged Hispanics. The situation is 

reversed for the disabled: among 

Medicare beneficiaries under 65 

(entitled to Medicare because of 


EP03AU04.001</GPH>
46924 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

disability), for the three different racial 

or ethnic groups (white, black, 

Hispanic), Hispanics were the least 

likely to be enrollees of M+C 

coordinated care plans. Similarly, for 

blacks, while over one in five aged black 

enrollees was enrolled in an M+C plan, 

fewer than one in ten disabled AfricanAmerican beneficiaries were enrollees 

of M+C plans. 

TABLE 1.—COMPOSITION OF MEDICARE ENROLLMENT BY AGE, RACE AND ETHNICITY IN AREAS WITH MEDICARE+CHOICE

PLANS, YEAR 2002 

Composition within total 

population in areas with 

plans 

Percent of group 

enrolled in M+C 

(‘‘penetration’’) 

Composition within FFS 

in area 

Composition in M+C 

Aged/Disabled Distribution: 

Aged (Age 65 or Over) ............. 86.4% 21.3% 84.9% 92.9% 

Entitled to Medicare Because of 

Disability (Under Age 65) ...... 13.6% 10.5% 15.1% 7.1% 

Racial/Ethnic Distribution: 

Black Non-Hispanic .................. 10.5% 18.9% 10.7% 10.0% 

Hispanic .................................... 10.3% 23.8% 9.8% 12.3% 

White Non-Hispanic .................. 79.2% 19.5% 79.6% 77.7% 

Composition within total 

aged population in areas 

with plans 

Percent of racial/ethnic 

group in area enrolled in 

M+C 

Composition of aged 

within FFS in area 

Composition of aged 

within M+C 

Aged by Race/Ethnicity: 

Black Non-Hispanic Aged ......... 9.0% 22.1% 8.9% 9.3% 

Hispanic Aged .......................... 9.4% 27.7% 8.7% 12.2% 

White Non-Hispanic Aged ........ 81.6% 20.5% 82.4% 78.4% 

Composition within total 

disabled population in 

areas with plans 

Percent of racial/ethnic 

group in area enrolled in 

M+C 

Composition of aged 

within FFX in area 

Composition of aged 

within M+C 

Disabled by Race/Ethnicity: 

Black Non-Hispanic Disabled .............................. 20.3% 9.6% 20.5% 18.7% 

Hispanic Disabled ..................... 15.7% 8.8% 16.0% 13.1% 

White Non-Hispanic Disabled ... 64.0% 11.2% 63.5% 68.2% 

Source: Unpublished CMS Data from the Medicare Current Beneficiary Survey, 2002. Note: Excludes racial/ethnic category ‘‘other.’’ 

Another factor that influences 

beneficiary decisions to enroll in M+C 

is the use of M+C plans as the means of 

providing retiree health benefits. A 

substantial number of enrollees (about 

18 percent of enrollment) are enrolled as 

retirees or dependents of retirees of 

firms that offer retiree coverage through 

M+C plans. These types of enrollees 

receive more generous benefits than 

individual Medicare enrollees of such 

plans (see Geoffrey R. Hileman, Kerry E. 

Moroz, C. William Wrightson, and Suhn 

K. Kim, ‘‘Medicare+Choice Individual 

and Group Enrollment: 2001 and 2002,’’

Health Care Financing Review, fall 

2002, volume 24, number 1). 

A current feature of private Medicare 

plans that makes them attractive to 

beneficiaries is the coverage of 

outpatient drugs. Private drug-only 

plans will be available to beneficiaries 

in traditional fee-for-service Medicare as 

of 2006. There is no direct evidence that 

we can rely on to assume that 

beneficiaries will be less likely to enroll 

in MA plans if drug coverage is 

available in traditional fee-for-service 

Medicare (other than pointing out that 

18 percent of current enrollees in nonemployer-sponsored MA plans are 

enrolled in plans with no drug coverage, 

and therefore there is a segment of the 

population that chooses MA coverage 

even without drug coverage.) However, 

for a variety of reasons, we believe the 

availability of drugs under Part D will 

only have a marginal impact on private 

MA plan enrollment. We believe that 

beneficiaries will view the private MA 

plans’ benefit package integrating drugs 

and other services as attractive; MA 

plans will be able to offer drug benefits 

for a lower premium than PDP plans at 

a lower cost; and they will continue to 

be able to offer other extra benefits, 

including additional drug coverage. 

Such extra benefits were important in 

attracting enrollees to private plans in 

the period of greatest enrollment 

growth. Another advantageous feature 

that will continue to be unique to 

private MA plans is that, unlike PDP 

plans, they will have the ability to 

reduce Part B and Part D premiums 

through the rebates available from 

Medicare for plans with bids below the 

applicable benchmark. (Although there 

are only preliminary results from the 

experience of Medicare+Choice plans 

that have offered Part B premium 

rebates, plans and beneficiaries have 

had mixed experiences with this 

relatively new option (see ‘‘Sub-Zero 

Premium’’ (BIPA 606) M+C Plan 

Evaluation, final report submitted by 

Bearing Point to CMS, September 30, 

2003, contract number 500–95–0057, 

task order 6, available at http:// 

www.cms.hhs.gov/researchers/demos/ 

subzeroevaluation.asp). However, we 

believe that in combination with other 

advantages of MA enrollment, and as 

beneficiaries and plans become more 

familiar with the premium rebate 

option, premium reductions will be a 

significant inducement for beneficiaries 

to enroll in MA plans. There is also the 

issue of whether the number of plan 

withdrawals in recent years and the 

publicity surrounding the withdrawals 

may deter beneficiaries from enrolling 

in MA plans. Again, we believe that the 

generous benefit packages and financial 

advantages of MA membership will 

outweigh such considerations.) 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46925 

Issues in Predicting Plan Behavior. 

With respect to plan behavior, whether 

plans have been available in a particular 

community (and whether Medicare 

beneficiaries have chosen to enroll in 

such plans) is often a function of local 

market factors. Brown and Gold found 

that ‘‘the capitation rate strongly 

influences whether and how quickly 

Medicare managed care develops and 

grows in an area, but other factors often 

outweigh the significance of the 

payment level’’ (Randy Brown and 

Marsha Gold, ‘‘What Drives Medicare 

Managed Care’s Growth?’’ Health Affairs 

(Nov/Dec 1999). Among other factors 

that they cite as influencing increased 

Medicare private plan enrollment were 

factors such as the regulatory 

environment, whether or not employers 

and unions are offering supplemental 

coverage other than through Medicare 

health plans, and perhaps most 

importantly whether beneficiaries have 

greater familiarity with managed care in 

areas where plans have had a longstanding presence and acceptance in the 

commercial marketplace and among 

providers—as in the case of Portland, 

Oregon, which had, and continues to 

have, among the highest rates of 

Medicare private plan penetration even 

though the benefits available in Oregon 

have usually been less generous than in 

other areas with lower penetration 

levels. 

In the case of Oregon, where 

penetration is near the 50 percent level 

in urban counties, one factor is that 

Medicare private plan enrollment 

includes a much higher percentage of 

employer-sponsored enrollees (about 

one-third) than the national average (18 

percent) (based on unpublished 2002 

CMS data). By way of contrast, in 

another high-penetration area—MiamiDade County, Florida—employersponsored enrollment is under 5 

percent, but the extremely generous 

benefit packages have attracted about 50 

percent of the county’s Medicare 

beneficiaries, who have been able to 

obtain such benefits as unlimited 

generic and brand drug coverage, and 

currently can obtain a full rebate of their 

Part B premium. 

The Medicare regional plans present a 

market opportunity for insurers to 

participate in Medicare at less risk, with 

potentially higher payment levels than 

local plans in certain areas. With the 

financial incentives for PPO formation 

in the MMA, we believe that health 

plans will view the Medicare regional 

plan option as a good market 

opportunity to cover an insured 

population whose numbers will rise 

over the coming years, and we believe 

that many organizations that are already 

licensed as health insurers in multiple 

States (and in many cases, licensed in 

all States) will participate as both local 

and regional plans. 

A major goal in introducing regional 

plans is to extend health plan access to 

rural areas through regional MA 

organizations that will cover relatively 

large geographic areas (at least the size 

of a State). There is an extensive 

literature on the subject of the limited 

participation of Medicare health plans 

in rural areas even after the BBA raised 

payments significantly in rural areas. 

For example, in testimony to the 

Congress, the chairman of the Medicare 

Payment Advisory Commission 

summed up the reasons for limited 

availability of Medicare HMOs in rural 

areas and suggested what remedy there 

might be: ‘‘Even though the floor under 

payments has been increased 

substantially (to $475 monthly), 

coordinated care Medicare+Choice 

plans offering generous benefit packages 

at little or no cost have not entered rural 

areas. We see three reasons for this. 

First, coordinated care plans rely on 

provider networks, which are difficult 

to establish in rural areas. This 

difficulty arises because rural providers 

who face little competition have no 

incentive to accept reduced payments 

and because there are fewer so-called 

intermediate entities, such as 

independent practice associations, 

willing to accept financial risk. Second, 

the small populations in many rural 

areas provide too small an enrollment 

base over which to spread fixed costs. 

Third, because relatively few rural areas 

consume large amounts of health care, 

there is less scope to achieve efficiency 

gains * * * What should policymakers 

do? The efficiency gains and provider 

discounts that Medicare HMOs in urban 

areas use to fund additional benefits are 

unlikely to be achievable in rural areas. 

Although other alternatives to the 

current system should be explored—

such as risk sharing through partial 

capitation or split capitation—rural 

beneficiaries are unlikely to see more 

generous benefits without an explicit or 

implicit subsidy.’’ (‘‘Report to the 

Congress: Medicare in Rural America,’’

Statement of Glenn M. Hackbarth, J.D., 

chairman, Medicare Payment Advisory 

Commission, before the Subcommittee 

on Health Committee on Ways and 

Means, U.S. House of Representatives, 

June 12, 2001.) 

As previously noted, the use of the 

PPO model for regional plans, which are 

to cover wide areas, is intended to 

address the structural issues that have 

prevented Medicare plans from 

operating in rural areas. The payment 

issues are addressed through the 

incentives for the formation and 

continued participation of regional 

plans. However, the historical 

reluctance of Medicare plans to 

participate in rural areas is also a matter 

of uncertainty in projecting the extent of 

plan participation. The designation of 

regions would also be a factor affecting 

which rural areas may have plans 

participating. 

There is one further area of 

uncertainty, and that is related to the 

issue of medical savings account (MSA) 

plans. The MMA changed the MSA 

provisions of the BBA with a view 

towards facilitating the offering of such 

plans. However, we are unable to 

determine whether the MMA provisions 

will result in such plans being 

introduced and the extent to which 

beneficiaries might enroll in such plans. 

Projections Provided in the Impact 

Analysis. The methodology used to 

project the impact of the law and 

regulations is partially explained in the 

section on effects on beneficiaries. The 

projections are based on the 

assumption, for illustrative purposes, 

that there would be 15 regions with at 

least three regional plans in each region. 

However, we do not know at this time 

how many regions will be designated, 

and there is no limit on the number of 

regional plans. With regard to the 

number of MA local plans, the 

projections of enrollment did not 

involve assumptions about any specific 

number of local plans. Instead a certain 

level of enrollment was assumed for 

local plans based on the benefits they 

are expected to offer; and it was 

assumed that there would be sufficient 

capacity among local plans to enroll all 

beneficiaries that are expected to join 

regional plans. The estimates of plan 

bids are based on the proprietary 

information submitted to CMS by 

current Medicare Advantage plans 

(coordinated care plans as well as 

demonstration PPO plans). Beneficiary 

behavior is modeled with utility 

functions that predict the choices they 

will make among available health plan 

options. As previously mentioned, we 

recognize the high degree of uncertainty 

entailed in such projections. The 

projections represent our best estimate 

of the impact given the assumptions 

stated. 

C. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

requires that agencies identify any 

Federal mandates resulting from 

proposed rules that may result in the 

expenditure by State, local, and tribal 

governments of $100 million or more 

(adjusted for inflation and currently 

46926 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

about $110 million). If this threshold is 

met, a detailed analysis is required. This 

proposed rule does not contain any 

‘‘mandate’’ as such, and other direct 

effects on State, local, and tribal 

governments will be minimal. There 

will, however, be an indirect effect on 

State premium tax revenues due to the 

increased enrollment in MA plans and 

reduced enrollment in certain Medigap 

policies. These indirect effects, 

however, are not the result of these 

proposed rules, but of increased plan 

payments and prohibitions on sale of 

those Medigap policies implemented 

independently of these regulations. 

Title II of the MMA contains several 

provisions that have a direct impact on 

States. Section 232(a) of the MMA 

amends section 1856(b)(3) to preempt 

all State standards other than licensure 

and solvency as they apply to MA plans. 

Section 232(b) of MMA amends section 

1854(g) to expand a prohibition on State 

taxes for MA plans to apply to both 

CMS’ payments to MA plans and to 

enrollee premium payments to MA 

plans. In addition, section 221(c) of 

MMA allows for temporary waiver of 

State licensure in States covered by 

regional MA plans where those plans 

cover a multi-State area. 

Medicare law prohibiting State taxes 

on section 1853 payments to M+C 

organizations, that is, payments made 

by CMS to health plans contracting with 

Medicare, was established by the 

Balanced Budget Act 1997. That 

prohibition did not apply to enrollee 

premium payments made to M+C plans. 

Section 232(b) of the MMA has 

expanded the prohibition on State taxes 

for MA plans, addressed in statute at 

section 1854(g), to apply to both section 

1853 payments to MA plans and to 

section 1854 enrollee premium 

payments to MA plans. This provision 

was effective on the date of enactment 

of the MMA and is, therefore, not 

subject to the Regulatory Accountability 

provisions of the UMRA, which apply 

only to effects resulting from 

promulgation of rules. Section 

422.404(a) is revised to reflect this 

change. We do not anticipate that the 

added prohibition on taxation of 

enrollee premiums to have a significant 

cost impact on States. Enrollee 

premiums to Medicare health plans are 

a small proportion of total payments to 

health insurers. Thus, State loss of tax 

revenue from Medicare enrollee 

premiums would also be small. 

Therefore, even if it were subject to 

UMRA, the prohibition of taxation by 

States of Medicare enrollee premiums 

would not approach the UMRA 

threshold. 

We also recognize, however, that 

there is an indirect effect of the MMA 

law because of the expected enrollment 

shift from taxable Medigap insurance, 

and employer-sponsored private 

supplemental coverage, to non-taxable 

MA plans. This indirect effect would 

vary by State and would be dependent 

on a variety of factors, including the 

State’s tax rate on health insurance 

premiums, the extent of Medigap 

enrollment in a State, the extent that 

Medigap enrollees choose to shift to MA 

plans in that State, as well as other 

resulting factors such as changes in 

Medigap premiums that could result 

from enrollment shifts. Due to these 

factors, estimates of the indirect effect of 

enrollment shifts away from taxable 

Medigap and employer-sponsored 

supplemental plans combined with the 

prohibition on State taxation of 

Medicare enrollee premiums would 

involve great uncertainty and would 

necessarily be speculative. 

D. Federalism 

MMA provisions may have qualitative 

impacts on how States regulate and 

interrelate with health insurers serving 

Medicare enrollees due to the expanded 

preemption of State laws and possible 

temporary waiver of State licensure for 

multi-State MA regional plans. Law 

relating to Federal preemption of State 

standards for Medicare-contracting 

health plans has undergone several 

revisions in recent years. While Federal 

preemption of State standards was 

initially established into Medicare law 

by the Balanced Budget Act of 1997, a 

general preemption authority existed 

under Executive Order prior to that 

time. Federal preemption of State 

standards for Medicare-contracting 

health plans was expanded by Congress 

in 2000 and expanded again by 

Congress in 2003. 

Prior to 1997, Federal law did not 

contain specific preemption 

requirements for Medicare-contracting 

health plans. However, section 1876 

Federal requirements could preempt a 

State law or standard if State provisions 

were inconsistent with Federal 

standards based on general 

constitutional Federal preemption 

principles, consistent with the 

provisions of Executive Order 12612 on 

Federalism, since superseded by 

Executive Order 13132. Section 1876 

requirements did not preempt a State 

law or standard unless the State law or 

standard was in direct conflict with 

Federal law. See the June 26, 1998, 

Federal Register notice at page 35012 

for further discussion on the history of 

general Federal preemption of State law 

prior to the Balanced Budget Act of 

1997. 

The Balanced Budget Act of 1997 

established for the Medicare+Choice 

program at section 1856(b)(3) a general 

preemption authority in which State 

laws or standards would be preempted 

when they were inconsistent with M+C 

standards in the same manner that the 

previous Executive Order applied, and 

this law also established a specific 

preemption of State laws and standards 

in three areas: benefit requirements, 

requirements relating to inclusion or 

treatment of providers, and coverage 

determinations (including related 

appeals and grievance procedures). This 

meant that a general preemption applied 

if State laws, regulations, or other 

standards were inconsistent with 

Federal standards and, furthermore, in 

the specifically preempted areas, meant 

that State standards were preempted 

regardless of whether or not those 

standards were inconsistent with 

Federal standards. 

In 2000, section 614 of the Medicare, 

Medicaid, and SCHIP Benefits 

Improvement and Protection Act of 

2000 (BIPA) maintained the general 

preemption authority and expanded 

specific preemption requirements by 

amending benefit requirements to 

include cost-sharing requirements and 

by adding a fourth specific preemption 

for requirements relating to marketing 

materials and summaries and schedule 

of benefits regarding a M+C plan. Thus, 

the list of areas of specific preemption 

effective since 2001 were: benefit 

requirements (including cost-sharing 

requirements), requirements relating to 

inclusion or treatment of providers, 

coverage determinations (including 

related appeals and grievance 

procedures), and requirements relating 

to marketing materials and summaries 

and schedule of benefits. 

In 2003, section 232(a) of the MMA 

amended section 1856 for Medicare 

Advantage plans by eliminating the 

general and specific preemption 

distinctions from section 1856 and 

broadened Federal preemption of State 

standards to broadly apply preemption 

to all State law or regulation (other than 

State licensing laws or State laws 

relating to plan solvency). § 422.402 of 

regulation is thus revised. Note that 

State laws on secondary payer are also 

preempted by Federal law and a change 

is made in regulation at § 422.108(f) to 

reflect that States are prohibited from 

limiting the amount that MA 

organizations can recover from liable 

third parties under Medicare Secondary 

Payer provisions. Congress indicated its 

intention to fully preempt State laws in 

the Conference Report for the MMA 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46927 

emphasizing that Medicare is a Federal 

program and that State laws should not 

apply. Section 232(a) of MMA was 

effective on enactment. 

We do not perceive that there will be 

a significant cost impact on States from 

section 232(a) of MMA to broaden 

Federal preemption authority to 

preempt all State law and regulation 

(other than State licensing laws or State 

laws relating to plan solvency). The 

specific preemptions already in effect 

were broad areas where States were 

most likely to have enacted laws or 

developed other regulations or 

standards for health insurance. Apart 

from those specific preemptions, general 

preemption already applied where State 

provisions were inconsistent with 

Federal standards such that other State 

standards in conflict with Federal 

standards were also already preempted. 

Areas of State law that will newly be 

preempted by full preemption of State 

laws (other than licensing and solvency) 

do exist, however, and will affect State 

residents who are Medicare 

beneficiaries. State governments will be 

affected in that State governments will 

no longer be responsible for enforcing 

preempted laws, which will likely 

reduce costs to States. A discussion of 

the diverse types of State laws that 

previously fell under general 

preemption is addressed in some detail 

in the response to public comments in 

the preamble to a June 29, 2000, final 

rule implementing the Balanced Budget 

Act of 1997’s preemption law. (See 

pages 35012–35014 of the June 29, 2000, 

Federal Register for a further discussion 

of the types of State laws that may be 

affected, which includes grievances and 

quality complaint reviews conducted by 

State governments.) 

In reality, determinations of which 

State laws have been subject to general 

preemption often has not been made 

unless specific questions or disputes 

have arisen that resulted in a court 

review of applicability of law to specific 

cases. The MMA revision relieves 

uncertainty of which State laws are 

preempted by ‘‘preempting the field’’ of 

State laws other than State laws on 

licensing and solvency. 

As required by Executive Order 

13132, because of the implications for 

the States of the Federal preemption of 

State laws enacted in the MMA, we will 

consult with the States regarding the 

effect of the preemption provision on 

the role the States will play with respect 

to the regulation of Medicare plans, and 

the effect the preemption will have on 

State agencies and on beneficiaries 

enrolled in Medicare health plans. We 

will discuss the results of this 

consultation when this rule is published 

as a final rule. 

We also request public comment on 

the effect of the preemption provisions 

included in this proposed rule. 

E. Effect on Beneficiaries 

The MMA increases the value of 

benefits that enrollees of MA plans have 

and will increase the availability of such 

benefits. When MA plans can bid at 

levels below the relevant benchmark, 

they can offer Medicare enrollees 

coverage of benefits beyond what 

Medicare covers (such as eyeglasses and 

hearing aids, as well as additional drug 

coverage), reduction in out-of-pocket 

expenditures for covered services (either 

as reduced cost sharing, on average, 

compared to fee-for-service Medicare, or 

reduced premium expenditures 

compared to Medigap, for example), and 

reductions in expenditures for the 

Medicare Part B and Part D premiums. 

As a result of the MMA provisions, we 

project that in the period 2004 through 

2009, Medicare beneficiaries enrolling 

in MA plans will see benefits beyond 

basic Medicare A and B coverage valued 

at $1.4 billion. For 2005, the expected 

dollar value of benefits for beneficiaries 

will include approximately $256 

million in remaining contributions to 

plan stabilization funds that plans must 

use by the end of 2005. (Effective for 

years after 2005, the MMA eliminated 

the ‘‘stabilization fund’’ option that was 

used by some plans to deposit Medicare 

payments for use in a later contract year 

to finance the cost of additional benefits 

or premium reductions. These funds 

will have to be used in the 2005 contract 

year. There is also a potential spillover 

effect of increased provision of benefits 

that competing plans in the same area 

would have to offer to remain 

competitive with plans using the 

stabilization fund dollars.) The estimate 

of benefits for beneficiaries is shown in 

Table 2. 

The data in Table 2 (and in Table 4) 

reflect projections we have made about 

the number of plans participating, their 

bids and (consequently) their level of 

benefits, and the level of expected 

beneficiary enrollment. These 

projections are based on (a) What we 

know about the expected benchmarks in 

each area; (b) the current premium and 

benefit packages of MA plans and PPO 

demonstration plans, and their costs for 

the packages as submitted to CMS; and 

(c) the current patterns of enrollment in 

health plans in Medicare and the 

commercial sector. As previously noted, 

we assume that there will be at least 

three regional plans in each region (in 

our illustrative case that assumes that 

there are 15 regions), and that there will 

be a sufficient number of local plans to 

meet beneficiary demand for enrollment 

in local plans. In general, in terms of the 

proportion of funds used to provide 

extra benefits to enrollees, we expect 

local MA plans to be able to have 

significantly more revenue available 

than regional PPO plans for the 

provision of extra benefits and reduced 

out-of-pocket expenditures. However, 

we would also expect that in many 

areas, there will only be regional plans 

available, and no local MA coordinated 

care plans. As noted elsewhere, areas 

where there are only regional plan 

options and no coordinated care MA 

plans are likely to have higher 

benchmarks that are a vestige of the 

‘‘floor’’ payment status of such counties. 

Although PPO plans may face higher 

costs in operating in such areas, the 

higher benchmarks will enable them to 

offer enriched benefit packages 

(compared to traditional fee-for-service 

Medicare). The projections of Tables 2 

and 4 show the distribution of dollars 

among all plans. The distribution is 

subject to regional variation (as is 

currently the case), so that in some 

areas, for example, beneficiaries will 

have more offerings and better benefit 

packages available to them as a result of 

plans using more funds to provide extra 

benefits, reduced cost sharing, and 

lower premiums. Some plans may offer 

very few extra benefits but would still 

be attractive to enrollees, as noted 

elsewhere, and would be viewed by 

beneficiaries as more advantageous than 

FFS Medicare with Medigap coverage, 

for example. 

The dollar figures shown in Tables 2 

and 4 reflect the projected additional 

Medicare Part A and B expenditures 

incurred solely as a result of the MMA 

provisions. That is, the expenditures are 

the incremental program expenditures 

that are incurred because of the MMA 

provisions, including any difference in 

expenditures that result when 

beneficiaries enroll in a private plan 

rather than receiving care in fee-forservice Medicare. 

46928 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

TABLE 2.—PROJECTED BENEFITS TO MA ENROLLEES RESULTING FROM TITLE II PROVISIONS OF THE MMA, YEARS 2004 

TO 2009, IN MILLIONS (AMOUNTS ABOVE AMOUNTS IN ABSENCE OF MMA TITLE II PROVISIONS); PROJECTED TOTAL

PLAN ENROLLMENT, 2004 TO 2009, IN MILLIONS

Year 

2004 

Year 

2005 

Year 

2006 

Year 

2007 

Year 

2008 

Year 

2009 

Total, Years 

2004–2009 

Enrollment Projection, Local Plans ...................................................... 4.662 5.088 6.449 6.547 6.685 6.825 ........................

Enrollment Projection, Regional Plans ................................................ ............ ............ 3.064 4.665 5.534 6.815 ........................

Total Value of Transfer Payments Used for Extra Benefits and/or 

Premium and Cost Sharing Reductions, Local Plans ...................... 134 201 220 177 148 121 1001 

Total Value of Transfer Payments Used for Extra Benefits and/or 

Premium and Cost Sharing Reductions, Regional Plans ................ ............ ............ 48 118 117 117 400 

Total Value of Transfer Payments Used for Extra Benefits and/or 

Premium and Cost Sharing Reductions, Both Types of Plans ........ 134 201 268 295 265 238 1,401 

Because of the MMA payment 

increases effective March 2004, 

beneficiaries enrolled in private plans 

have already seen reduced expenditures 

and increased benefits. 

The March payment increases varied 

by geographic area. For example, 

because of the MMA provision that 

made fee-for-service payment rates one 

of the ‘‘prongs’’ of payment, New Jersey 

counties had an average 24.3 percent 

payment rate increase on an enrollmentweighted basis (all counties in New 

Jersey had 86 or more enrollees and 

have MA plans available). As a result, 

in New Jersey, the average monthly 

M+C coordinated care plan premium 

across all counties declined from $56 to 

$15. In all 21 of New Jersey’s counties 

coordinated care plans have added a 

drug benefit. Previously, a drug benefit 

was available from an M+C coordinated 

care plan in only one county for 2004 

before the MMA changes (though the 

two PPO demonstration projects 

operating in New Jersey did offer drug 

coverage). As of December 2003, only 

seven percent of New Jersey Medicare 

beneficiaries were enrolled in M+C 

plans or PPO demonstration plans. In 

July 1999, sixteen percent of New Jersey 

beneficiaries were enrolled in M+C 

plans. We would expect enrollment in 

New Jersey to rise because of the 

availability of better benefits. (In 

addition, a Medicare contracting plan in 

New Jersey recently announced that it 

would expand its Medicare service to 

include eight more counties.) 

There are notable geographic 

differences in the benefit offerings of 

MA plans. In addition to the access 

differences between rural and urban 

counties that have already been 

discussed, the generosity of benefits has 

been lower in rural areas than urban 

areas. In 1999, for example, while the 

enrollment weighted premium for all 

enrollees of M+C plans was $5 per 

month, for the three percent of enrollees 

residing in rural counties and enrolled 

in M+C plans, the enrollment-weighted 

premium was $14 per month. In 1999, 

when 84 percent of the universe of M+C 

enrollees had drug coverage in a basic 

plan (zero premium or mandatory 

premium), 57 percent of rural enrollees 

had this level of drug coverage. For the 

March 2004 benefit offerings, this 

difference between rural and urban 

areas persists. Zero premium plans are 

available to 68 percent of urban 

beneficiaries in counties where there are 

plans, but only 30 percent of the 

beneficiaries who live in a non-MSA 

county in which there is an operating 

MA coordinated care plan or 

demonstration PPO have access to a 

zero premium plan. In rural areas, 72 

percent of those with access to a plan 

can obtain drug coverage through a 

private plan, while in urban counties 

with plans available, 95 percent of 

beneficiaries have access to a drug 

coverage plan. 

This difference between urban and 

rural areas may persist among MA local 

plans, which can vary benefits by 

county. With MA regional plans, there 

is a requirement that benefits must be 

uniform throughout the entire region. 

Hence, regional plans cannot offer 

different benefits in rural and urban 

counties, which will eliminate the 

disparity between such counties in the 

regional plan arena. However, there may 

be differences between regions in the 

generosity of benefits regional MA plans 

offer, and the degree of disparity would 

depend in part on the make-up of the 

regions, which CMS will determine at a 

later date. 

Table 3 illustrates the variation that 

exists in current coordinated care plan 

offerings across States. The table lists 

the types of MA benefit packages 

available in the counties of each State in 

which plans are available (coordinated 

care plans and PPO demonstration 

plans). The counties are categorized by 

the most generous benefit package being 

offered by at least one plan in each 

county. The table indicates whether the 

State has any counties in which there 

are (a) zero premium plans with drug 

coverage included in the zero premium 

plan, (b) plans with zero premium but 

no drug coverage, (c) plans that include 

drug coverage in a benefit offering for 

which there is a premium, and (d) 

counties in which plans charge a 

premium but no drug coverage plan is 

offered. This kind of benefit variation at 

the State level will not occur with 

regional plans because of the uniform 

benefit requirement, as noted above, and 

because Medicare will now include a 

drug benefit. 

BILLING CODE 4120–01–P 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46929 

BILLING CODE 4120–01–C High penetration in MA plans may 

affect the Medigap market. To the extent 

that Medicare beneficiaries will be 

leaving Medigap plans to join MA plans, 


EP03AU04.002</GPH>
46930 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

or will join MA plans on becoming 

eligible for Medicare rather than 

choosing fee-for-service Medicare with 

Medigap coverage, there is a potential 

effect on the cost of Medigap premiums 

in some markets. If fewer new enrollees 

enroll in Medigap plans, and if MA 

continues to enroll disproportionately 

younger beneficiaries, premiums will 

rise as Medigap subscribers age and use 

more services. As premiums rise, the 

premium rate may cause some 

subscribers to discontinue Medigap 

coverage (in favor of MA enrollment, or 

fee-for-service coverage without a 

supplement), causing a further increase 

in Medigap premiums as only the 

subscribers with the greatest perceived 

health care expenditures maintain their 

Medigap coverage. If MA plans continue 

to attract younger or healthier 

beneficiaries, and relatively older or 

sicker beneficiaries remain in fee-forservice Medicare, there is a further 

potential Medigap effect leading to 

rising premiums. The Medigap effects 

can potentially have a greater impact on 

rural areas in a State (where Medigap is 

a more common form of supplemental 

coverage than in non-rural areas). 

Because most Medigap plans are rated 

on a statewide basis, if the movement 

away from Medigap to MA plans is the 

result of the ability of urban local plans 

to offer extremely generous benefits that 

regional plans are unable to match, the 

market changes in the urban area(s) 

could cause Medigap premium rates to 

rise for all the State’s beneficiaries, even 

for those beneficiaries that may not have 

the range of choices available to urban 

areas. With regard to any Medigap 

effect, however, it should be noted that 

the most recent trends in the data from 

the Medicare Current Beneficiary 

Survey for 2001 show a significant rise 

in the number of beneficiaries with 

Medigap coverage, possibly due to the 

decline in the availability of employersponsored retiree coverage. 

F. Effect on Health Plans and Insurers 

Health plans will see significant 

benefits as a result of the MMA through 

the transfer payments from the Federal 

Government to participating plans. Plan 

payments will increase significantly, 

allowing plan revenues and profits to 

rise as enrollment increases with the 

offering of better benefits. Organizations 

that currently contract with Medicare 

will have new market opportunities as 

regional plans and opportunities to 

expand their participation as local plans 

(other than as PPOs at a local level, 

which are prohibited from being newly 

formed for an interim transition period, 

2006 to 2007). Organizations that are not 

currently participating in Medicare will 

have a more favorable market 

environment for participating as local or 

regional plans. 

The Federal Government transfer 

payments to health plans over and 

above what would have been paid in the 

absence of the law, as a result of the 

Title II provisions of the MMA, are 

expected to total $23.4 billion. Of this 

amount, plan administrative costs 

(which include profits and retained 

earnings) are expected to total $1.2 

billion (over and above amounts that 

otherwise would have been paid). The 

remaining amounts will finance the 

provision of health care benefits 

(together with other revenue the plan 

has, such as member premiums). The 

benefits to health plans will vary 

geographically, depending on 

benchmarks and the cost of doing 

business for the plans. The 

administrative cost figure cited here for 

the plans includes projected start-up 

costs for new organizations becoming 

Medicare contractors. The estimates of 

benefits related to MA plans for 2004 

through 2009 are shown in Table 4. (The 

basis for these projections is discussed 

in the section on effects on 

beneficiaries, in the discussion of Table 

2.) 

TABLE 4.—PROJECTED BENEFITS TO MA PLANS RESULTING FROM TITLE II PROVISIONS OF THE MMA, YEARS 2004 TO

2009, IN MILLIONS (AMOUNTS ABOVE AMOUNTS IN ABSENCE OF MMA TITLE II PROVISIONS); PROJECTED TOTAL

PLAN ENROLLMENT, 2004 TO 2009, IN MILLIONS

Year 

2004 

Year 

2005 

Year 

2006 

Year 

2007 

Year 

2008 

Year 

2009 

Total, years 

2004–2009 

Enrollment Projection, Local Plans ...................................................... 4.662 5.088 6.449 6.547 6.685 6.825 ........................

Enrollment Projection, Regional Plans ................................................ ............ ............ 3.064 4.665 5.534 6.815 ........................

Total Value of Transfer Payments Used for the Provision of Medicare A and B Benefits, Local Plans ................................................. 1,430 2,155 2,356 1,894 1,590 1,299 10,724 

Total Value of Transfer Payments Used for the Provision of Medicare A and B Benefits, Regional Plans ........................................... ............ ............ 1,225 2,990 2,978 2,966 10,159 

Total Value of Transfer Payments—Plan Administrative Costs (Including Profit), Local Plans .............................................................. 174 262 286 230 193 158 1,303 

Total Value of Transfer Payments—Plan Administrative Costs (Including Profit) Regional Plans .......................................................... ............ ............ 142 345 344 343 1,174 

Total Value of Transfer Payments to Plans, Both Types of Plans ..... 1,604 2,417 4,009 5,459 5,105 4,766 23,360 

As between regional and local plans, 

and the choice that an organization can 

make, regional plans, as described 

elsewhere, have a number of financial 

incentives. Local plans have the 

advantage of being able to selectively 

market to Medicare beneficiaries in that 

they can make decisions on a county 

basis. Local MA plans can choose 

whether or not to serve a particular 

county, and they can also vary benefits 

and premiums by county under one 

contract by segmenting larger service 

areas to as small a unit as a single 

county. The uniform benefit 

requirement applies to local plans at the 

service area or segment level, while 

regional MA plans, as previously noted, 

must have a uniform benefit in the 

entire region (for each of the plans that 

an MA regional organization offers in a 

region, each of which must be offered 

on a region-wide basis). One 

organization may offer both local and 

regional plans. The possible 

consequences of these differences in 

service area configurations are 

discussed further in the section on 

alternatives considered. 

Although we have emphasized the 

additional benefits that we expect plans 

to be able to offer, by having eliminated 

the adjusted community rate process 

and its requirement that permissible 

plan profit levels must be the same as 

for a plan’s commercial product, and 

having eliminated the limit on 

premiums related to cost sharing for 

Medicare-covered benefits, plans can 

potentially increase their profit levels, 

as their competitive situation permits. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46931 

Plans with bids exceeding the 

benchmark can also be assured of 

having adequate revenue to operate as 

Medicare plans. These provisions may 

lend stability to the program in allowing 

plans to make adjustments to revenue 

needs from one year to the next without 

facing statutorily imposed limits on 

their ability to generate needed revenue. 

There are a number of statutory and 

regulatory provisions which reduce 

burden on Medicare plans, including 

the statutory changes that eliminated 

the reporting requirements relating to 

physician incentive plans, and the 

major changes in the quality assurance 

standards for plans. As discussed 

elsewhere, this proposed rule also has 

several administrative changes that will 

reduce plan burden, including the fileand-use approach to marketing material 

review, elimination of plan disclosure 

requirements that are redundant, and 

provisions that streamline the appeals 

procedure as regards notices to 

beneficiaries. 

In terms of estimating the impact of 

these changes, the physician incentive 

plan (PIP) burden reduction was 

previously codified in regulation CMS–

4041–F on August 22, 2003 and 

effective September 22, 2003. In the 

regulatory impact statement of that rule 

(pages 50,853 and 50,854 of the Federal 

Register) we said: ‘‘We find that overall 

the economic impact of this final rule is 

positive, due to * * * the reductions in 

regulatory burden due to * * * the 

reduction of the physician incentive 

reporting requirements * * * The data 

available do not allow us to determine 

the distributional effects * * * We have 

not considered alternatives to lessen the 

economic impact or regulatory burden 

of this final rule because the regulatory 

burden is reduced * * * ’’ We have no 

new data at this time that would alter 

the analysis and conclusions drawn in 

the prior rule. 

With regard to the ‘‘file and use’’

policy, we are codifying in regulation a 

previously existing program tolerance. 

The ‘‘burden reduction’’ actually 

associated with ‘‘File and Use’’ is 

minimal for two reasons. The first is 

that it represents a ‘‘tolerance’’ already 

in use; so additional burden reduction 

is non-existent. Second, File and Use is 

simply permission to publish (or use) 

certain marketing materials prior to 

CMS review and approval. To the extent 

that MA plans ‘‘earn’’ (or qualify for) 

File and Use status, the only advantage 

gained and the only burden reduction 

available to them is that MA plans 

qualifying for File and Use will not need 

to wait for CMS approval prior to using 

specific marketing materials. Finally, 

CMS does not currently collect data nor 

does it have information on the 

distributional impact of the currently 

existing Use and File program, so it is 

impossible to project the precise impact 

that File and Use will have on 

organizations qualifying for it. 

We remove certain plan disclosure 

requirements from § 422.111(f). These 

disclosure requirements all are 

information that MA organizations must 

provide ‘‘upon request.’’ We have no 

data that would help us quantify the 

actual level of burden reduction. We 

note that CMS initiated this burden 

reduction. To the extent that MA 

organizations did not bring the burden 

associated with these disclosure 

requirements to our attention as part of 

the regulatory reform initiative, they 

probably also have not actually been 

called upon to so disclose through 

actual requests for such information. 

Therefore, the level of administrative 

burden mitigation is likely negligible. 

As stated in the preamble, we request 

suggestions for other burden-reducing 

reforms or innovations that will 

improve the ability of plans to 

participate in the program without 

compromising quality or services. We 

are particularly interested in comments 

on whether, within the statutory 

construct, there are structural or 

administrative requirements in the MA 

program that would act either as a 

barrier to plan entry into the MA market 

or would adversely impact plan 

participation, and consequently, 

beneficiary choice. 

Other Effects. Although most 

Medicare health plans and organizations 

that can participate as MA plans stand 

to benefit from the MA provisions, as 

previously noted Medigap insurers may 

face price pressures and see declining 

enrollment if MA enrollment increases 

to the level that CMS projects, and if 

fewer individuals in fee-for-service 

Medicare buy Medigap, though there is 

the mitigating factor previously 

discussed regarding the trend of an 

increase in the number of Medicare 

beneficiaries with Medigap policies. It 

should be noted that many of the 

insurers that offer Medigap coverage are 

companies that also operate health 

plans and are already, or can become, 

local or regional MA plans. 

Medicare Advantage private fee-forservice plans are another class of insurer 

that may see changes in the competitive 

environment. To date, such plans have 

operated primarily in ‘‘floor’’ counties 

(counties in which, because of the BBA 

and BIPA payment rules, health plan 

payment rates are higher than estimated 

fee-for-service Medicare costs). Private 

fee-for-service plans generally have not 

competed directly against coordinated 

care plans. Private fee-for-service plans 

offer less generous benefit packages than 

MA coordinated care plans, but they do 

offer some level of supplemental 

coverage for individuals (including, in 

the case of two organization, drug 

coverage), and they offer an advantage 

that some beneficiaries prefer, which is 

that there is not a limited network of 

providers that must be used to obtain 

covered care. As a consequence of the 

MMA, where there are regional MA 

plans, regional plans would have a 

competitive advantage over Medicare 

private fee-for-service plans that had 

usually targeted areas in which there 

were no MA local plans. MA regional 

plans can offer coverage for out-ofnetwork care, and they are likely to be 

able to offer a significant level of extra 

benefits because of the financial 

incentives in the MMA. (As stated 

elsewhere in the preamble, regional MA 

plans may not be private fee-for-service 

plans; regional plans must operate as a 

PPO model. All but one of the current 

private fee-for-service plans is 

sponsored by an organization that is 

part of a firm that has local MA plan 

contracts—though the one exception is 

the largest PFFS plan.) 

G. Effects on States 

States may see benefits from Title II 

of the MMA if more Medicaid 

beneficiaries who are also entitled to 

Medicare A and B coverage (the dual 

eligible population) enroll in private 

Medicare plans. Because MA enrollees 

are likely to receive non-Medicarecovered benefits (such as vision care), 

dual eligible enrollees would receive 

benefits that the States would otherwise 

have had to pay for. States may benefit 

from reduction of the Part B premium 

which the State would otherwise pay for 

dual eligibles. It should be noted that to 

date, the enrollment level of dual 

eligibles in Medicare plans is not as 

high as it could be (see Edith G. Walsh 

and William D. Clark, ‘‘Managed Care 

and Dually Eligible Beneficiaries: 

Challenges in Coordination,’’ Health 

Care Financing Review, fall 2002, 

volume 24, number 1). A number of 

factors could contribute to greater 

enrollment of dual eligibles in MA 

plans: the extension of plan availability 

across an entire State (as part of a 

regional plan), the likelihood of Part B 

premium rebates (which the State 

would be entitled to), and the 

designation in the law of dual eligibles 

as a category for purposes of 

determining whether an MA plan is a 

specialized plan. As also noted 

previously, dual eligible individuals do 

not have the same incentives to enroll 

in MA plans as other low-income 

46932 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Medicare beneficiaries. In certain 

circumstances, a State may require the 

enrollment of dual eligibles in MA plans 

(if, for example, the plan is also a 

Medicaid health plan and the State has 

a waiver permitting mandatory health 

plan enrollment for Medicaid 

beneficiaries). 

The direct effect on the States of the 

expansion of the premium tax 

prohibition is discussed in the section 

on unfunded mandates. The MMA 

changed the law to exempt from State 

premium taxes the premiums paid by 

beneficiaries, as well as Federal 

payments to plans (which the law 

already exempted). This provision by 

itself has a relatively minor effect on 

State revenues, given the prevalence of 

zero-premium MA plans and given the 

expected trend in MA benefit packages 

towards more zero-premium products. 

However, an indirect effect of the 

premium tax prohibition is that, to the 

extent that there are reductions in the 

number of beneficiaries who hold 

Medigap policies, States may lose 

premium tax revenue that would have 

been derived from Medigap policies (the 

entire premium of which is generally 

taxed). As previously discussed, it is 

unclear what the impact will be if there 

is such an effect, given the trend of 

greater numbers of beneficiaries with 

Medigap coverage. 

H. Effect on Employers and Unions as 

Sponsors of Retiree Coverage 

Historically, Medicare-contracting 

health plans that contracted with 

employer or union groups to provide 

benefits had to comply with the same 

Medicare regulatory requirements that 

apply to all Medicare-contacting health 

plans. In 2000, section 617 of the 

Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA) added a new 

authority at section 1857(i), effective 

2001, that provided CMS broad 

authority to waive or modify 

requirements that hinder the design of, 

the offering of, or the enrollment in 

M+C plans under contracts between 

M+C organizations and employers, labor 

organizations, or the trustees of a fund 

established to furnish benefits to an 

employer’s current or former employees 

or to a labor organization’s current or 

former members. 

Three types of waivers have been 

approved under the BIPA authority 

which are discussed in a August 22, 

2003, Federal Register notice on p. 

50845. The three types of waivers are: 

(1) M+C organizations are allowed to 

offer employer-only plans that are not 

open to individuals and plan marketing 

materials do not have to be submitted 

for CMS review and approval; (2) M+C 

organizations are allowed to ‘‘swap’’

benefits not covered by Medicare of 

approximately equal value when an 

employer asks for a benefit package 

different from what is offered on the 

individual market; and (3) M+C 

organizations are allowed to raise the 

co-payments for certain benefits but to 

provide a higher benefit level or a 

modification to the premium charged as 

long as projected beneficiary liability is 

actuarially equivalent. These waiver 

authorities also will continue for MA 

organizations. 

Section 222(j) of the MMA adds 

another authority for employer or union 

sponsored plans, effective 2006, at 

section 1857(i)(2) of the Act for CMS to 

waive or modify requirements that 

hinder the design of, the offering of, or 

the enrollment in an MA plan offered 

directly by an employer, a labor 

organization, or the trustees of a fund 

established by employers or labor 

organizations to furnish benefits to 

current or former employees or to 

current or former members of labor 

organizations. This authority is added in 

the proposed rule at § 422.106(d). We do 

not know to what extent employers or 

labor organizations may be interested in 

pursuing waivers under this new 

authority. For an employer or union to 

contract in this manner may require that 

the employer or union obtain State 

licensure as a risk-bearing entity and 

meet any licensure and solvency 

standards imposed by the State for 

health plans. To the extent that such 

licensure would be required, there may, 

however, be a few entities that already 

offer health insurance for their own 

employees or offer insurance on the 

market that may be interested. 

However, we do believe that there is 

likely to be a significant increase in the 

number of retirees whose employer or 

union provides retiree coverage through 

an MA plan because of the additional 

payments MA plans will receive (so that 

benefits that otherwise would have been 

financed by the employer or union can 

be financed by Medicare payments), and 

because regional plans will be available 

that can cover wider geographic areas 

and meet the needs of employers with 

retirees residing throughout a large 

geographic area, or dispersed across 

many geographic areas. 

As of January 2002, about 18 percent 

of enrollees in Medicare+Choice plans 

were employer- or union-sponsored 

retirees (see Hileman et al., previously 

cited). There are 1.1 million 

beneficiaries residing in counties in 

which only employer-sponsored retirees 

or dependents may enroll in MA plans 

operating in those counties. This 

particular market segment is attractive 

to MA plans for a number of reasons, 

including the ease of marketing to a 

large group, their status as previously 

insured individuals, and the ability to 

offer seamless continuation of coverage 

between active worker status as a plan 

enrollee and retiree status. The regional 

PPO model may also facilitate the 

ability of plans to serve this population 

to the extent that retirees no longer 

reside near their place of work. 

According to a 2003 Hewitt-Kaiser 

Family Foundation survey of large 

employers, 21 percent of employers 

with 1000 or more employees require 

new Medicare-eligible retirees to pay 

100 percent of the plan premium. The 

survey also found that, with regard to 

future trends, ‘‘Serious consideration is 

also being given to only providing 

access to health benefits and asking 

retirees to pay 100 percent of costs; 26 

percent of firms said that they are very 

or somewhat likely to make such a 

change.’’ (Frank B. McArdle, et al., 

‘‘Large Firms’’ Retiree Health Benefits 

Before Medicare Reform: 2003 Survey 

Results.’’ Health Affairs, web exclusive, 

January 14, 2004.) MA plans are a likely 

vehicle for employers to offer health 

plans under these circumstances. 

I. Effect on the Federal Government 

The benefits to beneficiaries and 

private health plans are the result of 

transfer payments from the Federal 

Government to plans, or, in the case of 

reductions in the Part B and Part D 

premiums, transfer payments directly to 

beneficiaries. For the period 2004 

through 2009, the total amount of such 

transferred funds is projected to be 

$23.4 billion above what would 

otherwise have been incurred in the 

absence of the Title II provisions of the 

law. The total expenditure figure 

assumes that $5.2 billion of the 

stabilization fund dollars for regional 

MA plans are used in the period 2004 

through 2009. The preceding figure 

assumes a private plan penetration rate, 

for illustrative purposes, of 33 percent 

by 2009. We have not separately 

projected an administrative cost to the 

Government for the administration of 

Title II of the MMA separate from 

administration of all portions of the 

MMA taken together. 

The section on alternatives 

considered examines the impact on 

expenditures in choosing between 

statewide and plan-specific risk 

adjustment to determine rebate 

amounts. Another issue that has an 

effect on expenditures is the payment 

adjustment relating to risk adjustment 

for bids that exceed the benchmark. 

Proposed § 422.308(e), discussed in 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46933 

subpart G of the preamble, would 

implement section 1853(a)(1)(G) of the 

Act, which requires CMS to make 

certain plan payment adjustments to 

take into account the health status of a 

plan’s enrollees. For plans bidding 

above the benchmark, this provision 

would ensure that the total revenue a 

plan receives for its actual enrollees 

matches the plan’s required revenue. 

The 1853(a)(1)(G) provision requires 

CMS to adjust plan payments in 

recognition of the amount that a health 

plan receives as a basic premium from 

its enrollees. The basic member 

premium that plans actually will charge 

is the premium for a ‘‘1.0’’ beneficiary—

that is, it is determined based on the 

revenue needs for a person with average 

health status. For a plan with a risk 

score above 1.0 (that is, the plan has 

enrollees that are sicker than average 

and utilize more services), there would 

be an additional payment from 

Medicare to provide the plan with 

revenue that covers the shortfall 

between the basic premium determined 

for a 1.0 enrollee, and the actual 

revenue necessary from member 

premiums. (Under the current system, 

and through 2005, in such a case 

enrollees would be charged a higher 

plan premium to cover the needed 

revenue that matches their enrollees’

actual utilization patterns.) 

A similar adjustment would be made 

for plans with risk scores below 1.0. A 

plan with a risk score below 1.0 would 

have determined its basic premium for 

a 1.0 person, and enrollees will be 

charged that level of premium. This 

provides the plan with more revenue 

than it needs. Consequently, the section 

1853(a)(1)(G) provision would call for a 

reduction in Medicare’s payment to the 

plan in recognition of the additional 

revenue that comes from member 

premiums that are determined for a 1.0 

beneficiary. 

The budgetary impact of this 

provision depends on the number of 

plans that would have bids above the 

benchmark, and the health status of 

enrollees in such plans. One would 

assume that the majority of 

organizations deciding to enter the 

Medicare market would like to be able 

to offer extra benefits at no cost, or at 

little cost, to prospective enrollees. 

Therefore there may be few plans that 

bid above the benchmark, and those that 

do so would try to limit the basic 

premium to an amount that would 

attract a sufficient number of 

beneficiaries. However, bids above the 

benchmark may arise (a) in certain 

areas—for example, in areas where there 

may be only one or two plans, or (b) in 

certain competitive situations—for 

example, when the reason for a bid 

above the benchmark is that the plan 

offers coverage that is expensive but has 

features that appeal to beneficiaries 

(such as a wide network of providers, 

particular ‘‘marquee’’ providers in the 

network, or generous out-of-network 

coverage). 

With respect to the risk profile of 

plans that may be bidding above the 

benchmark, currently private plan 

enrollees are healthier on average than 

Medicare beneficiaries in traditional feefor-service. If plans bidding above the 

benchmark have healthier-than-average 

enrollees, the budgetary impact of the 

1853(a)(1)(G) provision would actually 

be net program savings as beneficiaries 

bear some extra cost in their plan 

premium. If today’s patterns of 

enrollment continue, there may be such 

program savings: looking at the subset of 

plans that currently charge a premium 

for Medicare-covered services compared 

to plans that have no premium charge 

for Medicare-covered services (a rough 

type of proxy for determining whether 

a bid will be above the benchmark), the 

risk status of enrollees of plans in which 

there is no premium is below 1.0 but 

closer to 1.0 than among plans charging 

a premium. The latter group of plans 

have risk scores that are also below 1.0, 

but the risk scores are about 10 percent 

lower—that is, risk scores show that 

enrollees are healthier—than the risk 

scores of plans that have no premium 

charge for Medicare-covered services. 

In summary, the 1853(a)(1)(G) risk 

adjustment provision, which may have 

limited applicability if few plans bid 

above the benchmark, may result in 

program savings. There is also an 

impact on beneficiaries, who will have 

higher premiums in plans with bids 

over the benchmark with healthier-thanaverage enrollees, and lower premiums 

in such plans with sicker-than-average 

enrollees, as compared to a system in 

which the plan premium is risk 

adjusted. 

J. Administrative Costs 

The administrative cost estimates for 

MA plans included in the section on 

effects on health plans and insurers are 

based on the administrative costs 

currently incurred by Medicare 

Advantage plans. The administrative 

cost figures shown in Table 4—at 10 

percent of revenue—include both costs 

to administer the program and the profit 

or retained earnings of health plans. 

Administrative costs for local plans and 

regional plans are considered to be 

roughly the same based on the reported 

administrative costs of current MA 

plans that are PPOs and HMOs 

(weighted by enrollment). 

K. Analysis of Effects on Small Entities 

The Regulatory Flexibility Act (RFA) 

requires us to determine whether a 

proposed rule will have a ‘‘significant 

economic impact on a substantial 

number of small entities.’’ If so, the RFA 

requires that an Initial Regulatory 

Flexibility Analysis (IRFA) be prepared. 

Under the RFA, a ‘‘small entity’’ is 

defined as either a small business (as 

defined by the size standards of the 

Small Business Administration, or 

SBA), a non-profit entity of any size that 

is not dominant in its field, or a small 

governmental jurisdiction. The SBA size 

standard for ‘‘small entity’’ health 

insurance plans is annual revenue of $6 

million or less. 

The direct effects of Medicare 

Advantage fall primarily on insurance 

firms and on individual enrollees. The 

competitive market created by Medicare 

Advantage is likely to have long run 

indirect effects on health care providers, 

such as hospitals, physicians, and 

pharmacies, depending on the extent to 

which MA plans attract enrollees. 

However, those effects will result from 

the workings of market choices made by 

enrollees, plans, and providers, not from 

specific provisions of these proposed 

rules. (There is an MMA provision for 

paying certain ‘‘essential hospitals’’

higher rates for participation in the MA 

program; which we analyze below.) 

Therefore, we primarily analyze effects 

on the insurance industry (including 

HMOs as insurers) in this IRFA. We 

welcome comments on this approach 

and on whether we have missed some 

important category of effect or impact. 

We do not believe that these proposed 

rules will create a significant economic 

impact on a substantial number of small 

entities. 

However, we have prepared a 

voluntary IRFA. Under longstanding 

HHS policy we prepare an IRFA if 

significant impacts of a proposed rule 

on small entities are positive rather than 

negative. We also prepare an IRFA if we 

cannot be certain of a conclusion of no 

‘‘significant impact’’ on less than a 

‘‘substantial number.’’ In this case, the 

statutory reform is so major and the 

number of regulatory changes so large 

that we cannot be certain of our 

conclusion. Finally, we generally 

prepare an IRFA if there is likely to be 

substantial interest on the part of small 

entities. Essentially all of the insurance 

firms affected by the statute and our 

proposed rules exceed size standards for 

‘‘small entities’’ within the meaning of 

the RFA and implementing SBA 

guidelines, which state that an 

insurance firm is ‘‘small’’ only if its 

revenues are below $6 million annually. 

46934 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

We note that under prior law (continued 

unchanged for Medicare Advantage), no 

health insurance plan is normally 

eligible to participate in Medicare 

Advantage unless it already serves at 

least 5,000 enrollees, or 1,500 enrollees 

if it primarily serves rural areas. At the 

5,000-enrollee level, no plan would fall 

below the SBA revenue cutoff assuming, 

very conservatively, a $2,000 per 

enrollee cost. While a very small rural 

plan could fall below the threshold, we 

do not believe that there are more than 

a handful of such plans. In the 

InterStudy Competitive Edge HMO 

Directory for 2000, discussed below, we 

found only one rural HMO with a 

continuing enrollment level below 

1,500. Therefore, the statutory limits 

generally prevent any insurance firm 

defined as ‘‘small’’ pursuant to the 

RFA’s size standards from participating 

in the program. However, a substantial 

fraction of the insurance firms affected 

by these proposed rules are ‘‘small 

entities’’ by virtue of their non-profit 

status. The analysis in this section, 

taken together with the other regulatory 

impact sections, and the preamble as a 

whole, constitute our IRFA for the 

Medicare Advantage provisions of Title 

II of the MMA. We note that there is a 

related IRFA in the companion 

proposed rule on the Part D Drug 

Program of Title I of the MMA. 

1. The Health Insurance Industry 

The 1997 Economic Census: Finance 

and Insurance (the latest available 

edition) states that there were 944 firms 

classified as ‘‘Health and Medical 

Insurance Carriers’’ under the North 

American Industry Classification 

System. Of these, 851 firms operated the 

entire year. Using Census data, these 

firms had total revenue of $203 billion, 

operated through about 3,200 

establishments, and had about 328,000 

employees. Of the 851 firms that 

operated the entire year, 342 had 

revenues of less than $5 million. Taking 

into account subsequent inflation, this 

corresponds closely to the $6 million 

threshold established by the SBA as the 

current cutoff for small businesses in 

this insurance category. Thus, 

approximately 40 percent of the 

industry as counted by the Census is 

‘‘small’’ using the SBA definition. These 

small firms had total revenue of about 

$440 million, rather less than one half 

of one percent of total health insurance 

revenue. As discussed below, we do not 

believe that any of these small firms 

underwrite comprehensive health 

insurance policies, or are actual or 

potential competitors in the Medicare 

Advantage market. 

In contrast, the Census found that the 

largest 50 firms, or 6 percent, accounted 

for 75 percent of all health insurance 

revenue. While these data cannot be 

reconciled directly with other statistics 

on numbers and size of health insurance 

companies, they clearly indicate that the 

market for comprehensive health 

insurance policies, covering the lives of 

about 200 million Americans, is 

dominated by several hundred 

companies, few of which, and most 

likely none of which, are ‘‘small’’ by 

SBA revenue standards. 

Another source of industry data, 

much richer in detail, is found in the 

InterStudy Competitive Edge. This 

annual report covers only HMOs. The 

discussion that follows uses the 2000 

edition as reflecting most of the changes 

of the 1990s, but still close enough in 

time to the Census information to be 

roughly comparable. In 2000, there were 

560 HMOs. While these were all 

separately incorporated, many were 

subsidiaries of larger corporations. For 

example, the report lists 40 United 

HealthCare plans, 22 Aetna and 32 

Prudential plans (all owned by Aetna), 

31 Cigna plans, 10 Humana plans, and 

9 Kaiser plans. Ninety-seven of these 

HMOs enrolled 200,000 or more people 

(enrollment is a standard industry 

measure of size). The InterStudy data, 

using an enrollment cutoff of 3,000 to 

correspond roughly to the SBA $6 

million threshold, shows that only 5 

HMOs were continually operating 

entities (not entering or exiting the 

industry) with revenues below the SBA 

small entity threshold. 

Of the approximately 200 contracts 

under the current M+C program (this 

figure excludes demonstration 

contracts), only a handful have 

enrollment of fewer than one thousand 

or annual Medicare revenue of under $6 

million assuming, conservatively, 

revenues of $6,000 per enrollee 

(Medicare enrollees cost, and are 

reimbursed, more than double working 

age persons). Of course, these plans 

have other revenues from non-Medicare 

clients, and we are unaware of any 

current M+C organizations with 

revenues below the SBA threshold. 

(Note that the number of M+C contracts 

includes separate Medicare contracts 

held by a single firm in different parts 

of the country’as in the case of 

PacifiCare, for example, which has ten 

contracts in eight States.) 

These data show that few, if any, 

health insurance firms with revenues of 

$6 million or less underwrite 

comprehensive insurance in the 

national insurance market. Furthermore, 

discussions with Bureau of the Census 

staff indicate many and probably most 

of the smallfirms classified as insurers 

do not underwrite health care costs (that 

is, provide comprehensive health 

insurance), but are firms offering dental 

or medical discounts through small 

provider networks or offering 

indemnity-type policies paying, for 

example, a few hundred dollars a day 

for each day spent in a hospital. They 

would not even be licensed by States to 

offer comprehensive or group insurance 

policies. Therefore, we have no reason 

to believe that the creation of the 

Medicare Advantage program will have 

any positive or negative effect on 

‘‘small’’ insurance firms, with the 

possible exception of Medigap insurers. 

Some of these small firms may be 

Medigap insurers. For this limited 

group, the MMA has major 

consequences. Specifically, existing 

categories of Medigap policy that cover 

prescription drugs will become illegal to 

sell to new enrollees, and several new 

Medigap categories will be created. 

(These changes, however, are specified 

in the statute and are not subject to 

regulatory discretion). Furthermore, 

Medigap insurance is a unique type of 

product that does not involve accepting 

insurance risk for the full cost of health 

benefits, since Medicare itself remains 

the primary insurer. Therefore, it is 

unlikely that any consequential number 

of firms operating solely in the Medigap 

market would expect to operate in the 

Medicare Advantage market. Effects of 

the MMA on Medigap are discussed in 

more detail the economic effects 

analysis in the companion Title I 

proposed rule. 

Despite these conclusions, it is 

possible that there is some potentially 

burdensome effect on insurance firms 

we have failed to anticipate. We request 

comments on whether any provisions of 

these rules may inadvertently create 

problems or burdens for any ‘‘small’’

firms in the health insurance industry 

with annual revenues below $6 million. 

The definition of small entities under 

the RFA also encompasses not-for-profit 

organizations that are not ‘‘dominant’’ in 

their field. (HHS interprets ‘‘dominant’’

to mean national dominance). There are 

many large HMO companies that are 

non-profit. As of 2000, about 37 percent 

of HMO enrollment was in non-profit 

firms, and 152 of 558 HMOs, or 27 

percent, were non-profit (InterStudy 

Competitive Edge HMO Industry Report 

for 2000). None of these firms is 

nationally ‘‘dominant’’ in the health 

insurance industry although many firms 

achieve large market share in particular 

health care markets. 

About half of these firms already 

compete in the Medicare M+C market, 

and most are potential entrants or 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46935 

reentrants as local Medicare Advantage 

plans. According to the InterStudy data, 

about one third of HMOs currently 

participating in M+C are non-profit. 

Some HMOs, profit or non-profit, may 

be potential entrants in the new regional 

MA markets. This may depend, in part, 

on how we later define regional 

boundaries. It will certainly depend on 

how rapidly the non-profit firms grow 

by merger or make other market 

adaptations, such as adding PPO 

networks. However, relatively few HMO 

plans (in contrast to parent company or 

linked HMOs), operating through local 

HMO networks, are likely to be able to 

compete in a region encompassing large 

areas or several States and multiple 

health care markets. 

2. The Local Medicare Advantage 

Market and Small Entities 

Under Medicare Advantage, there are 

two distinct (though overlapping) 

markets: local and regional. All existing 

M+C HMO plans participate on a local 

area basis, typically covering the several 

counties encompassed in a metropolitan 

area. Because HMOs are most common 

in metropolitan areas, and especially in 

the largest metropolitan areas, existing 

plan availability and enrollment is 

concentrated in these. As discussed 

previously in this analysis, only about 

one fifth of U.S. counties, though over 

60 percent of the eligible population, 

have an M+C HMO plan available. The 

MMA makes one major change for local 

plans by significantly improving 

payment rates. This statutory change is 

already in effect and is not addressed in 

these proposed rules. These rules will 

have beneficial effects on local plans, by 

reducing some administrative burdens, 

but the changes we propose, singly and 

collectively, do not rise to the level of 

‘‘significant economic impact’’ on local 

HMOs. 

The other major changes of Medicare 

Advantage include the creation of a new 

regional plan structure to become 

operational in 2006, designed for and 

limited to PPO plans. The regional 

structure is intended to ensure that the 

entire beneficiary population, not just 

those residing in major urban centers, 

has access to alternative plans. As 

discussed elsewhere in this analysis, we 

assume that as a result of these changes 

private plans may attract as much as 

one-third of all Medicare enrollment by 

2009. 

Starting in 2006, local HMOs will face 

two new sources of competition. First, 

they will find themselves seeking to 

attract enrollees from a pool of eligible 

applicants who will now have Part D 

drug benefits as enrollees in FFS 

Medicare. Second, they will be 

competing against regional MA plans 

serving their areas. Regional plans will 

have some advantages specified in the 

statute, including access to the 

stabilization fund and, temporarily, to 

risk sharing with the government. It is 

possible that some existing local plans 

will lose some enrollment. The local 

HMOs will, however, have important 

assets including integrated benefit 

packages (as compared to free-standing 

PDPs), quite likely drug benefits at 

premiums lower than PDP premiums, 

and extra benefits (including rebates of 

the Parts B and D premiums) not 

available in FFS and possibly more 

generous than those available in 

regional MA plans. The local plans will 

have an existing customer base and preexisting networks in the areas where 

most beneficiaries live. Most compete in 

major metropolitan areas where 

Medicare payment rates are higher than 

in other areas that a region would 

encompass. Finally, many and perhaps 

most local plans are subsidiaries of large 

insurance firms that offer multiple 

product lines. These firms retain the 

ability to ‘‘mix and match’’ their product 

offerings to best advantage. Regardless, 

whether and how much any given plan 

loses or gains will primarily depend on 

its overall attractiveness (benefits, 

services, provider panels, out of 

network benefits, and premiums) 

compared to its competitors. Nothing in 

these proposed rules, as such, either 

favors or disfavors local plans when 

competing against regional plans. 

While it is impossible to predict the 

precise situations that these HMOs will 

face, or their responses, there are some 

lessons available from the FEHB 

Program experience. In that program, 

about 200 local HMOs co-exist in 

competition with about a dozen national 

PPO plans. Most HMOs compete in big 

city markets against 15 or 20 plans, both 

PPO and HMO. While HMO enrollment 

in the program has declined slightly in 

recent years, and almost half of all 

HMOs have left the program since their 

peak participation in the early 1990s 

(reflecting mainly industry 

consolidations), HMOs currently enroll 

about 35 percent of all Federal 

employees, and 9 percent of retirees, 

down only slightly from the peak levels 

of 39 percent and 10 percent, 

respectively, a decade ago. 

3. The Regional Medicare Advantage 

Market and Small Entities 

Starting in 2006, health insurance 

firms both profit and non-profit (and 

hence ‘‘small entities’’ under the RFA) 

will be able to compete as regional 

plans. As discussed elsewhere in this 

Preamble, we cannot yet predict how 

many regions there will be, or how their 

boundaries will be drawn. That decision 

is not a subject of these proposed rules, 

but will be announced administratively 

at a later time. 

A firm may compete in as many 

regions as it chooses, up to and 

including the entire nation. The chief 

constraint is that a plan must 

demonstrate that it has a region-wide 

network of providers. Elsewhere in this 

Preamble we ask for comments on some 

aspects of defining networks and 

network adequacy, but the alternatives 

under consideration would all allow 

normally operated PPOs reasonably 

feasible methods of building their 

networks. 

We know of one group of potential 

regional competitors who may be 

affected by regional boundary decisions. 

In recent years many Blue Cross/Blue 

Shield plans have merged within and 

across State lines. However, there still 

remain several dozen of these plans that 

operate on a state-delineated basis. 

While no decision we make on regional 

boundaries are not likely to adversely 

affect current plan operations or 

revenues, if these plans were not able to 

compete effectively in multi-State 

regions they might forego an important 

business opportunity. We request 

comments on whether these or any 

other types of plans face potential 

disadvantage and, if so, what steps 

could be taken by us to reduce such 

problems. However, we note that there 

are many ways by which health plans 

can compete on a regional or national 

basis, and that the Blue Cross plans 

themselves have a history of national 

cooperation in the FEHB program. 

Therefore, we are interested in 

suggestions not only for steps we might 

take, but that plans might take, to 

ameliorate any problems created by the 

regional structure. Additionally, a local 

plan may encompass all or most of a 

State, and/or operate in more than one 

State if it so chooses. Of course, regional 

plans have some advantages, but local 

plans have others. In other words, it is 

not clear whether, and, if so, the extent 

to which, regional boundary decisions 

potentially constrain plan participation 

in Medicare Advantage in any important 

way, and we request comments on this. 

We will also provide additional 

opportunities at a later time to comment 

on possible regional boundaries, as 

discussed previously in this Preamble. 

Another potential problem facing 

regional plans is the requirement, in the 

statute, that they apply for licensure in 

each State in which they operate. Since 

the statute preempts State standards for 

benefits, coverage, and provider 

networks, leaving effectively only 

46936 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

solvency standards as State-imposed 

requirements, we anticipate no 

important problems for plans. However, 

we request comments on any problem 

that the statute may create. In this 

regard, we note that at present some 

insurance carriers operate in multiple 

States, either directly or through 

subsidiaries, under the far more 

burdensome legal requirement of 

meeting every standard in each of those 

States. 

There is another problem that could 

be important to a plan far larger than the 

SBA size standard but nonetheless 

smaller than the plans serving hundreds 

of thousands or millions of enrollees. 

Organizing the full resources needed to 

compete effectively in the Medicare 

context will require substantial 

investments in acquiring and 

maintaining actuarial expertise, legal 

expertise, effective marketing, network 

building, benefit design, cost-control, 

disease management, formulary design, 

claims processing, financing, etc. There 

are economies of scale in health 

insurance (like many other businesses), 

and these presumably favor larger firms, 

all other things equal, up to some point. 

We are not aware of any industry 

studies that seek to measure the 

minimum size necessary for health 

insurance firms to compete effectively 

in local, regional, or national markets 

and request information on this 

question. However, to the best of our 

understanding any such barriers to entry 

or cost competitiveness are likely to fall 

well within the size of most firms 

competing today in such large systems 

as M+C, the FEHB Program, or the 

private employer market. However, if 

there are any statutory or regulatory 

requirements that impose unnecessary 

burdens on smaller firms otherwise able 

to compete effectively, we request 

comments and suggestions on these. 

In summary, the Medicare Advantage 

program, by having both a regional and 

local model, provides opportunity for 

health insurance entities of all types and 

most sizes (but probably not below the 

‘‘small’’ insurance entity cutoff level 

defined by the SBA, which is lower than 

appears viable for a comprehensive, 

risk-bearing insurance plan), and 

offering many different kinds of plans, 

to participate. That participation is more 

likely to take the form of local plans in 

the case of smaller and non-profit 

entities. However, the overriding 

objective of the regional plan model is 

to give beneficiaries access to and 

choice among integrated private plans 

that can offer comprehensive health 

insurance encompassing Medicare parts 

A, B, and D. This model is dictated in 

almost all its important details in the 

statute. We do have discretion on 

regional boundaries. If we later decide 

to design regions that make it harder for 

some non-profit entities to compete 

regionally, this will reflect a decision 

that the objectives of beneficiary access 

and choice take precedence. However, it 

is not clear that there is any real 

conflict, because an organization 

seemingly disadvantaged as a regional 

plan may be advantaged as a local plan. 

In fact, the local plan model provides 

significant flexibility in terms of letting 

plans define their own market and 

service areas, without having to meet 

the network adequacy and other 

requirements of the MA regional market 

area. 

Throughout this preamble we have 

identified regulatory alternatives that 

may lessen burden on entities of any 

size. We are particularly interested in 

comments on those that may 

differentially affect smaller insurance 

firms, and on identification of ways to 

alleviate unnecessary burden, consistent 

with the underlying purposes of the 

Medicare Advantage program. 

4. Hospitals 

An additional program under 

Medicare Advantage directly affects 

hospitals. HHS has long taken the 

approach of treating all hospitals as 

presumptive ‘‘small entities’’ within the 

meaning of the RFA, mainly because of 

the dominance of the non-profit model 

in the hospital industry (about 80 

percent) and also because most of the 

rest have revenues under the $29 

million SBA size threshold for 

hospitals. 

The MMA facilitates the inclusion of 

hospitals in regional networks in cases 

in which a plan and a hospital cannot 

reach an agreement on payment levels. 

As described in more detail under the 

Subpart C preamble section, if we find 

the hospital’s participation ‘‘essential’’

to meeting a plan’s network adequacy 

requirement, and the hospital can 

demonstrate to us that its costs are 

higher than the normal Part A payment 

it receives, then the MA plan can pay 

the normal amount and the network 

adequacy fund will pay the difference. 

The total amount available nationally 

for this purpose is $25 million in 2006 

(rising annually at the hospital market 

basket rate). 

This provision will most likely to 

occur in small towns and rural areas, 

particularly if such areas are served by 

only one hospital. It is impossible at this 

time to predict the frequency with 

which this situation will arise, since 

that depends on future bargaining 

among plans and hospitals, and on 

hospitals’ ability to demonstrate excess 

costs. Since the hospitals benefiting 

would otherwise serve Medicare 

enrollees at Medicare rates, the financial 

effects of this program on hospitals are 

positive. Likewise, by allowing regional 

plans to meet their network 

requirements at a reasonable cost the 

effects on them are positive. We note 

that over 700 rural hospitals are already 

paid at rates somewhat higher than 

would otherwise be applicable under 

Medicare’s hospital payment rules. 

Some of these would be candidates for 

‘‘essential’’ hospital payments (although 

the eligibility criteria are different). 

However, despite the large number 

involved (about one in seven hospitals 

participate), these are small hospitals in 

sparsely inhabited rural areas and 

account for only about one percent of 

Medicare hospital payments. The 

pattern under the essential hospital 

program is likely to be similar. 

We are not aware of any 

consequential burden on hospitals in 

our regulatory proposals for this 

program, but welcome comments. 

5. Medical Savings Accounts 

These regulations also change the 

rules for Medical Savings Accounts 

(MSAs), which are high deductible 

plans. This provides new opportunities 

for insurance firms to participate in 

Medicare Advantage. High deductible 

plans are increasingly being offered in 

the under age 65 market by large 

insurance firms. As discussed 

previously in this Preamble, we are 

implementing the statutorily defined 

changes (at section 233 of the MMA), 

which are intended to make MSAs a 

viable option for beneficiaries. We are 

also proposing to amend the existing 

rules in several places to remove 

requirements that would be 

inappropriate if applied to MSAs. 

Nothing we propose adds burden; we 

welcome comments on any remaining 

barriers to the sponsorship of MSA 

plans. 

6. Employer Sponsored Plans 

The MMA adds new authority for 

employers and unions to sponsor plans 

for their employees and former 

employees, or members. Previously they 

could sponsor plans through an M+C 

plan; the statute gives them the 

flexibility to sponsor plans directly. The 

statute and the proposed regulation 

provide for waivers of any Medicare 

Advantage requirement that would 

unduly impede employer or unionsponsored plans. We request comments 

on any potential barriers affecting 

employers of any size that we should 

address more directly. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46937 

7. Other Requirements in the Regulatory 

Flexibility Act 

The RFA lists five general 

requirements for an IRFA and four 

categories of burden reducing 

alternative to be considered. It also 

defines as a small entity a ‘‘small 

governmental jurisdiction’’ whose area 

has a population of less than fifty 

thousand. We anticipate no 

consequential effects of these 

regulations on small governmental 

jurisdictions. We know of no relevant 

Federal rules that duplicate, overlap, or 

conflict with the proposed rule (which 

in any event amends an existing rule 

that is not duplicated or overlapped by 

other rules). The analysis above, taken 

together with the rest of this preamble, 

addresses all these general 

requirements. 

We have not, however, addressed the 

various categories of burden reducing 

alternatives listed in the RFA as 

appropriate in IRFAs. These 

alternatives, such as an exemption from 

coverage of the rule for small entities, 

establishment of less onerous 

requirements for small entities, or use of 

performance rather than design 

standards, simply do not apply to a 

situation in which a program beneficial 

to entities both large and small is being 

created, and in which the regulations do 

not create economically ‘‘significant’’

burdens. Furthermore, the consumer 

choice-driven Medicare Advantage 

program is overwhelmingly a 

‘‘performance’’ system rewarding plans 

that operate at lower costs, provide 

better service, or provide better benefits 

as evaluated by enrollees and potential 

enrollees. CMS operates in a 

stewardship role, not as the promulgator 

of detailed design standards (except in 

a few areas, such as procedural 

protections for enrollees). However, 

throughout this Preamble we identify 

issues and options for attention by 

affected entities, including a number of 

proposed changes that would lessen the 

burden of the existing M+C rule. We 

welcome comments on these and 

suggestions for additional steps we can 

take, consistent with the underlying 

statute, to minimize any unnecessary 

burdens on current or potential 

Medicare Advantage plans or other 

affected entities. 

L. Alternatives Considered 

In this section we discuss a decision 

that CMS has made that prohibits plans 

from applying rebate dollars to optional 

supplemental packages. The remaining 

issues discussed in this section address 

the major areas in which CMS is seeking 

comment to determine which option to 

choose among the options offered in the 

preamble. As part of the impact 

analysis, we are providing supplemental 

information that will help readers of 

this proposed rule understand some of 

the issues that need to be considered in 

evaluating the options, or in suggesting 

alternatives that CMS should consider 

as options. 

1. Designation of Regions 

A number of considerations need to 

be balanced in designating the regions 

for the regional Medicare Advantage 

plans. The statute and the conference 

report for the MMA provide some 

guidance about what the Congress 

considers important factors in 

delineating regions, as has been 

discussed in the preamble. The 

designation of regions will be made after 

the market study required by the MMA. 

The law provides for a minimum of ten, 

and a maximum of 50, regions. There 

are provisions in the law that favor the 

development of multi-State regions (for 

example, the use of Federal licensure 

and solvency standards pending State 

licensure), or that favor the 

development of a national plan (the 

bonus for a national plan). As noted 

previously, one of the primary reasons 

for using the regional plan approach is 

to provide access to health plans for 

areas in which ‘‘local’’ plans are less 

likely to be offered. 

The major goal is to maximize access 

to a choice of private health plans in as 

many areas as possible. Therefore, an 

important question is what type of 

regional configuration, or method of 

configuring regions, has the greatest 

likelihood of extending private plan 

options to areas with no plans or to 

underserved areas. In terms of public 

comment, perhaps the greatest benefit 

for CMS would be to hear from plans 

and potential plans regarding the factors 

they would consider important in 

promoting plan participation. Similarly, 

other interested parties (beneficiaries, 

beneficiary advocates, providers), would 

also have opinions on how the regions 

should be delineated. We recognize that 

there are a number of factors that would 

affect any decision on the designation of 

regions, including State licensure issues 

for insurers and size and capital 

requirements for plans, as well as other 

potential barriers to initial or 

subsequent market entry; issues relating 

to the ability to form provider networks 

over a wide area; the nature of existing 

health care market areas for commercial 

and Medicare plans; the number of 

competitors that operate in an area or 

are likely to operate in an area; and the 

goal of initiating and sustaining 

competition. 

One obvious question is whether the 

regions should be comprised of the 

largest possible number (the 50 States, 

or a close approximation), or a 

configuration consisting of much larger 

geographic areas. Designating a 

relatively small number of large regions 

may be viewed as providing an undue 

advantage to larger companies (for 

example, the several insurance 

companies already licensed in virtually 

every State). A larger number of regions 

may promote the use of local or regional 

firms that may be better able to form 

networks because of their current 

operations in a given State, while an 

insurer that is new to the market may 

have more difficulty in network 

formation. On the other hand, to the 

extent that participation as a regional 

plan can involve a relatively high level 

of risk as a business venture, larger 

companies may be more willing, and 

better able, to take such risk. Economies 

of scale may only be possible if the 

regions are relatively large and are 

designed in such a way that a relatively 

high level of enrollment can be 

expected. A regional configuration that 

emphasizes large regions and results in 

a smaller number of large plans may 

permit participating plans to have 

greater leverage in securing provider 

contracts as compared to a situation in 

which there are many competitors in an 

area. Another factor that we are 

uncertain about is whether it is feasible 

to assume that, if there are multi-State 

regions, individual insurance 

companies would be willing to form 

consortiums with insurers from other 

States in order to cover a wider area. 

One possibility for the designation of 

regions is to have the 50 regions consist 

essentially of the 50 States. Such a 

configuration may not be the best way 

to ensure that the designation of regions 

contributes to the overall goal of 

maximizing the availability of health 

plan choices. New Jersey, for example, 

currently has plans available in every 

county in the State, including at least 

one MA coordinated care plan and one 

demonstration PPO plan in each county. 

There are nine counties in which only 

one organization is offering plans, but in 

all 21 New Jersey counties, there is a 

zero premium plan available with drug 

coverage. Making New Jersey a region, 

if a regional plan were to participate, 

would bring more competition to the 

State. However, including New Jersey as 

one State within a multi-State region 

might allow Medicare to capitalize on 

the presumed ability of the highly 

competitive New Jersey plans to extend 

their reach beyond New Jersey, and, as 

discussed previously, help to achieve 

46938 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the objective of expanding access to 

private plan choices. 

Using Florida as a different kind of 

example, if Florida by itself were 

designated as a region, and Florida had 

only regional plans, all beneficiaries in 

each Florida county would have the 

same kinds of benefit offerings. Looking 

at the current offerings of Florida MA 

plans as shown in Table 3, there is a 

range of benefit offerings in the State 

from county to county, but in all 

counties in which there are MA plans, 

drug coverage is available. Some Florida 

residents must pay a premium to obtain 

the drug coverage. With a regional plan, 

there would be a uniform benefit across 

the State, and the 19 percent of the 

population (560,000 beneficiaries) that 

currently does not have access to a 

private plan could enroll in a plan. 

The preamble discusses the kinds of 

State characteristics that we are looking 

to balance in the formation of regions. 

The statute emphasizes extending plans 

to rural areas. As shown in Table 5, the 

States with the smallest Medicare 

populations tend to have the highest 

proportion of rural beneficiaries as a 

percent of their Medicare population 

and also are more likely to be 

contiguous with each other. Could such 

States stand alone as individual regions? 

Would there be a sufficient market to 

support regional plans in each of these 

States, or do such small populations 

require multi-State regions? If it is 

assumed that multi-State regions must 

be comprised of States that are 

contiguous, is there a possible 

configuration of these smaller States 

that would create a region in which 

participation as a regional plan is a 

viable option for a health insurer? (Note 

that these States generally are among 

those with the lowest per capita 

expenditures. Although this might 

indicate that there may not be much 

opportunity for health plans to achieve 

savings in health care utilization or 

discounts from providers, it is also true 

these States are generally the areas in 

which the fee-for-service component of 

the benchmarks will be based on floor 

payments rather than Medicare fee-forservice payments, thereby resulting in 

potentially higher plan payments and 

possible higher rebates for enrollees.) 

BILLING CODE 4120–01–P 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46939 

At the other end of the scale are the 

most populous States, shown in Table 6. 

Potentially, each of these States could 

be designated a region (notwithstanding 


EP03au04.003</GPH>
46940 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

the preceding discussion of the case of 

New Jersey). Although the rural issue is 

generally thought of in the context of 

States such as the Mountain States that 

are sparsely populated, if access were 

extended throughout each of these 15 

primarily urban States, access will have 

been extended to 50 percent of all rural 

Medicare beneficiaries (defining ‘‘rural’’

as Medicare beneficiaries who reside in 

counties that are not within an MSA). 

This would triple the percent of rural 

beneficiaries with access to coordinated 

care plans (which stands at about 15 

percent currently). 

BILLING CODE 4120–01–P 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46941 

BILLING CODE 4120–01–C 


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46942 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

The conference report for the MMA 

contains two suggestions relating to the 

designation of regions that are difficult 

to reconcile: ‘‘The Secretary could not 

divide states so that portions of the state 

were in different regions’’ and ‘‘[t]o the 

extent possible, the Secretary would 

include multi-state metropolitan 

statistical areas (MSAs) in a single 

region, except that he or she could 

divide an MSA where necessary to 

establish a region of such size and 

geography to maximize the participation 

of PPOs.’’ There are 44 multi-State 

MSAs, with 37 States having at least one 

multi-State MSA. Looking at the 

location of these MSAs across the 

country, it would be necessary in many 

cases to divide MSAs between regions 

or to create very large regions. To divide 

MSAs, CMS would look to the analysis 

of health care markets and how they are 

configured, but we would also invite 

comment on other factors that we 

should consider when it appears 

necessary to divide an MSA so that a 

part, or parts of, the MSA fall within 

different regional boundaries. 

As discussed in the preamble, we will 

be conducting a market survey and 

providing additional opportunity for 

public input during the course of that 

work. We welcome comments in 

response to this proposed rule regarding 

the many considerations related to the 

designation of the regions for the MA 

program as well as for the PDPs and the 

potential for establishing the same or at 

least similar regional configurations. 

2. Statewide or Region-Wide Versus 

Plan-Specific Risk Adjustment To 

Determine Savings 

The issue of statewide or region-wide 

versus plan-specific risk adjustment is 

discussed in the section dealing with 

‘‘Calculation of Savings’’ (§ 422.264) in 

the text and preamble of the proposed 

rule. The statute and the proposed rule 

state that, for local plans, CMS may use 

either a statewide average risk adjuster, 

a risk adjuster for a geographic area 

different from a State (for example, a 

metropolitan statistical area), or a planspecific risk adjuster, to determine the 

average per capita savings that exist 

when there are bids below the 

benchmark. Similarly, for regional 

plans, CMS may use a region-wide 

adjuster, an adjuster for a different 

geographic area, or a plan-specific risk 

adjuster in determining average per 

capita savings. 

There are two reasons for applying 

risk adjustment to determine savings 

(which in turn determine the dollar 

value of available enrollee rebates). One 

is that if the savings computation were 

not subject to risk adjustment, plan 

enrollees overall would receive higher 

rebates than are appropriate because 

current enrollees in Medicare 

Advantage plans are on the whole 

healthier than beneficiaries with fee-forservice Medicare coverage (and, in the 

future if the situation is reversed, or if 

in a given area enrollees of health plans 

are sicker than those in fee-for-service 

Medicare, rebates would be lower than 

they should be). In other words, risk 

adjustment ensures that plans are paid 

appropriately for their enrolled 

population. The other reason for 

applying risk adjustment to the savings 

computation is that a comparison of the 

ability of health plans to achieve savings 

should be based on a comparison that 

takes into account the relative health 

status of each plan’s enrollees in 

evaluating whether one plan is more 

‘‘efficient’’ than another. To do 

otherwise would make two plans that 

are equally efficient look as though one 

plan (a plan with healthier enrollees) 

was more efficient than another plan (a 

plan with sicker enrollees) merely 

because on a per capita basis the 

enrollees of the latter plan are more 

costly than enrollees of the plan with 

healthier enrollees. If each of the plans 

is equally efficient, a risk adjustment 

system would reveal each plan’s per 

capita costs to be the same (assuming 

beneficiary characteristics other than 

health status are equal between the two 

plans). If, under a standard of relative 

efficiency, two plans are equally 

efficient, in principle their cost to an 

enrollee should be the same. If one plan 

is more efficient than another, 

beneficiaries would be rewarded for 

choosing the more efficient plan. 

The process called for in the statute 

for determining a statewide risk 

adjustment to compute savings for local 

plans is to compare a risk-adjusted 

benchmark against risk-adjusted bids. 

The benchmark, and all plan bids, 

would be adjusted by the average risk 

factor for enrollees in all local MA plans 

in a given State (an enrollment-weighted 

average that is projected and announced 

at the time CMS publishes MA rates for 

a forthcoming year). That is, there is an 

‘‘apples-to-apples’’ comparison of bids 

to the benchmark, and an ‘‘apples-toapples’’ comparison to other plans. The 

two numbers that are being adjusted, the 

benchmark and a plan bid, are numbers 

for an ‘‘average’’ beneficiary—a 

beneficiary with demographic and 

health status characteristics that 

represent an average across the entire 

Medicare population in the United 

States. That is, the benchmark and plan 

bids that are being adjusted, for 

purposes of determining the appropriate 

level of savings, are risk-neutral. (The 

plan bid that represents a bid for an 

average, or ‘‘1.0’’ beneficiary, is referred 

to in the statute as the ‘‘unadjusted MA 

statutory non-drug monthly bid 

amount.’’) 

In terms of the total dollars that will 

be available as rebate dollars, there is no 

difference, among equally efficient 

plans, between a statewide approach 

versus any other geographic area 

approach, or a plan-specific approach, 

to determining an appropriately riskadjusted savings. In terms of how one 

plan compares to another in 

‘‘efficiency,’’ a statewide risk adjustment 

system for rebates treats all equally 

efficient plans the same with respect to 

the dollar amount of rebates that are 

available for enrollees, regardless of the 

health status of the enrollees. Under a 

statewide system of determining 

savings, the adjustment is applied at an 

area-wide level when the savings 

computation is subject to risk 

adjustment. That is, the benchmark, and 

all bids for the State, are adjusted by the 

average risk factor across all plans. If, 

for example, the enrollment-weighted 

average risk factor across all plans is 1.1 

(110 percent of the risk factor for an 

average beneficiary), both the 

benchmark and all plan bids are 

adjusted by this factor to determine the 

dollar difference between the 

benchmark and each bid. In essence, 

this removes relative differences in risk 

among plans as a factor in determining 

how one plan’s bid compares to another. 

The only difference that remains among 

plans is any difference in bids that 

reflects the relative efficiency of one 

plan versus another. If all plans are 

equally efficient—that is, if, for 

example, all plans are able to provide 

the Medicare benefit at 80 percent of the 

benchmark level—all plans will have 

the same rebate dollar amount available 

per enrollee (representing 20 percent of 

the statewide or region-wide 

benchmark, adjusted by the statewide or 

region-wide average risk factor). A planspecific approach would incorporate 

into the savings computation a risk 

adjustment factor that can vary from 

plan to plan, yielding different dollar 

savings per person at the plan level but 

resulting in the same total dollar rebates 

when all plans are equally efficient 

because the statewide or region-wide 

method uses a weighted average risk 

factor across all plans. Assuming that all 

rebate dollars are used by all plans to 

reduce the Part B premium, and 

assuming the risk-adjusted average per 

capita savings had been computed as 

$25 per person per month, if an 

individual joins Plan X, with sicker 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46943 

beneficiaries, the person receives a $25 

reduction in his or her Part B premium, 

which is the same amount he or she 

would receive on joining Plan Y, with 

healthier beneficiaries. This $25 rebate 

would represent the same value to each 

beneficiary enrolled in either of the two 

plans because all beneficiaries across 

the Nation are faced with the same cost 

of paying the Part B premium, 

regardless of their health status or the 

State or county in which they live. 

However, if rebate dollars are used for 

other purposes, the value of the rebate 

in terms of its ‘‘buying power,’’ would 

vary from plan to plan based on the risk 

profile of the individual plan. Any plan 

feature that is more expensive if there is 

higher utilization—for example, the 

buy-out of cost sharing, or reductions in 

premiums for supplemental benefits 

offered by a plan—would have a 

different value in a plan with a healthier 

enrollment mix as compared to a plan 

with sicker enrollees. That is, it costs a 

plan more to ‘‘buy down’’ cost sharing 

for a sicker population than for a 

healthier population. Enrollees will see 

that difference as a difference in their 

out-of-pocket costs, which will be 

higher in a ‘‘sicker’’ plan. (For example, 

if plans have as their starting point an 

intent to have a $200 copayment for 

each hospital inpatient admission, and 

a plan wishes to reduce the copayment 

to $100 per admission by paying the 

provider an additional $100 per 

admission, the total revenue needed to 

finance this copayment reduction would 

be higher for a plan with higher rates of 

hospital admissions than a plan with 

lower admission rates. If plans have the 

same level of rebate dollars per capita, 

the ‘‘healthier’’ plan can afford enrollees 

a greater reduction in the hospital 

copayment (to $50, for example) 

because the average number of people to 

whom the copayment applies is lower 

than in a ‘‘sicker’’ plan.) 

The relatively higher cost of obtaining 

benefits through a ‘‘sicker’’ plan can be 

mitigated by having a plan-specific risk 

adjustment for the determination of 

savings. Plans with less healthy 

enrollees would have rebate amounts 

higher than other plans that are equally 

efficient but have healthier enrollees. In 

terms of what the benefits look like from 

an enrollee’s point of view, a planspecific adjustment can help achieve 

parity between ‘‘sicker’’ and ‘‘healthier’’

plans. However, as just discussed, a 

plan-specific approach, if used for a 

dollar reduction in the Part B premium 

that makes the ‘‘sicker’’ plan appear 

cheaper than the ‘‘healthier’’ plan 

defeats the purpose of a rebate, the 

value of which should only be based on 

relative efficiency. (As previously 

discussed, it should also be noted that 

plan features other than the premium 

are likely to show a ‘‘sicker’’ plan as a 

higher cost plan in terms of cost sharing 

that enrollees must pay or in terms of 

the level of extra benefits the plan is 

able to offer in comparison to a 

‘‘healthier’’ plan. Because of this, the 

plan-specific approach may be the more 

desirable approach if the goal is to 

achieve some type of parity between 

equally efficient plans.) 

As a possible basis for preferring the 

statewide approach, there is the 

argument that it is a normal insurance 

principle that one would expect 

enrollees of an insurance plan with a 

relatively sicker covered group to have 

to pay more than enrollees in a plan 

with a relatively healthier covered 

group. As for the plan-specific 

approach, it is also true that the 

differences in risk status among plans 

may even out over time if a planspecific adjustment is used. More 

enrollees will be drawn to the less 

expensive plan (the plan with the higher 

rebate, which may be less expensive for 

healthier enrollees, if, for example, extra 

benefits are the same as in other plans 

but cost sharing is higher). If 

beneficiaries make such enrollment 

choices, the risk profile of the ‘‘sicker’’

plan will change towards being closer to 

an average risk profile. Similarly, if a 

plan that has an apparent advantage in 

rebates because of selection (enrolling 

healthier enrollees) rather than because 

of efficiency, the plan’s relative 

inefficiency will be revealed in 

subsequent years to the extent that 

sicker beneficiaries choose to enroll in 

a plan offering better benefits or lower 

cost-sharing and premiums. 

The preceding discussion deals with 

plans that are equally efficient and the 

effects of plan-specific versus statewide 

risk adjustment in determining rebates. 

Additional issues arise if there is 

variation in efficiency among plans and 

variation in plan risk ‘‘profiles’’ (the 

makeup of the plan enrollment by 

health status). Using a statewide risk 

adjuster to determine rebates will result 

in higher program payments if efficient 

plans have relatively healthier enrollees. 

Using a plan-specific risk adjustment 

system will result in higher program 

payments if efficient plans have 

relatively sicker enrollees. In general, 

the lowest program expenditures will 

occur when the plans with the greatest 

savings are subject to the lowest 

possible risk adjustment of those 

savings—whether it is the plan-specific 

approach or a statewide or other 

regional approach. The different effects 

are illustrated in the hypothetical 

examples shown in Tables 7, 8, and 9. 

Tables 10 and 11 show a feature of the 

law that also affects the outcome, which 

is that plans in which there are no 

savings are also taken into consideration 

in determining the risk adjustment 

when a statewide or other region-wide 

method is used. 

Table 7 shows that when plans are 

equally efficient (that is, the savings for 

a 1.0 beneficiary is the same among 

plans), either risk adjustment method 

results in the same level of program 

payments, regardless of the relative risk 

profiles of each plan’s enrollees. Table 

8 shows that if the more efficient of the 

two plans (in this case, a far more 

efficient plan) has sicker enrollees, the 

plan-specific method yields higher 

rebates and greater program spending. 

Table 9 shows the situation in which 

the only difference, compared to the 

Table 8 scenario, is a reversal of the 

plan risk scores, with the more efficient 

plan having healthier enrollees. In such 

a case, the statewide approach yields 

higher rebates for plan enrollees and 

higher program spending. Tables 8 and 

9 illustrate that even though it is only 

the hypothetical Plan ABC that is 

efficient and has any appreciable 

savings, how these savings are 

translated into rebates is very much 

dependent on the characteristics of 

competing plans when the statewide or 

region-wide risk adjustment method is 

used. Similarly, Tables 10 and 11 

illustrate the same circumstances with 

regard to the effect of plans with no 

savings. Wide swings in the level of 

rebate dollars are possible under either 

method, but we cannot quantify the 

effect at this time without knowing the 

risk distribution of enrollees for 2006 

and the respective bids of the health 

plans. 

TABLE 7.—SAVINGS AND REBATES FOR EQUALLY EFFICIENT PLANS

Plan ABC Plan XYZ Totals 

Benchmark ............................................................................................................................................... $700 $700 ....................

Bid (for ‘‘1.0,’’ average risk individual)—Both plans equally efficient ...................................................... $600 $600 ....................

Enrollees .................................................................................................................................................. 1000 1000 2,000 

46944 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

TABLE 7.—SAVINGS AND REBATES FOR EQUALLY EFFICIENT PLANS—Continued 

Plan ABC Plan XYZ Totals 

Risk At Plan Level in Relation to 1.0—ABC Plan has sicker enrollees .................................................. 1.4 0.8 ....................

Enrollment-Weighted Statewide Average Risk Computation .................................................................. 0.70 0.40 1.10 

Savings With Statewide Method: Adjust Bid and Benchmark by Statewide Average Risk Factor 

Adjust Benchmark .................................................................................................................................... $770 $770 ....................

Adjust Bid ................................................................................................................................................. $660 $660 ....................

Per Capita Savings with Statewide Method ............................................................................................ $110 $110 ....................

Total Savings ................................................................................................................................ $110,000 $110,000 $220,000 

Savings With Plan-Specific Method: Adjust Bid and Benchmark by Plan-Specific Risk Factor 

Adjust Benchmark .................................................................................................................................... $980 $560 ....................

Adjust Bid ................................................................................................................................................. $840 $480 ....................

Per Capita Savings with Plan-Specific Method ....................................................................................... $140 $80 ....................

Total Savings ........................................................................................................................................... $140,000 $80,000 $220,000 

Computation of Total Medicare Payment to Plans and on Behalf of Enrollees 

Statewide—

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $840,000 $480,000 $1,320,000 

Statewide Rebate × Enrollment × .75 .............................................................................................. $82,500 $82,500 $165,000 

Total Payment to Plans ................................................................................................................ $922,500 $562,500 $1,485,000 

Per Enrollee Rebate ................................................................................................................................ $82.50 $82.50 ....................

Plan-Specific—

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $840,000 $480,000 $1,320,000 

Plan-Specific Rebate × Enrollment × .75 ......................................................................................... $105,000 $60,000 $165,000 

Total Payment to Plans ................................................................................................................ $945,000 $540,000 $1,485,000 

Per Enrollee Rebate ................................................................................................................................ $105 $60 ....................

Net Effect: Each Method Results in the Same Level of Program Payments 

TABLE 8.—SAVINGS AND REBATES WHEN EFFICIENT PLAN HAS SICKER ENROLLEES

Plan ABC Plan XYZ Totals 

Benchmark ............................................................................................................................................... $700 $700 

Bid (for ‘‘1.0,’’ average risk individual)—ABC Plan far more efficient ..................................................... $600 $699 

Enrollees .................................................................................................................................................. 1000 1000 2,000 

Risk At Plan Level in Relation to 1.0—ABC Plan has sicker enrollees .................................................. 1.4 0.8 

Enrollment-Weighted Statewide Average Risk Computation .................................................................. 0.70 0.40 1.10 

Savings With Statewide Method: Adjust Bid and Benchmark by Statewide Average Risk Factor 

Adjust Benchmark .................................................................................................................................... $770 $770 

Adjust Bid ................................................................................................................................................. $660 $769.99 

Per Capita Savings with Statewide Method ............................................................................................ $110 $0.01 

Total $$ of Savings ....................................................................................................................... $ 110,000 $11 $110,011 

Savings With Plan-Specific Method: Adjust Bid and Benchmark by Plan-Specific Risk Factor 

Adjust Benchmark .................................................................................................................................... $980 $560 

Adjust Bid ................................................................................................................................................. $840 $559.99 

Savings with Plan-Specific Method ......................................................................................................... $140 $0.01 

Total Savings ................................................................................................................................ $140,000 $8 $140,008 

Computation of Total Medicare Payment to Plans and on Behalf of Enrollees 

Statewide—

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $840,000 $559,992 $1,399,992 

Statewide Rebate × Enrollment × .75 .............................................................................................. $82,500 $8.25 $82,508.25 

Total Payment to Plans ................................................................................................................ $922,500 $560,000.25 $1,482,500 

Per Enrollee Rebate: ............................................................................................................................... $82.50 $0.01 

Plan-Specific—

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $ 840,000 $559,992 $1,399,992 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46945 

TABLE 8.—SAVINGS AND REBATES WHEN EFFICIENT PLAN HAS SICKER ENROLLEES—Continued 

Plan ABC Plan XYZ Totals 

Plan-Specific Rebate × Enrollment × .75 ......................................................................................... $105,000 $6 $105,006 

Total Payment to Plans ................................................................................................................ $945,000 $559,998 $1,504,998 

Per Enrollee Rebate: ............................................................................................................................... $105 $0.01 ....................

Net Effect: Plan-Specific Method Yields Higher Program Payments Totaling: $22,498 

TABLE 9.—SAVINGS AND REBATES WHEN EFFICIENT PLAN HAS HEALTHIER ENROLLEES

Plan ABC Plan XYZ Totals 

Benchmark ............................................................................................................................................... $700 $700 

Bid (for ‘‘1.0,’’ average risk individual)—ABC Plan far more efficient ..................................................... $600 $699 

Enrollees .................................................................................................................................................. 1000 1000 2,000 

Risk At Plan Level in Relation to 1.0—XYZ Plan has sicker enrollees .................................................. .8 1.4 

Enrollment-Weighted Statewide Average Risk Computation .................................................................. 0.40 0.70 1.10 

Savings With Statewide Method: Adjust Bid and Benchmark by Statewide Average Risk Factor 

Adjust Benchmark .................................................................................................................................... $770 $770 

Adjust Bid ................................................................................................................................................. $660 $769.99 

Per Capita Savings with Statewide Method ............................................................................................ $110 $0.01 

Total $$ of Savings ....................................................................................................................... $110,000 $11 $110,011 

Savings With Plan-Specific Method: Adjust Bid And Benchmark by Plan-Specific Risk Factor 

Adjust Benchmark .................................................................................................................................... $560 $980 

Adjust Bid ................................................................................................................................................. $480 $979.99 

Savings with Plan-Specific Method ......................................................................................................... $80 $0.01 

Total Savings ................................................................................................................................ $80,000 $14 $80,014 

Computation of Total Medicare Payment to Plans and on Behalf of Enrollees 

Statewide 

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $480,000 $979,986 $1,459,986 

Statewide Rebate × Enrollment × .75 .............................................................................................. $82,500 $8.25 $82,508.25 

Total Payment to Plans ................................................................................................................ $562,500 $979,994.25 $1,542,494 

Per Enrollee Rebate ................................................................................................................................ $82.50 $0.01 

Plan-Specific 

Plan’s Risk-Adjusted Bid × Enrollment ............................................................................................. $480,000 $979,986 $1,459,986 

Plan-Specific Rebate × Enrollment × .75 ......................................................................................... $60,000 $10.50 $60,010.50 

Total Payment to Plans ................................................................................................................ $540,000 $979,996.50 $1,519,997 

Per Enrollee Rebate ................................................................................................................................ $60 $0.01 

Net Effect: Statewide Method Yields Higher Program Payments Totaling: $22,498 

BILLING CODE 4120–01–P 

46946 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 


EP03AU04.005</GPH>
Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46947 


EP03AU04.006</GPH>
46948 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 


EP03AU04.007</GPH>
Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46949 

There is another issue, which is that 

within a State, local plans may not be 

competing directly against each other. 

That is, in a large State, health plans in 


EP03AU04.008</GPH>
46950 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

one section of the State may not be 

competing against health plans in 

another section of the State, or the State 

could be served by individual plans in 

individual counties (to use an extreme 

example), each of which operates in 

non-overlapping service areas where 

there is only one plan option available 

to beneficiaries. In the latter case of 

single non-competing plans, using a 

statewide risk adjuster would seem to be 

unfair to plans and enrollees. In such a 

situation, it would seem that the fairest 

approach is to employ a plan-specific 

risk adjuster. Similarly, if there are 

discrete market areas smaller than a 

State in which health plans compete, 

then—as implied in the statutory 

language—the appropriate course might 

be to use a Metropolitan Statistical Area 

as the geographic area in which a multiplan risk adjustment system will be 

used to determine the rebate 

computation (if CMS decides against the 

general application of the plan-specific 

option). In that way, savings that health 

plans in a particular MSA can achieve 

would be used for enrollees in that MSA 

rather than being applicable to a wider 

geographic area. 

The statewide approach to 

determining rebates differs from the 

current method of determining savings, 

which is essentially done on a planspecific basis (and therefore using the 

statewide method may result in a 

different competitive dynamic among 

plans). The current system for 

computing extra benefits that enrollees 

may be entitled to—which will continue 

through 2005—uses the ‘‘adjusted 

community rate proposal’’ process. 

Under this process for determining 

whether there is excess revenue, there 

are actual and implicit adjustments at 

the plan-specific level to account for the 

risk profile of a plan’s enrollees. The 

excess revenue determination (that is, 

the savings computation) is based on a 

comparison of a plan’s stated ‘‘average 

payment rate’’ from CMS (a projection 

of what CMS will pay the plan—which 

is a risk-adjusted payment) compared to 

the plan’s ‘‘adjusted community rate’’ (a 

Medicare term) for its projected 

Medicare enrollment. This ‘‘community 

rate’’ is implicitly adjusted for the risk 

status of projected Medicare enrollees 

because the ‘‘adjusted’’ aspect of the 

Medicare ‘‘adjusted community rate’’ is 

the adjustment that a plan makes to 

reflect the relatively higher utilization of 

Medicare enrollees as compared to other 

enrollees to whom a community rate 

applies. That is, under a strict 

community rating system, each group 

seeking to buy health care coverage from 

a community-rated plan will receive the 

same quoted community rate as any 

other group that is buying coverage (for 

the same benefit package) from the 

health plan, regardless of the expected 

costs and health status of the particular 

group seeking coverage. For Medicare, 

plans are allowed to adjust the rate to 

reflect the utilization and higher 

expenditures associated with Medicare 

enrollees. The adjustment is made on 

the basis of the plan’s own history with 

respect to the relative costs of its 

Medicare enrollees. Hence, there is an 

implicit risk adjustment of the 

‘‘community rate’’ as it would apply to 

this segment of a health plan’s 

enrollment. The amount that, under the 

current system, a Medicare plan must 

return to beneficiaries as extra benefits 

when there is excess revenue is the 

difference between the ‘‘adjusted 

community rate’’—implicitly adjusted 

for risk, as just described—and 

Medicare’s average payment rate, which 

is explicitly risk adjusted, using CMS 

risk adjustment factors, at the plan level. 

The analogue of the current practice 

would be the plan-specific approach to 

determining the calculation of savings 

(rather than what is essentially a type of 

pooling of savings across multiple plans 

if the statewide method were to be 

used). 

As noted in the preamble, we 

welcome comments on the issues 

related to statewide versus plan-specific 

(or other geographic area) risk 

adjustment for the purpose of 

determining the distribution of rebates 

among plan enrollees. 

3. Prohibiting Use of Rebate Dollars for 

the Purchase of Optional Supplemental 

Benefits 

The MMA retains a provision from 

pre-existing law that allows health plans 

to have optional supplemental benefits 

that Medicare enrollees can choose to 

purchase for an additional premium 

(section 1852(a)(3)(B)). Such optional 

supplemental packages are financed 

entirely by enrollee premiums (as is also 

currently true of mandatory 

supplemental packages that all 

beneficiaries are required to purchase 

from an MA plan, if the mandatory 

supplement is approved by CMS). Once 

the bidding system begins in 2006, the 

concept of an optional supplemental 

offering seems inconsistent with the 

new design of the MA program in two 

ways: with regard to the question of 

whether an optional supplemental 

package can have its price reduced by 

a rebate (which, as explained below, 

appears not be administratively 

feasible); and also with regard to the 

question of how to deal with an optional 

supplemental package that, because of 

its features, would have an effect on a 

plan’s bid for coverage of Part A and B 

services (for example, an optional 

supplement that buys down cost sharing 

for A and B services). As noted in the 

preamble we are prohibiting plans from 

applying rebate dollars to optional 

supplemental premiums, and we are 

asking for comment on the issue of 

whether optional supplemental plans 

may include benefits that affect the 

utilization of A and B services. (The 

latter issue is discussed in the 

preamble.) 

Under the current adjusted 

community rate process (the process by 

which plans submit premium and 

benefit proposals to CMS for approval), 

what in 2006 will become rebate dollars 

are termed ‘‘excess revenue.’’ Excess 

revenue amounts have to be ‘‘returned’’

to beneficiaries in the form of extra 

benefits, reduced cost sharing, or 

reduced premiums for basic or 

mandatory supplemental benefits—that 

is, a benefit spread over the entire 

enrolled population. Excess revenue 

cannot be used to reduce an optional 

supplemental premium that 

beneficiaries can decline to pay. 

Although the statute governing the use 

of savings beginning in 2006 states that 

each enrollee is entitled to a rebate of 

75 percent of savings (1854(b)(1)(C)), 

which can be applied as a credit 

‘‘toward an MA monthly supplemental 

beneficiary premium (if any),’’ the 

statute is silent on the question of 

whether in 2006 rebates may be applied 

to optional supplemental packages. One 

could infer that such a use of rebate 

dollars is permitted because there is no 

specific statutory prohibition. 

As explained in the preamble, we do 

not believe that applying a rebate to an 

optional supplemental benefit is 

consistent with the requirement that 

each beneficiary enrolled in a plan is 

entitled to the same dollar value of the 

rebate (‘‘the MA plan shall provide to 

the enrollee a monthly rebate equal to 

75 percent of the average per capita 

savings’’ (1854(b)(1)(C)). (There could be 

an administratively cumbersome way of 

permitting the use of rebate dollars to 

optional supplemental premiums. 

Because enrollees can decline an 

optional package, enrollees would have 

to have an alternative option, or a menu 

of options to choose from, to fully 

allocate the individual rebate. For 

example, if the rebate amount was $50 

per month, and an optional supplement 

was offered at $25, enrollees choosing 

the supplement would have to dispose 

of $25 (for example, by a reduction in 

the Part B premium), and those who 

decline would have to dispose of $50 

(for example, by a $50 reduction in the 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46951 

Part B premium). We believe, however, 

that this would present overly 

burdensome administrative problems 

for health plans as well as for CMS and 

the Social Security Administration if 

there were variable Part B premium 

rates at the sub-plan level. Rather than 

relying on the plan identifier to 

determine the appropriate premium 

reduction amount, each person’s record 

would have to carry the premium 

reduction information.) 

4. Intra-Area Geographic Adjustment to 

Payments 

In addition to the discussion in the 

preamble of the adjustment for intraarea variation, which the statute says 

‘‘shall’’ be applied to bids and 

benchmarks, we would note that the 

statute and the conference report refer 

only to adjustments to reflect ‘‘variations 

in MA local payment rates,’’ for both 

local and regional plans. A literal 

interpretation of the language would 

entail using only the MA payment rates 

as the basis for making adjustments to 

bids and benchmarks. Clearly, although 

for local plans it may be appropriate to 

use a benchmark adjustment based on 

variation in local MA payment rates, for 

a regional plan such an adjustment to 

the benchmark is problematic because 

the benchmarks for regional plans 

include plan bids as a component of the 

benchmark. Hence, we believe a strictly 

literal interpretation is not consistent 

with the Medicare Advantage bidding 

and payment process. 

The initial bid for a multi-county 

local plan or for a regional plan assumes 

a certain mix of enrollees from different 

parts of the geographic area. The plan 

presents a single average bid that covers 

its revenue needs for the population that 

it assumes will enroll in the plan. If the 

plan’s enrollment mix is from a different 

geographic area with substantially 

different costs, the plan’s initial bid will 

either be higher or lower than its actual 

revenue needs. The plan’s costs may not 

bear a direct relation to Medicare 

payment rates in a county—particularly 

if the county rate is historically a ‘‘floor’’

rate (and even when the county rate is 

based on Medicare fee-for-service rates 

the payment rate may not represent plan 

costs, as is clear from the present 

pattern of extra benefits available to 

enrollees in MA plans). 

The preamble mentions possible ways 

to ensure that there is an appropriate 

intra-area adjustment, and seeks public 

comment on the different options. The 

suggested approaches seek to establish a 

relative relationship among the counties 

in the areas in question, though each is 

an imprecise measure for purposes of 

adjusting the bid. For example, in the 

same way that local Medicare fee-forservice expenditures may not reflect 

plan revenue needs in a given county, 

using the relationship between a 

county’s Medicare fee-for-service 

expenditures and national expenditures, 

as the preamble suggests, may also not 

accurately reflect the variation that 

health plans see in their costs. Using 

only input prices, as is also suggested, 

of course ignores utilization differences 

(practice patterns, beneficiary 

preferences, the mix of services) that 

may appropriately be a component of 

the costs that plans face in a given 

county. 

Another option that we had 

considered is to have plans themselves 

provide CMS with the plan’s statement 

of the relationship among counties (or 

broader geographic area) with regard to 

the relative revenue needs for each area. 

CMS would then use the plan’s 

statement of relative costs to make intraarea adjustments. This approach may 

also be somewhat imprecise in that a 

plan’s revenue needs in a given county 

may vary with the size of enrollment 

(for example, a large enrollment base in 

a county may enable a plan to secure 

more favorable contracting 

arrangements from providers, thereby 

lowering plan costs). 

M. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in Table 12 we have 

prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of Title II of the MMA that 

are the subject of this regulation. All 

expenditures are classified as transfers 

to either beneficiaries or health plans. 

The table provides our best estimate of 

the dollar amount of these transfers, 

expressed in 2001 dollars, at three 

percent and seven percent discount 

rates. 

TABLE 12.—ACCOUNTING STATEMENT: 

CLASSIFICATION OF EXPENDITURES, 

2004 THROUGH 2009 

[Dollars in millions, discounted to 2001 present 

value] 

Transfers 

Three Percent Annual Discount 

Rate. 

Annualized Monetized 

Transfers: ‘‘On 

Budget’’.

19,083. 

From Whom To 

Whom?.

Federal Government 

To Private Plans. 

TABLE 12.—ACCOUNTING STATEMENT: 

CLASSIFICATION OF EXPENDITURES, 

2004 THROUGH 2009—Continued 

[Dollars in millions, discounted to 2001 present 

value] 

Transfers 

Annualized Monetized 

Transfers: ‘‘On 

Budget’’.

1,659. 

From Whom To 

Whom?.

Federal Government 

To Medicare Beneficiaries. 

Seven Percent Annual Discount 

Rate. 

Annualized Monetized 

Transfers: ‘‘On 

Budget’’.

15,232. 

From Whom To 

Whom?.

Federal Government 

To Private Plans 

Annualized Monetized 

Transfers: ‘‘On 

Budget’’.

1,325. 

From Whom To 

Whom?.

Federal Government 

To Medicare Beneficiaries. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 417 

Administrative practice and 

procedure, Grant programs-health, 

Health care, Health insurance, Health 

maintenance organizations (HMO), Loan 

programs-health, Medicare, Reporting 

and recordkeeping requirements. 

42 CFR Part 422 

Administrative practice and 

procedure, Health facilities, Health 

maintenance organizations (HMO), 

Medicare, Penalties, Privacy, Reporting 

and recordkeeping requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR chapter IV as set forth below: 

PART 417—HEALTH MAINTENANCE 

ORGANIZATIONS, COMPETITIVE 

MEDICAL PLANS, AND HEALTH CARE 

PREPAYMENT PLANS 

1. The authority citation for part 417 

continues to read as follows: 

Authority: Sec. 1102 and 1871 of the Social 

Security Act (42 U.S.C. 1302 and 1395hh), 

sec. 1301, 1306, and 1310 of the Public 

Health Service Act (42 U.S.C. 300e, 300e–5, 

and 300e–9), and 31 U.S.C. 9701. 

46952 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

Subpart J—Qualifying Conditions for 

Medicare Contracts 

2. Amend § 417.402 by—

A. Revising paragraph (b). 

B. Adding paragraph (c). 

The revision and addition read as 

follows: 

§ 417.402 Effective date of initial 

regulations. 

* * * * * 

(b) No new cost contracts are accepted 

by CMS. CMS will, however, accept and 

approve applications to modify cost 

contracts in order to expand service 

areas, provided they are submitted on or 

before September 1, 2006, and CMS 

determines that the organization 

continues to meet regulatory 

requirements and the requirements in 

its cost contract. Section 1876 cost 

contracts will not be extended or 

renewed beyond December 31, 2007, 

where conditions in paragraph (c) of 

this section are present. 

(c) Mandatory HMO or CMP service 

area reduction and contract nonrenewal. CMS will non-renew all or a 

portion of an HMO’s or CMP’s service 

area using procedures in § 417.492(b) for 

any period beginning on or after January 

1, 2008, where—

(1) There were two or more 

coordinated care plan-model MA 

regional plans in the same service area 

or portion of a service area for the entire 

previous year meeting one of the 

conditions in paragraph (c)(3) of this 

section; or 

(2) There were two or more 

coordinated care plan-model MA local 

plans in the same service area or portion 

of a service area for the entire previous 

year meeting one of the conditions in 

paragraph (c)(3) of this section. 

(3) Minimum enrollment 

requirements. (i) With respect to any 

service area or portion of a service area 

that is within a Metropolitan Statistical 

Area with a population of more than 

250,000 and counties contiguous to the 

Metropolitan Statistical Area, 5,000 

enrolled individuals. 

(ii) With respect to any service area or 

portion of a service area that is not 

within a Metropolitan Statistical Area 

described in paragraph (c)(3)(i) of this 

section, 1,500 individuals. 

Subpart Q—Beneficiary Appeals 

3. Section 417.600 is revised to read 

as follows: 

§ 417.600 Basis and scope. 

(a) Statutory basis. (1) Section 1869 of 

the Act provides the right to a 

redetermination, reconsideration, 

hearing, and judicial review for 

individuals dissatisfied with a 

determination regarding their Medicare 

benefits. 

(2) Section 1876 of the Act provides 

for Medicare payments to HMOs and 

CMPs that contract with CMS to enroll 

Medicare beneficiaries and furnish 

Medicare-covered health care services to 

them. 

(3) Section 234 of the MMA requires 

section 1876 contractors to operate 

under the same provisions as MA plans 

where two plans of the same type enter 

the cost contract’s service area. 

(b) Applicability. (1) The rights, 

procedures, and requirements relating to 

beneficiary appeals and grievances set 

forth in subpart M of part 422 of this 

chapter also apply to Medicare contracts 

with HMOs and CMPs under section 

1876 of the Act. 

(2) In applying those provisions, 

references to section 1852 of the Act 

must be read as references to section 

1876 of the Act, and references to MA 

organizations as references to HMOs 

and CMPs. 

§ 417.602 through § 417.638 [Removed] 

4. Sections 417.602 through 417.638 

are removed. 

Subpart U—Health Care Prepayment 

Plans 

5. Section 417.840 is revised to read 

as follows: 

§ 417.840 Administrative review 

procedures. 

The HCPP must apply § 422.568 

through § 422.619 of this chapter to 

organization determinations that affect 

its Medicare enrollees, and to 

reconsiderations, hearings, Medicare 

Appeals Council review, and judicial 

review of those organization 

determinations. 

PART 422—MEDICARE ADVANTAGE 

PROGRAM 

6. The authority citation for part 422 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

7. Revise the heading of Part 422 to 

read as set forth above. 

Subpart A—General Provisions 

8. Amend § 422.1(a) by adding the 

following statutory basis in numerical 

order: 

§ 422.1 Basis and scope. 

(a) * * * 

1858—Special rules for MA Regional 

Plans. 

* * * * * 

9. Amend § 422.2 by—

A. Removing the definitions of 

‘‘ACR,’’ ‘‘Additional benefits,’’ ‘‘Adjusted 

community rate,’’ and ‘‘M+C.’’

B. Revising the definitions of ‘‘Basic 

benefits,’’ ‘‘Benefits,’’ ‘‘Mandatory 

supplemental benefits,’’ and ‘‘Service 

area.’’

C. Adding the definitions of 

‘‘Institutionalized,’’ ‘‘MA,’’ ‘‘MA local 

area,’’ ‘‘MA local plan,’’ ‘‘MAPrescription Drug Plan,’’ ‘‘MA regional 

plan,’’ ‘‘Prescription drug plan (PDP),’’

‘‘Prescription drug plan (PDP) sponsor,’’

‘‘Special needs individual,’’ and 

‘‘Specialized MA plans.’’

D. Nomenclature change: In the 

definitions of ‘‘M+C eligible individual,’’

‘‘M+C organization,’’ ‘‘M+C plan,’’ and 

‘‘M+C plan enrollee,’’ every occurrence 

of ‘‘M+C’’ is removed and ‘‘MA’’ is 

added in its place. 

The revisions and additions read as 

follows: 

§ 422.2 Definitions. 

* * * * * 

Basic benefits means all Medicarecovered benefits (except hospice 

services). 

Benefits means health care services 

that are intended to maintain or 

improve the health status of enrollees, 

for which the MA organization incurs a 

cost or liability under an MA plan (not 

solely an administrative processing 

cost). Benefits are submitted and 

approved through the annual bidding 

process. 

* * * * * 

Institutionalized means for the 

purpose of defining a special needs 

individual, an MA eligible individual 

who continuously resides in a long-term 

care facility for 90 days or longer, as 

determined by the presence of a 90-day 

assessment in the Minimum Data Set 

(MDS). 

* * * * * 

MA stands for Medicare Advantage. 

MA local area is defined in § 422.252. 

MA local plan means an MA plan that 

is not an MA regional plan. 

MA-Prescription Drug (PD) Plan 

means an MA plan that provides 

qualified prescription drug coverage 

under Part D of the Social Security Act. 

MA regional plan means a 

coordinated care plan structured as a 

preferred provider organization (PPO) 

that serves one or more entire regions. 

An MA regional plan must have a 

network of contracting providers that 

have agreed to a specific reimbursement 

for the plan’s covered services and must 

pay for all covered services whether 

provided in or out of the network. 

* * * * * 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46953 

Mandatory supplemental benefits 

means health care services not covered 

by Medicare that an MA enrollee must 

purchase as part of an MA plan. The 

benefits may include reductions in costsharing for benefits under the original 

Medicare fee-for-service program and 

are paid for in the form of premiums 

and cost-sharing, or by an application of 

the beneficiary rebate rule in section 

1854(b)(1)(C)(ii)(I) of the Act, or both. 

* * * * * 

Prescription drug plan (PDP) means 

approved prescription drug coverage 

that is offered under a policy, contract, 

or plan that has been approved as 

meeting the requirements specified in 

part 423 of this chapter and that is 

offered by a MA organization that has a 

contract with CMS that meets the 

contract requirements under part 423 of 

this chapter and does not include a 

fallback plan unless specifically 

identified as a prescription drug plan. 

Prescription drug plan (PDP) sponsor 

means a nongovernmental entity that is 

certified under part 423 of this chapter 

as meeting the requirements and 

standards of that part for that sponsor. 

* * * * * 

Service area means a geographic area 

that for local MA plans is a county or 

multiple counties, and for MA regional 

plans is a region approved by CMS 

within which an MA-eligible individual 

may enroll in a particular MA plan 

offered by an MA organization. Each 

MA plan must be available to all MAeligible individuals within the plan’s 

service area. In deciding whether to 

approve an MA plan’s proposed service 

area, CMS considers the following 

criteria: 

(1) For local MA plans: 

(i) Whether the area meets the ‘‘county 

integrity rule’’ that a service area 

generally consists of a full county or 

counties. However, CMS may approve a 

service area that includes only a portion 

of a county if it determines that the 

‘‘partial county’’ area is necessary, 

nondiscriminatory, and in the best 

interests of the beneficiaries. 

(ii) The extent to which the proposed 

services area mirrors service areas of 

existing commercial health care plans or 

MA plans offered by the organization. 

(iii) For MA coordinated care plans 

and network MA MSA plans, whether 

the contracting provider network meets 

the access and availability standards set 

forth in § 422.112. Although not all 

contracting providers must be located 

within the plan’s service area, CMS 

must determine that all services covered 

under the plan are accessible from the 

service area. 

(iv) For non-network MA MSA plans, 

CMS may approve single county nonnetwork MA MSA plans even if the MA 

organization’s commercial plans have 

multiple county service areas. 

(2) For MA regional plans, whether 

the service area consists of the entire 

region. 

Special needs individual means an 

MA eligible individual who is 

institutionalized, as defined above, is 

entitled for Medicaid under title XIX, or 

has severe or disabling chronic 

condition(s) and would benefit from 

enrollment in a specialized MA based 

on criteria established by CMS. 

Specialized MA Plans means any type 

of MA coordinated care plan that 

exclusively enrolls special needs 

individuals. 

10. Amend § 422.4 by—

A. Revising the section heading. 

B. Revising paragraph (a)(1)(iii). 

C. Redesignating paragraph (a)(1)(iv) 

as paragraph (a)(1)(v). 

D. Adding a new paragraph (a)(1)(iv). 

E. Revising newly redesignated 

paragraph (a)(1)(v). 

F. Removing paragraph (a)(2)(ii). 

G. Redesignating paragraph (a)(2)(iii) 

as paragraph (a)(2)(ii). 

The revisions and additions read as 

follows: 

§ 422.4 Types of MA plans. 

(a) General rule. * * * 

(1) A coordinated care plan. * * * 

(iii) Coordinated care plans include 

plans offered by health maintenance 

organizations (HMOs), providersponsored organizations (PSOs), 

regional or local preferred provider 

organizations (PPOs) as specified in 

paragraph (a)(1)(v) of this section, RFBs, 

and other network plans (except 

network MSA and PFFS plans). 

(iv) A specialized MA plan includes 

any type of coordinated care plan that 

exclusively enrolls special needs 

individuals as defined in § 422.2. 

(v) A PPO plan is a plan that has a 

network of providers that have agreed to 

a contractually specified reimbursement 

for covered benefits with the 

organization offering the plan; provides 

for reimbursement for all covered 

benefits regardless of whether the 

benefits are provided within the 

network of providers; and, only for 

purposes of quality assurance 

requirements in § 422.152(e), is offered 

by an organization that is not licensed 

or organized under State law as an 

HMO. 

* * * * * 

§ 422.6 [Removed] 

11. Remove § 422.6. 

§ 422.8 [Removed] 

12. Remove § 422.8. 

§ 422.10 [Redesignated and Amended] 

13. Redesignate § 422.10 as § 422.6 

and amend newly redesignated § 422.6 

by—

a. Revising the section heading. 

b. Revising paragraph (a). 

c. Revising paragraph (b). 

d. Revising paragraph (d)(2)(ii). 

e. Revising paragraph (e). 

f. Revising paragraph (f)(1). 

g. Revising paragraph (f)(2) 

h. Revising paragraph (f)(3). 

The revisions read as set forth below: 

§ 422.6 Cost-sharing in enrollment-related 

costs (MA user fee). 

(a) Basis and scope. This section 

implements that portion of section 1857 

of the Act that pertains to cost-sharing 

in enrollment-related costs. It sets forth 

the procedures that CMS follows to 

determine the aggregate annual ‘‘user 

fee’’ to be contributed by MA 

organizations and PDP sponsors under 

Medicare Part D and to assess the 

required user fees for each MA plan 

offered by MA organizations and PDP 

sponsors. 

(b) Purpose of assessment. Section 

1857(e)(2) of the Act authorizes CMS to 

charge and collect from each MA plan 

offered by an MA organization its pro 

rata share of fees for administering 

section 1851 of the Act (relating to 

dissemination of enrollment 

information), and section 4360 of the 

Omnibus Budget Reconciliation Act of 

1990 (relating to the health insurance 

counseling and assistance program) and 

section 1860D–1(c) of the Act (relating 

to dissemination of enrollment 

information for the drug benefit). 

* * * * * 

(d) Collection of fees. * * * 

(2) Amount to be collected. * * * 

(ii) For fiscal year 2006 and each 

succeeding year, $200 million, the 

applicable portion (as defined in 

paragraph (e) of this section) of $200 

million. 

(e) Applicable portion. In this section, 

the term ‘‘applicable portion’’ with 

respect to an MA plan means, for a 

fiscal year, CMS’ estimate of Medicare 

Part C and D expenditures for those MA 

organizations as a percentage of all 

expenditures under title XVIII and with 

respect to PDP sponsors, the applicable 

portion is CMS’ estimate of Medicare 

Part D prescription drug expenditures 

for those PDP sponsors as a percentage 

of all expenditures under title XVIII. 

(f) Assessment methodology. (1) The 

amount of the applicable portion of the 

user fee each MA organization and PDP 

sponsor must pay is assessed as a 

percentage of the total Medicare 

payments to each organization. CMS 

determines the annual assessment 

46954 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

percentage rate separately for MA 

organizations and for PDPs using the 

following formula: 

(i) The assessment formula for MA 

organizations (including MA–PD plans): 

C divided by A times B where—

A is the total estimated January payments 

to all MA organizations subject to the 

assessment; 

B is the 9-month (January through 

September) assessment period; and 

C is the total fiscal year MA organization 

user fee assessment amount determined in 

accordance with paragraph (d)(2) of this 

section. 

(ii) The assessment formula for PDPs: 

A is the total estimated January payments 

to all PDP sponsors subject to the assessment; 

B is the 9-month (January through 

September) assessment period; and 

C is the total fiscal year PDP sponsor’s user 

fee assessment amount determined in 

accordance with paragraph (d)(2) of this 

section. 

(2) CMS determines each MA 

organization’s and PDP sponsor’s pro 

rata share of the annual fee on the basis 

of the organization’s calculated monthly 

payment amount during the 9 

consecutive months beginning with 

January. CMS calculates each 

organization’s monthly pro rata share by 

multiplying the established percentage 

rate by the total monthly calculated 

Medicare payment amount to the 

organization as recorded in CMS’

payment system on the first day of the 

month. 

(3) CMS deducts the organization’s fee 

from the amount of Federal funds 

otherwise payable to the MA 

organization or PDP sponsor for that 

month. 

* * * * * 

Subpart B—Eligibility, Election, and 

Enrollment 

14. Amend § 422.50 by—

A. Revising the section heading. 

B. Adding an introductory text. 

C. Revising paragraph (a)(5). 

The revisions and addition read as 

follows: 

§ 422.50 Eligibility to elect an MA plan. 

For this subpart, all references to an 

MA plan include MA–PD and both MA 

local and MA regional plans, as defined 

in § 422.4 unless specifically noted 

otherwise. 

(a) * * * 

(5) Completes and signs an election 

form or another CMS approved election 

method and gives information required 

for enrollment; and 

* * * * * 

15. Add § 422.52 to read as follows: 

§ 422.52 Eligibility to elect an MA plan for 

special needs individuals. 

(a) General rule. To elect an MA plan 

for special needs individuals, an 

individual must meet eligibility 

requirements specified in this section. 

(b) Basic eligibility requirements. To 

be eligible to elect a special needs MA 

plan, an individual must meet the 

eligibility requirements for that plan, as 

well as MA as described in § 422.50. 

Further, the individual must—

(1) Be institutionalized in a Medicare 

or Medicaid certified institution as 

defined by CMS; or 

(2) Be entitled to medical assistance 

under a State plan under title XIX of the 

Act; or 

(3) Meet other eligibility requirements 

established by CMS to identify 

individuals who would benefit from 

enrollment in such a specialized MA 

plan. 

(c) CMS may waive § 422.50(a)(2) that 

excludes persons with ESRD. 

(d) Deeming continued eligibility. If a 

special needs MA plan determines that 

the enrollee no longer meets the 

eligibility criteria, but it is reasonable to 

expect that, in the absence of continued 

coverage under the MA plan, the 

individual would meet the special 

needs criteria of the plan within a 

certain period of time, as specified by 

CMS, the enrollee may be deemed to 

continue to be eligible for the MA plan. 

(e) Exceptions. As specified in 

§ 422.4, CMS may designate certain MA 

plans that disproportionately serve 

special needs beneficiaries as 

‘‘specialized’’ MA plans for special 

needs individuals. If CMS provides the 

designation: 

(1) Individuals already enrolled in an 

MA plan that CMS subsequently 

designates as a special needs MA plan 

may continue to be enrolled in the plan. 

(2) The MA plan may restrict future 

enrollment to only certain specialized 

needs individuals, as established under 

§ 422.4. 

16. Amend § 422.54 by—

A. Revising the section heading. 

B. Revising paragraph (a). 

C. Revising paragraph (b). 

D. Revising paragraph (c)(1)(ii). 

E. Revising paragraph (c)(2). 

F. Revising paragraph (d)(3). 

The revisions read as follows: 

§ 422.54 Continuation of enrollment for MA 

local plans. 

(a) Definition. Continuation area 

means an additional area (outside the 

service area) within which the MA 

organization offering a local plan 

furnishes or arranges to furnish services 

to its continuation-of-enrollment 

enrollees. Enrollees must reside in a 

continuation area on a permanent basis. 

A continuation area does not expand the 

service area of any MA local plan. 

(b) Basic rule. An MA organization 

may offer a continuation of enrollment 

option to MA local plan enrollees when 

they no longer reside in the service area 

of a plan and permanently move into 

the geographic area designated by the 

MA organization as a continuation area. 

The intent to no longer reside in an area 

and permanently live in another area is 

verified through documentation that 

establishes residency, such as a driver’s 

license or voter registration card. 

(c) * * * 

(1) * * * 

(ii) Describe the option(s) in the 

member materials it offers and make the 

option available to all MA local plan 

enrollees residing in the continuation 

area. 

(2) An enrollee who moves out of the 

service area and into the geographic area 

designated as the continuation area has 

the choice of continuing enrollment or 

disenrolling from the MA local plan. 

The enrollee must make the choice of 

continuing enrollment in a manner 

specified by CMS. If no choice is made, 

the enrollee must be disenrolled from 

the plan. 

(d) * * * 

(3) Reasonable cost sharing. For 

services furnished in the continuation 

area, an enrollee’s cost-sharing liability 

is limited to the cost-sharing amounts 

required in the MA local plan’s service 

area (in which the enrollee no longer 

resides). 

* * * * * 

17. Amend § 422.56 by—

A. Revising the section heading. 

B. Revising paragraph (a). 

C. Revising paragraph (b). 

The revisions read as follows: 

§ 422.56 Enrollment in an MA MSA plan. 

(a) General. An individual is not 

eligible to elect an MA MSA plan unless 

the individual provides assurances that 

are satisfactory to CMS that he or she 

will reside in the United States for at 

least 183 days during the year for which 

the election is effective. 

(b) Individuals eligible for or covered 

under other health benefits program. 

Unless otherwise provided by the 

Secretary, an individual who is enrolled 

in a Federal Employee Health Benefit 

plan under 5 U.S.C. chapter 89, or is 

eligible for health care benefits through 

the Veteran’s Administration under 10 

U.S.C. chapter 55 or the Department of 

Defense under 38 U.S.C. chapter 17, 

may not enroll in an MA MSA plan. 

* * * * * 

18. Amend § 422.60 by—

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46955 

A. Revising paragraph (b)(1). 

B. Revising paragraph (b)(3). 

C. Revising the heading of paragraph 

(c). 

D. Revising paragraph (c)(1). 

E. Revising paragraph (d). 

F. Revising paragraph (e). 

G. Revising paragraph (f)(1). 

H. Revising paragraph (f)(3). 

The revisions read as follows: 

§ 422.60 Election process. 

* * * * * 

(b) Capacity to accept new enrollees. 

(1) MA organizations may submit 

information on enrollment capacity of 

plans. 

* * * * * 

(3) CMS considers enrollment limit 

requests for an MA plan service area, or 

a portion of the plan service area, only 

if the health and safety of beneficiaries 

is at risk, such as if the provider 

network is not available to serve the 

enrollees in all or a portion of the 

service area. 

(c) Election forms and other election 

mechanisms. (1) The election must 

comply with CMS instructions 

regarding content and format and have 

been approved by CMS as described in 

§ 422.80. The election must be 

completed by the MA eligible 

individual (or the individual who will 

soon become eligible to elect an MA 

plan) and include authorization for 

disclosure and exchange of necessary 

information between the U.S. 

Department of Health and Human 

Services and its designees and the MA 

organization. Persons who assist 

beneficiaries in completing forms must 

sign the form, or through other 

approved mechanisms, indicate their 

relationship to the beneficiary. 

* * * * * 

(d) When an election is considered to 

have been made. An election in an MA 

plan is considered to have been made 

on the date the completed election is 

received by the MA organization. 

(e) Handling of elections. The MA 

organization must have an effective 

system for receiving, controlling, and 

processing elections. The system must 

meet the following conditions and 

requirements: 

(1) Each election is dated as of the day 

it is received in a manner acceptable to 

CMS. 

(2) Elections are processed in 

chronological order, by date of receipt. 

(3) The MA organization gives the 

beneficiary prompt notice of acceptance 

or denial in a format specified by CMS. 

(4) If the MA plan is enrolled to 

capacity, it explains the procedures that 

will be followed when vacancies occur. 

(5) Upon receipt of the election, or for 

an individual who was accepted for 

future enrollment from the date a 

vacancy occurs, the MA organization 

transmits, within the timeframes 

specified by CMS, the information 

necessary for CMS to add the 

beneficiary to its records as an enrollee 

of the MA organization. 

(f) Exception for employer group 

health plans. (1) In cases in which an 

MA organization has both a Medicare 

contract and a contract with an 

employer group health plan, and in 

which the MA organization arranges for 

the employer to process elections for 

Medicare-entitled group members who 

wish to enroll under the Medicare 

contract, the effective date of the 

election may be retroactive. Consistent 

with § 422.250(b), payment adjustments 

based on a retroactive effective date may 

be made for up to a 90-day period. 

* * * * * 

(3) Upon receipt of the election from 

the employer, the MA organization must 

submit the enrollment within 

timeframes specified by CMS. 

§ 422.62 [Amended] 

19. Amend § 422.62 by—

A. Revising the section heading. 

B. Revising paragraph (a). 

C. Revising paragraph (b) introductory 

text. 

D. Revising the heading of paragraph 

(d). 

E. Revising paragraph (d)(1). 

F. Removing paragraph (d)(2)(i)(A). 

G. Redesignating paragraph 

(d)(2)(i)(B) as paragraph (d)(2)(i)(A). 

H. Redesignating paragraph 

(d)(2)(i)(C) as paragraph (d)(2)(i)(B). 

The revisions and addition read as 

follows: 

§ 422.62 Election of coverage under an MA 

plan. 

(a) General: Coverage election 

periods—(1) Initial coverage election 

period for MA. The initial coverage 

election period is the period during 

which a newly MA-eligible individual 

may make an initial election. This 

period begins 3 months before the 

month the individual is first entitled to 

both Part A and Part B and ends on the 

later of—

(i) The last day of the month 

preceding the month of entitlement; or 

(ii) If after May 15, 2006, the last day 

of the individual’s Part B initial 

enrollment period. 

(2) Annual coordinated election 

period. (i) Beginning with 2002, the 

annual coordinated election period for 

the following calendar year is November 

15th through December 31st, except for 

2006. 

(ii) For 2006, the annual coordinated 

election period begins on November 15, 

2005 and ends on May 15, 2006. 

(iii) During the annual coordinated 

election period, an individual eligible to 

enroll in an MA plan may change his or 

her election from an MA plan to original 

Medicare or to a different MA plan, or 

from original Medicare to an MA plan. 

If an individual changes his or her 

election to original Medicare, he or she 

may also elect a PDP. 

(3) Open enrollment and 

disenrollment opportunities through 

2005. Through 2005, the number of 

elections or changes that an MA eligible 

individual may make is not limited 

(except as provided for in paragraph (d) 

of this section for MA MSA plans). 

Subject to the MA plan being open to 

enrollees as provided under 

§ 422.60(a)(2), an individual eligible to 

elect an MA plan may change his or her 

election from an MA plan to original 

Medicare or to a different MA plan, or 

from original Medicare to an MA plan. 

(4) Open enrollment and 

disenrollment during 2006. (i) Except as 

provided in paragraphs (a)(4)(ii), 

(a)(4)(iii), and (a)(6) of this section, an 

individual who is not enrolled in an MA 

plan, but who is eligible to elect an MA 

plan in 2006, may elect an MA plan 

only once during the first 6 months of 

the year. 

(A) An individual who is enrolled in 

an MA–PD plan may elect another MA–

PD plan or original Medicare and 

coverage under a PDP. Such an 

individual may not elect an MA plan 

that does not provide qualified 

prescription drug coverage. 

(B) An individual who is enrolled in 

an MA plan that does not provide 

qualified prescription drug coverage 

may elect another MA plan that does 

not provide that coverage or original 

Medicare. Such an individual may not 

elect an MA–PD plan or coverage under 

a PDP. 

(ii) Newly eligible MA individual. An 

individual who becomes MA eligible 

during 2006 may elect an MA plan or 

change his or her election once during 

the period that begins the month the 

individual is entitled to both Part A and 

Part B and ends on the last day of the 

6th month of the entitlement, or on 

December 31, whichever is earlier, 

subject to the limitations in paragraphs 

(a)(4)(i)(A) and (a)(4)(i)(B) of this 

section. 

(5) Open enrollment and 

disenrollment beginning in 2007. (i) For 

2007 and subsequent years, except as 

provided in paragraphs (a)(5)(ii), 

(a)(5)(iii), and (a)(6) of this section, an 

individual who is not enrolled in an MA 

plan but is eligible to elect an MA plan 

46956 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

may make an election into an MA plan 

once during the first 3 months of the 

year. 

(A) An individual who is enrolled in 

an MA–PD plan may elect another MA–

PD plan or original Medicare and 

coverage under a PDP. Such an 

individual may not elect an MA plan 

that does not provide qualified 

prescription drug coverage. 

(B) An individual who is enrolled in 

an MA plan that does not provide 

qualified prescription drug coverage 

may elect another MA plan that does 

not provide that coverage or original 

Medicare. Such an individual may not 

elect an MA–PD plan or coverage under 

a PDP. 

(ii) Newly eligible MA individual. An 

individual who becomes MA eligible 

during 2007 or later may elect an MA 

plan or change his or her election once 

during the period that begins the month 

the individual is entitled to both Part A 

and Part B and ends on the last day of 

the 3rd month of the entitlement, or on 

December 31, whichever is earlier 

subject to the limitations in paragraphs 

(a)(5)(i)(A) and (a)(5)(i)(B) of this 

section. 

(6) Open enrollment period for 

institutionalized individuals. After 

2005, an individual who is eligible to 

elect an MA plan and who is 

institutionalized, as defined by CMS, is 

not limited (except as provided for in 

paragraph (d) of this section for MA 

MSA plans) in the number of elections 

or changes he or she may make. Subject 

to the MA plan being open to enrollees 

as provided under § 422.60(a)(2), an MA 

eligible institutionalized individual may 

at any time elect an MA plan or change 

his or her election from an MA plan to 

original Medicare, to a different MA 

plan, or from original Medicare to an 

MA plan. 

(b) Special election periods. An 

individual may at any time (that is, not 

limited to the annual election period) 

discontinue the election of an MA plan 

offered by an MA organization and 

change his or her election, in the form 

and manner specified by CMS, from an 

MA plan to original Medicare or to a 

different MA plan under any of the 

following circumstances: 

* * * * * 

(d) Special rules for MA MSA plans—

(1) Enrollment. An individual may 

enroll in an MA MSA plan only during 

an initial or annual election period 

described in paragraphs (a)(1) and (a)(2) 

of this section. 

* * * * * 

20. Amend § 422.66 by—

A. Revising the section heading. 

B. Revising paragraph (b)(1)(i). 

C. Revising paragraph (b)(1)(ii). 

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

E. Revising paragraph (b)(3)(iii) 

introductory text. 

F. Revising paragraph (d)(5). 

G. Revising paragraph (e). 

H. Revising paragraph (f)(2). 

The revisions and additions read as 

follows: 

§ 422.66 Coordination of enrollment and 

disenrollment through MA organizations. 

* * * * * 

(b) * * * 

(1) * * * 

(i) Elect a different MA plan by filing 

the appropriate election with the MA 

organization. 

(ii) Submit a request for disenrollment 

to the MA organization in the form and 

manner prescribed by CMS or file the 

appropriate disenrollment request 

through other mechanisms as 

determined by CMS. 

* * * * * 

(3) * * * 

(ii) Provide enrollee with notice of 

disenrollment in a format specified by 

CMS; and 

(iii) In the case of a plan where lockin applies, include in the notice a 

statement explaining that he or she—

* * * * * 

(d) * * * 

(5) Election. The individual who is 

converting must complete an election as 

described in § 422.60(c)(1). 

* * * * * 

(e) Maintenance of enrollment. (1) An 

individual who has made an election 

under this section is considered to have 

continued to have made that election 

until either of the following, which ever 

occurs first: 

(i) The individual changes the 

election under this section. 

(ii) The elected MA plan is 

discontinued or no longer serves the 

area in which the individual resides, the 

organization does not offer, or the 

individual does not elect, the option of 

continuing enrollment, as provided 

under § 422.54(b)(3)(ii). 

(2) An individual who has elected an 

MA plan that does not provide 

prescription drug coverage will not be 

deemed to have elected an MA–PD plan. 

(3) An individual enrolled in an MA 

plan that, as of December 31, 2005, 

offers any prescription drug coverage 

will be deemed to have elected an MA–

PD plan offered by the same 

organization as of January 1, 2006. 

(4) If an individual is enrolled with an 

MA organization that in 2005 offers 

more than one MA plan that includes 

drug coverage; the MA plan in which 

the individual is enrolled as of 

December 31, 2005 includes drug 

coverage; and that MA plan becomes an 

MA–PD plan on January 1, 2006, the 

individual will be deemed to have 

elected to enroll in that MA–PD plan. 

(5) An individual enrolled in an MA–

PD plan as of December 31 of a year is 

deemed to have elected to remain 

enrolled in that plan on January 1 of the 

following year. 

(f) * * * 

(2) Upon receipt of the election from 

the employer, the MA organization must 

submit a disenrollment notice to CMS 

within timeframes specified by CMS. 

21. Amend § 422.68 by revising 

paragraph (b) to read as follows: 

§ 422.68 Effective dates of coverage and 

change of coverage. 

* * * * * 

(b) Annual election periods. For an 

election or change of election made 

during an annual election period as 

described in § 422.62(a)(2), coverage is 

effective as of the first day of the 

following calendar year except that for 

the special annual election period 

described in § 422.62(a)(2)(ii), elections 

made after December 31, 2005 through 

May 15, 2006 are effective as of the first 

day of the first calendar month 

following the month in which the 

election is made. 

* * * * * 

22. Amend § 422.74 by—

A. Revising the section heading. 

B. Revising paragraph (b)(1)(ii). 

C. Revising paragraph (c)(1). 

D. Revising paragraph (d)(1). 

E. Revising paragraph (d)(2). 

The revisions read as follows: 

§ 422.74 Disenrollment by the Medicare 

Advantage Organization. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) The individual has engaged in 

disruptive or threatening behaviors 

specified at paragraph (d)(2) of this 

section. 

* * * * * 

(c) * * * 

(1) Be provided to the individual 

before submission of the disenrollment 

transaction to CMS; and 

* * * * * 

(d) Process for disenrollment—(1) 

Monthly basic and supplementary 

premiums are not paid timely. An MA 

organization may disenroll an 

individual from the MA plan for failure 

to pay basic and supplementary 

premiums under the following 

circumstances: 

(i) The MA organization can 

demonstrate to CMS that it made 

reasonable efforts to collect the unpaid 

premium amount. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46957 

(ii) The MA organization provides the 

enrollee with notice of disenrollment 

that meets the requirements set forth in 

paragraph (c) of this section. 

(iii) If the enrollee fails to pay the 

premium for optional supplemental 

benefits but pays the basic premium and 

any mandatory supplemental premium, 

the MA organization has the option to 

discontinue the optional supplemental 

benefits and retain the individual as an 

MA enrollee. 

(2) Disruptive or threatening 

behavior—(i) Basis for disenrollment. 

An MA organization may disenroll an 

individual from the MA plan if the 

individual’s behavior is disruptive, 

unruly, abusive, uncooperative, or 

threatening. Disruptive behavior may 

not be based upon the use of medical 

services or noncompliance with medical 

advice. An individual who engages in 

disruptive or threatening behavior refers 

to an individual who exhibits any of the 

following: 

(A) An individual whose behavior 

jeopardizes his or her health or safety, 

or the safety of others; 

(B) An individual whose behavior 

impairs the MA’s ability to furnish 

services to either the individual or other 

individuals enrolled in the plan; or 

(C) An individual with decisionmaking capacity who refuses to comply 

with the terms of the enrollment 

agreement. 

(ii) Effort to resolve the problem. The 

MA organization must make a serious 

effort to resolve the problems presented 

by the individual, including the use (or 

attempted use) of the MA organization’s 

grievance procedures. The beneficiary 

has a right to submit any information or 

explanation that he or she may wish to 

submit to the MA organization. 

(iii) Documentation. The MA 

organization must document the 

enrollee’s behavior, its own efforts to 

resolve any problems, as described in 

paragraphs (d)(2)(i) through (d)(2)(ii) of 

this section and any extenuating 

circumstances. 

(iv) CMS review of the proposed 

disenrollment. CMS will decide after 

reviewing the documentation submitted 

by the MA organization and any 

information submitted by the 

beneficiary (which the MA organization 

must forward to CMS) whether the MA 

organization has met the criteria for 

disenrollment for disruptive or 

threatening behavior. CMS will make 

the decision within 20 working days 

after receipt of the documentation and 

will notify the MA organization within 

5 working days after making its 

decision. 

(v) Effective date of disenrollment. If 

CMS permits an MA organization to 

disenroll an individual for disruptive 

behavior, the termination is effective the 

first day of the calendar month after the 

month in which the MA organization 

gives the individual notice of the 

disenrollment that meets the 

requirements set forth in paragraph (c) 

of this section. 

(vi) Reenrollment in the MA 

organization. Once an individual is 

disenrolled from the MA organization 

for disruptive behavior, the MA 

organization has the option to decline 

future enrollment by the individual for 

a period of time specified by CMS. 

(vii) Expedited process. In the event 

that an individual’s disruptive or 

threatening behavior is so extreme as to 

have caused harm to others or prevented 

the MA plan from providing services, 

CMS may consider allowing an 

expedited disenrollment process. 

* * * * * 

23. Amend § 422.80 by—

A. Revising paragraph (a)(2). 

B. Adding paragraph (a)(3). 

C. Revising paragraph (e)(1)(ii). 

D. Revising paragraph (e)(1)(iii). 

E. Revising paragraph (e)(1)(iv). 

F. Revising paragraph (e)(1)(v). 

G. Adding paragraph (e)(1)(ix). 

The revisions and additions read as 

follows: 

§ 422.80 Approval of marketing materials 

and election forms. 

(a) * * * 

(1) * * * 

(2) CMS does not disapprove the 

distribution of new material or form; or 

(3) If the MA plan is deemed by CMS 

to meet certain performance 

requirements established by CMS, the 

MA plan may distribute designated 

marketing materials 5 days following 

their submission to CMS. 

* * * * * 

(e) * * * 

(1) * * * 

(ii) Engage in any discriminatory 

activity, including targeted marketing to 

Medicare beneficiaries from higher 

income areas without making 

comparable efforts to enroll Medicare 

beneficiaries from lower income areas. 

(iii) Solicit Medicare beneficiaries 

door-to-door. 

(iv) Engage in activities that could 

mislead or confuse Medicare 

beneficiaries, or misrepresent the MA 

organization. The MA organization may 

not claim it is recommended or 

endorsed by CMS or Medicare or the 

Department of Health and Human 

Services or that CMS or Medicare or the 

Department of Health and Human 

Services recommends that the 

beneficiary enroll in the MA plan. It 

may, however, explain that the 

organization is approved for 

participation in Medicare. 

(v) Distribute marketing materials for 

which, before expiration of the 45-day 

period (or 10 days as provided in 

paragraph (a)(1) of this section), the MA 

organization receives from CMS written 

notice of disapproval because it is 

inaccurate or misleading, or 

misrepresents the MA organization, its 

marketing representatives, or CMS. 

* * * * * 

(ix) Engage in any other marketing 

activity prohibited by CMS in its 

marketing guidance. 

* * * * * 

Subpart C—Benefits and Beneficiary 

Protections 

§ 422.100 [Amended] 

24. Amend § 422.100 by—

A. Revising paragraph (b)(2). 

B. Revising paragraph (c)(1). 

C. Removing paragraph (e). 

D. Redesignating paragraph (f) as 

paragraph (e). 

E. Redesignating paragraph (g) as 

paragraph (f). 

F. Redesignating paragraph (h) as 

paragraph (g). 

G. Redesignating paragraph (i) as 

paragraph (h). 

H. Redesignating paragraph (j) as 

paragraph (i). 

I. Revising the heading of newly 

redesignated paragraph (f). 

J. Revising newly redesignated 

paragraph (f) introductory text. 

K. Revising newly redesignated 

paragraph (f)(2). 

The revisions read as follows: 

Subpart C—Benefits and Beneficiary 

Protections 

§ 422.100 General requirements. 

* * * * * 

(b) * * * 

(2) An MA plan (and an MA MSA 

plan, after the annual deductible in 

§ 422.103(d) has been met) offered by an 

MA organization satisfies paragraph (a) 

of this section with respect to benefits 

for services furnished by noncontracting 

provider if that MA plan provides 

payment in an amount the provider 

would have received under original 

Medicare (including balance billing 

permitted under Medicare Part A and 

Part B). 

* * * * * 

(c) * * * 

(1) Basic benefits are all Medicarecovered services, expect hospice 

services. 

* * * * * 

(f) CMS review and approval of MA 

benefits. CMS reviews and approves MA 

46958 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

benefits using written policy guidelines 

and requirements in this part and other 

CMS instructions to ensure that—

* * * * * 

(2) MA organizations are not 

designing benefits to discriminate 

against beneficiaries, promote 

discrimination, discourage enrollment 

or encourage disenrollment, steer 

subsets of Medicare beneficiaries to 

particular MA plans, or inhibit access to 

services; and 

* * * * * 

25. Amend § 422.101 by—

A. Revising paragraph (b)(2). 

B. Adding paragraph (b)(4). 

C. Adding paragraph (d). 

D. Adding paragraph (e). 

The revision and additions read as 

follows: 

§ 422.101 Requirements relating to basic 

benefits. 

* * * * * 

(b) * * * 

(2) General coverage guidelines 

included in original Medicare manuals 

and instructions unless superseded by 

regulations in this part or related 

instructions; and 

* * * * * 

(4) Instead of applying rules in 

paragraph (b)(3) of this section, an 

organization offering an MA regional 

plan may elect to have any local 

coverage determination that applies in 

any part of an MA region apply to all 

parts of that same MA region. The 

election is at the discretion of the MA 

regional plan and is not subject to CMS 

pre-approval. 

* * * * * 

(d) Special cost-sharing rules for MA 

regional plans. In addition to the 

requirements in paragraph (a) through 

paragraph (c) of this section, MA 

regional plans must provide for the 

following: 

(1) Single deductible. MA regional 

plans, to the extent they apply a 

deductible, are permitted to have only a 

single deductible related to combined 

Medicare Part A and Part B services. 

Applicability of the single deductible 

may be differential for specific innetwork services and may also be 

waived for preventative services or 

other items and services. 

(2) Catastrophic limit. MA regional 

plans are required to provide for a 

catastrophic limit on beneficiary out-ofpocket expenditures for in-network 

benefits under the original Medicare feefor-service program (Part A and Part B 

benefits). 

(3) Additional catastrophic limit. MA 

regional plans are required to provide 

an additional catastrophic limit on 

beneficiary out-of-pocket expenditures 

for in-network and out-of-network 

benefits under the original Medicare feefor-service program. This second out-ofpocket catastrophic limit, which would 

apply to both in-network and out-ofnetwork benefits under original 

Medicare, may be higher than the innetwork catastrophic limit in paragraph 

(d)(2) of this section, but may not 

increase the limit described in 

paragraph (d)(2) of this section. 

(4) Tracking of deductible and 

catastrophic limits and notification. MA 

regional plans are required to track the 

deductible (if any) and catastrophic 

limits in paragraphs (d)(1) through (d)(3) 

of this section based on incurred out-ofpocket beneficiary costs for original 

Medicare covered services, and are also 

required to notify members when the 

deductible (if any) or a limit has been 

reached. 

(e) Other rules for MA regional plans. 

(1) MA regional plans are required to 

provide reimbursement for all covered 

benefits, regardless of whether those 

benefits are provided within or outside 

of the network of contracted providers. 

(2) In applying the actuarially 

equivalent level of cost-sharing with 

respect to MA bids related to benefits 

under the original Medicare program 

option as set forth at § 422.308, only the 

catastrophic limit on out-of-pocket 

expenses for in-network benefits in 

paragraph (d)(2) of this section will be 

taken into account. 

26. Amend § 422.102 by—

A. Revising paragraph (a)(1). 

B. Revising paragraph (a)(3). 

C. Adding paragraph (a)(4). 

The revisions and addition read as 

follows: 

§ 422.102 Supplemental benefits. 

(a) * * * 

(1) Subject to CMS approval, an MA 

organization may require Medicare 

enrollees of an MA plan (other than an 

MSA plan) to accept or pay for services 

in addition to Medicare-covered 

services described in § 422.101. 

* * * * * 

(3) CMS approves mandatory 

supplemental benefits if the benefits are 

designed in accordance with CMS’

guidelines and requirements as stated in 

this part and other written instructions. 

(4) Beginning in 2006, an MA plan 

may reduce cost sharing below the 

actuarial value specified in section 

1854(e)(4)(B) of the Act as a mandatory 

supplemental benefit. 

* * * * * 

27. Amend § 422.103 by—

A. Revising the section heading. 

B. Revising paragraph (a). 

The revisions read as follows: 

§ 422.103 Benefits under an MA MSA plan. 

(a) General rule. An MA organization 

offering an MA MSA plan must make 

available to an enrollee, or provide 

reimbursement for, at least the services 

described in § 422.101 after the enrollee 

incurs countable expenses equal to the 

amount of the plan’s annual deductible. 

* * * * * 

28. Amend 422.105 by revising 

paragraph (a) to read as follows: 

§ 422.105 Special rules for point of service 

option. 

(a) If an MA organization does not 

offer a POS benefit to members of a 

plan, or if it offers a POS benefit as an 

optional supplemental benefit and the 

member has not selected that benefit, 

then when those members receive what 

is a covered item or service from 

contracted providers of that plan, the 

member cannot be financially liable for 

more than the normal in-plan cost 

sharing, if the member correctly 

identified himself or herself as a 

member of that plan to the contracted 

provider before receiving the covered 

item or service. As a general rule, a POS 

benefit is an option that an MA 

organization may offer in an MA 

coordinated care plan to provide 

enrollees with additional choice in 

obtaining specified health care services. 

The organization may offer A POS 

option—

(1) Before January 1, 2006, under a 

coordinated care plan as an additional 

benefit as described in § 422.312; 

(2) Under a coordinated care plan as 

a mandatory supplemental benefit as 

described in § 422.102(a); or 

(3) Under a coordinated care plan as 

an optional supplemental benefit as 

described in § 422.102(b). 

(4) An MA regional plan is permitted 

to offer a POS–LIKE benefit as described 

in paragraphs (a)(2) or (a)(3) of this 

section as a supplemental benefit. An 

MA regional plan may offer a POS–LIKE 

option as a supplemental benefit where 

cost sharing for out-of-network services 

is reduced, in a limited manner, for 

services obtained from out-of-network 

providers. Offering a POS–LIKE 

supplemental benefit does not affect the 

MA regional plan’s responsibility to 

provide reimbursement for all covered 

benefits, regardless of whether those 

benefits are provided within the 

network of contracted providers. 

* * * * * 

29. Amend § 422.106 by—

A. Revising the paragraph (c) heading. 

B. Revising paragraph (c)(2). 

C. Adding paragraph (d). 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46959 

The revisions and addition read as 

follows: 

§ 422.106 Coordination of benefits with 

employer or union group health plans and 

Medicaid. 

* * * * * 

(c) Waiver or modification of 

contracts with MA organizations. * * * 

* * * * * 

(2) Approved waivers or 

modifications under this paragraph 

granted to any MA organization may be 

used by any other MA organization in 

developing its bid. 

(d) Employer sponsored MA plans for 

plan years beginning on or after January 

1, 2006. (1) To facilitate the offering of 

MA plans by employers, labor 

organizations, or the trustees of a fund 

established by one or more employers or 

labor organizations (or combination 

thereof) to furnish benefits to the 

entity’s employees, former employees 

(or combination thereof) or members or 

former members (or combination 

thereof), of the labor organizations, 

those MA plans may request, in writing, 

from CMS, a waiver or modification of 

those requirements in this part that 

hinder the design of, the offering of, or 

the enrollment in, those plans by those 

individuals. 

(2) An MA plan described in this 

paragraph may restrict the enrollment of 

individuals in that plan to individuals 

who are beneficiaries and participants 

in that plan. 

(3) Approved waivers or 

modifications under this paragraph 

granted to any MA plan may be used by 

any other similarly situated MA plan in 

developing its bid. 

30. Amend § 422.108 by revising 

paragraph (f) to read as follows: 

§ 422.108 Medicare secondary payer (MSP) 

procedures. 

* * * * * 

(f) MSP rules and State laws. 

Consistent with § 422.402 concerning 

the Federal preemption of State law, the 

rules established under this section 

supersede any State laws, regulations, 

contract requirements, or other 

standards that would otherwise apply to 

MA plans. A State cannot take away an 

MA organization’s right under Federal 

law and the MSP regulations to bill, or 

to authorize providers and suppliers to 

bill, for services for which Medicare is 

not the primary payer. The MA 

organization will exercise the same 

rights to recover from a primary plan, 

entity, or individual that the Secretary 

exercises under the MSP regulations in 

subparts B through D of part 411 of this 

chapter. 

30. Amend § 422.109 by—

A. Revising paragraph (a)(2). 

B. Revising paragraph (c)(2)(iv). 

C. Revising paragraph (c)(3). 

The revisions read as follows: 

§ 422.109 Effect of national coverage 

determinations (NCDs) and legislative 

changes in benefits. 

(a) * * * 

(2) The estimated cost of Medicare 

services furnished as a result of a 

particular NCD or legislative change in 

benefits represents at least 0.1 percent of 

the national average per capita costs. 

* * * * * 

(c) * * * 

(2) * * * 

(iv) Any services, including the costs 

of the NCD service or legislative change 

in benefits, to the extent the MA 

organization is already obligated to 

cover it as a supplemental benefit under 

§ 422.102. 

(3) Costs for significant cost NCD 

services or legislative changes in 

benefits for which CMS fiscal 

intermediaries and carriers will make 

payment are those Medicare costs not 

listed in paragraphs (c)(2)(i) through 

(c)(2)(iv) of this section. 

* * * * * 

32. Amend § 422.110 by—

A. Revising paragraph (b). 

B. Removing paragraph (c). 

The revision reads as follows: 

§ 422.110 Discrimination against 

beneficiaries prohibited. 

* * * * * 

(b) Exception. An MA organization 

may not enroll an individual who has 

been medically determined to have endstage renal disease. However, an 

enrollee who develops end-stage renal 

disease while enrolled in a particular 

MA organization may not be disenrolled 

for that reason. An individual who is an 

enrollee of a particular MA 

organization, and who resides in the 

MA plan service area at the time he or 

she first becomes MA eligible, or, an 

individual enrolled by an MA 

organization that allows those who 

reside outside its MA service area to 

enroll in an MA plan as set forth at 

§ 422.50(a)(3)(ii), then that individual is 

considered to be ‘‘enrolled’’ in the MA 

organization for purposes of the 

preceding sentence. 

§ 422.111 [Amended] 

33. Amend § 422.111 by—

A. Revising paragraph (b)(3). 

B. Revising paragraph (c)(1). 

C. Revising paragraph (d)(2). 

D. Revising paragraph (e). 

E. Removing paragraph (f)(4). 

C. Removing paragraph (f)(6). 

D. Redesignating paragraph (f)(5) as 

paragraph (f)(4). 

E. Redesignating paragraph (f)(7) as 

paragraph (f)(5). 

F. Redesignating paragraph (f)(8) as 

paragraph (f)(6). 

G. Redesignating paragraph (f)(9) as 

paragraph (f)(7). 

H. Redesignating paragraph (f)(10) as 

paragraph (f)(8). 

I. Redesignating paragraph (f)(11) as 

paragraph (f)(9). 

J. Revising newly redesignated 

paragraph (f)(5)(iv). 

K. Removing newly redesignated 

paragraph (f)(5)(v). 

L. Redesignating paragraph (f)(5)(vi) 

as paragraph (f)(5)(v). 

M. Redesignating paragraph (f)(5)(vii) 

as paragraph (f)(5)(vi). 

N. Redesignating paragraph (f)(5)(viii) 

as paragraph (f)(5)(vii). 

O. Revising newly redesignated 

paragraph (f)(9). 

P. Adding new paragraph (f)(10). 

The revisions and addition read as 

follows: 

§ 422.111 Disclosure requirements. 

* * * * * 

(b) * * * 

(3) Access. The number, mix, and 

distribution (addresses) of providers 

from whom enrollees may reasonably be 

expected obtain services; any out-of 

network coverage; any point-of-service 

option, including the supplemental 

premium for that option; and how the 

MA organization meets the 

requirements of § 422.112 and § 422.114 

for access to services offered under the 

plan. 

* * * * * 

(c) * * * 

(1) The information required in 

paragraph (f) of this section. 

* * * * * 

(d) * * * 

(2) For changes that take effect on 

January 1, notify all enrollees at least 15 

days before the beginning of the Annual 

Coordinated Election Period defined in 

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

* * * * * 

(e) Changes to provider network. The 

MA organization must make a good faith 

effort to provide notice of a termination 

of a contracted provider at least 30 

calendar days before the termination 

effective date to all enrollees who are 

patients seen on a regular basis by the 

provider whose contract is terminating, 

irrespective of whether the termination 

was for cause or without cause. When 

a contract termination involves a 

primary care professional, all enrollees 

who are patients of that primary care 

professional must be notified. 

(f) * * * 

(5) * * * 

46960 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(iv) In the case of an MA MSA plan, 

the amount of the annual MSA deposit. 

* * * * * 

(9) Supplemental benefits. Whether 

the plan offers mandatory and optional 

supplemental benefits, including any 

reductions in cost sharing offered as a 

mandatory supplemental benefit as 

permitted under section 1852(a)(3) of 

the Act (and implementing regulations 

at § 422.102) and the terms, conditions, 

and premiums for those benefits. 

(10) The names, addresses, and phone 

numbers of providers from whom the 

enrollee may obtain in-network 

coverage in other areas. 

§ 422.112 [Amended] 

34. Amend § 422.112 by—

A. Revising paragraph (a)(1). 

B. Removing paragraph (a)(4). 

C. Removing paragraph (a)(7). 

D. Redesignating paragraph (a)(5) as 

paragraph (a)(4). 

E. Redesignating paragraph (a)(6) as 

paragraph (a)(5). 

F. Redesignating paragraphs (a)(8) as 

paragraph (a)(6). 

G. Redesignating paragraph (a)(9) as 

paragraph (a)(7). 

H. Redesignating paragraph (a)(10) as 

paragraph (a)(8). 

I. Removing paragraph (b)(4)(i). 

J. Redesignating paragraph (b)(4)(ii) as 

paragraph (b)(4)(i). 

K. Redesignating paragraph (b)(4)(iii) 

as paragraph (b)(4)(ii). 

L. Adding paragraph (c). 

The revisions and addition read as 

follows: 

§ 422.112 Access to services. 

(a) Rules for coordinated care plans. 

* * * 

(1) Provider network. (i) Maintain and 

monitor a network of appropriate 

providers that is supported by written 

agreements and is sufficient to provide 

adequate access to covered services to 

meet the needs of the population served. 

These providers are typically used in 

the network as primary care providers 

(PCPs), specialists, hospitals, skilled 

nursing facilities, home health agencies, 

ambulatory clinics, and other providers. 

(ii) Exception: MA regional plans, 

upon CMS pre-approval, can use 

methods other than written agreements 

to establish that access requirements are 

met. 

* * * * * 

(c) Essential hospital. An MA regional 

plan may seek, upon application to 

CMS, to designate a hospital as an 

essential hospital as defined in section 

1858(h) of the Act under the following 

conditions: 

(1) The hospital that the MA regional 

plan seeks to designate as essential is a 

general acute care hospital as defined in 

section 1886(d) of the Act. 

(2) The MA regional plan provides 

convincing evidence to CMS that the 

MA regional plan needs to contract with 

the hospital as a condition of meeting 

access requirements under this section. 

(3) The MA regional plan must 

establish that it made a ‘‘good faith’’

effort to contract with the hospital to be 

designated as an essential hospital. 

(4) The hospital that is to be 

designated as an essential hospital 

provides convincing evidence to CMS 

that the amounts normally payable 

under section 1886 of the Act (and 

which the MA regional plan has agreed 

to pay) will be less than the hospital’s 

actual costs of providing care to the MA 

regional plan’s enrollees. 

(5) If CMS determines the 

requirements in paragraphs (c)(1) 

through (c)(4) of this section have been 

met, it will make payment to the 

essential hospital in accordance with 

section 1858(h)(2) of the Act, as limited 

by the amounts specified in section 

1858(h)(3) of the Act. 

35. Amend § 422.113 by—

A. Revising paragraph (b)(2)(v). 

B. Revising paragraph (c)(2)(iv). 

The revisions read as follows: 

§ 422.113 Special rules for ambulance 

services, emergency and urgently needed 

services, and maintenance and poststabilization care services. 

* * * * * 

(b) * * * 

(2) * * * 

(v) With a limit on charges to 

enrollees for emergency department 

services of $50 or what it would charge 

the enrollee if he or she obtained the 

services through the MA organization, 

whichever is less. 

* * * * * 

(c) * * * 

(2) * * * 

(iv) Must limit charges to enrollees for 

post-stabilization care services to an 

amount no greater than what the 

organization would charge the enrollee 

if he or she had obtained the services 

through the MA organization. For 

purposes of cost sharing, poststabilization care services begin upon 

admission. 

* * * * * 

36. Amend § 422.114 by—

A. Revising the section heading to 

read as set forth below. 

B. Adding paragraph (c) to read as 

follows: 

§ 422.114 Access to services under an MA 

private fee-for-service plan. 

* * * * * 

(c) Private fee-for-service plans that 

meet network adequacy requirements 

for a category of health care professional 

or provider by meeting the requirements 

in paragraph (a)(2)(ii) of this section 

may provide for a higher beneficiary 

copayment in the case of health care 

professionals or providers of that same 

category who do not have contracts or 

agreements to provide covered services 

under the terms of the plan. 

37. Amend § 422.133 by adding 

paragraph (b)(4) to read as follows: 

§ 422.133 Return to home skilled nursing 

facility. 

* * * * * 

(b) * * * 

(4) If an MA organization elects to 

furnish SNF care in the absence of a 

prior qualifying hospital stay under 

§ 422.101(c), then that SNF care is also 

subject to the home skilled nursing 

facility rules in this section. In applying 

the provisions of this section to 

coverage under this paragraph, 

references to a hospitalization, or 

discharge from a hospital, are deemed to 

refer to wherever the enrollee resides 

immediately before admission for 

extended care services. 

* * * * * 

Subpart D—Quality Improvement 

38. In subpart D, remove ‘‘quality 

assurance’’ wherever it appears and add 

in its place ‘‘quality improvement.’’

39. Revise § 422.152 to read as 

follows: 

§ 422.152 Quality improvement program. 

(a) General rule. Each MA 

organization (other than MA private-feefor-service and MSA plans) that offers 

one or more MA plans must have, for 

each of those plans, an ongoing quality 

improvement program that meets the 

applicable requirements of this section 

for the services it furnishes to its MA 

enrollees. As part of its ongoing quality 

improvement program, a plan must—

(1) Have a chronic care improvement 

program that meets the requirements of 

paragraph (c) of this section concerning 

elements of a chronic care program; 

(2) Conduct quality improvement 

projects that can be expected to have a 

favorable effect on health outcomes and 

enrollee satisfaction, and meet the 

requirements of paragraph (d) of this 

section; and 

(3) Encourage its providers to 

participate in CMS and HHS quality 

improvement initiatives. 

(b) Requirements for MA coordinated 

care plans (except for regional MA 

plans) and including local PPO plans 

that are offered by organizations that 

are licensed or organized under State 

law as HMOs. An MA coordinated care 

plan’s (except for regional PPO plans 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46961 

and local PPO plans as defined in 

§ 422.152(e)) quality improvement 

program must—

(1) In processing requests for initial or 

continued authorization of services, 

follow written policies and procedures 

that reflect current standards of medical 

practice. 

(2) Have in effect mechanisms to 

detect both underutilization and 

overutilization of services. 

(3) Measure and report performance. 

The organization offering the plan must 

do the following: 

(i) Measure performance under the 

plan, using the measurement tools 

required by CMS, and report its 

performance to CMS. The standard 

measures may be specified in uniform 

data collection and reporting 

instruments required by CMS. 

(ii) Make available to CMS 

information on quality and outcome 

measures that will enable beneficiaries 

to compare health coverage options and 

select among them, as provided in 

§ 422.64(c)(10). 

(4) Special rule for MA local PPO-type 

plans that are offered by an organization 

that is licensed or organized under State 

law as a health maintenance 

organization must meet the 

requirements specified in paragraphs 

(b)(1) through (b)(3) of this section. 

(c) Chronic care improvement 

program requirements. Develop criteria 

for participating in a chronic care 

improvement program. These criteria 

must include—

(1) Methods for identifying MA 

enrollees with multiple or sufficiently 

severe chronic conditions that would 

benefit from participating in a chronic 

care improvement program; and 

(2) Mechanisms for monitoring MA 

enrollees that are participating in the 

chronic care improvement program. 

(d) Quality improvement projects. (1) 

Quality improvement projects are an 

organization’s initiatives that focus on 

specified clinical and nonclinical areas 

and that involve the following: 

(i) Measurement of performance. 

(ii) System interventions, including 

the establishment or alteration of 

practice guidelines. 

(iii) Improving performance. 

(iv) Systematic and periodic followup on the effect of the interventions. 

(2) For each project, the organization 

must assess performance under the plan 

using quality indicators that are—

(i) Objective, clearly and 

unambiguously defined, and based on 

current clinical knowledge or health 

services research; and 

(ii) Capable of measuring outcomes 

such as changes in health status, 

functional status and enrollee 

satisfaction, or valid proxies of those 

outcomes. 

(3) Performance assessment on the 

selected indicators must be based on 

systematic ongoing collection and 

analysis of valid and reliable data. 

(4) Interventions must achieve 

demonstrable improvement. 

(5) The organization must report the 

status and results of each project to CMS 

as requested. 

(e) Requirements for MA regional 

plans and MA local plans that are PPO 

plans as defined in this section—(1) 

Definition of local preferred provider 

organization plan. For purposes of this 

section, the term local preferred 

provider organization (PPO) plan means 

an MA plan that—

(i) Has a network of providers that 

have agreed to a contractually specified 

reimbursement for covered benefits with 

the organization offering the plan; 

(ii) Provides for reimbursement for all 

covered benefits regardless of whether 

the benefits are provided within the 

network of providers; and 

(iii) Is offered by an organization that 

is not licensed or organized under State 

law as a health maintenance 

organization. 

(2) MA organizations offering an MA 

regional plan or local PPO plan as 

defined in this section must: 

(i) Measure performance under the 

plan using standard measures required 

by CMS and report its performance to 

CMS. The standard measures may be 

specified in uniform data collection and 

reporting instruments required by CMS. 

(ii) Evaluate the continuity and 

coordination of care furnished to 

enrollees. 

(iii) If the organization uses written 

protocols for utilization review, the 

organization must—

(A) Base those protocols on current 

standards of medical practice; and 

(B) Have mechanisms to evaluate 

utilization of services and to inform 

enrollees and providers of services of 

the results of the evaluation. 

(f) Requirements for all types of 

plans—(1) Health information. For all 

types of plans that it offers, an 

organization must—

(i) Maintain a health information 

system that collects, analyzes, and 

integrates the data necessary to 

implement its quality improvement 

program; 

(ii) Ensure that the information it 

receives from providers of services is 

reliable and complete; and 

(iii) Make all collected information 

available to CMS. 

(2) Program review. For each plan, 

there must be in effect a process for 

formal evaluation, at least annually, of 

the impact and effectiveness of its 

quality improvement program. 

(3) Remedial action. For each plan, 

the organization must correct all 

problems that come to its attention 

through internal surveillance, 

complaints, or other mechanisms. 

§ 422.154 [Removed] 

40. Remove § 422.154. 

41. Amend § 422.156 by adding 

paragraph (b)(7) to read as follows: 

§ 422.156 Compliance deemed on the 

basis of accreditation. 

* * * * * 

(b) * * * 

(7) Part D prescription drug benefit 

programs that are offered by MA 

programs. 

* * * * * 

Subpart E—Relationships With 

Providers 

§ 422.208 [Amended] 

42. In § 422.208, the following 

changes are made: 

A. Paragraph (c)(2) is revised. 

B. Paragraph (h) is removed. 

C. Paragraph (i) is redesignated as 

paragraph (h). 

The revision reads as follows: 

§ 422.208 Physician incentive plans: 

Requirements and limitations. 

* * * * * 

(c) * * * 

(2) If the physician incentive plan 

places a physician or physician group at 

substantial financial risk (as determined 

under paragraph (d) of this section) for 

services that the physician or physician 

group does not furnish itself, the MA 

organization must assure that all 

physicians and physician groups at 

substantial financial risk have either 

aggregate or per-patient stop-loss 

protection in accordance with paragraph 

(f) of this section and conduct periodic 

surveys in accordance with paragraph 

(h) of this section. 

* * * * * 

45. Section 422.210 is revised to read 

as follows: 

§ 422.210 Assurances to CMS. 

Each organization will provide 

assurance satisfactory to the Secretary 

that the requirements of § 422.208 are 

met. 

46. In 422.214, the following changes 

are made: 

A. Paragraph (a)(1) is revised. 

B. Paragraph (b) is revised. 

The revisions read as follows: 

§ 422.214 Special rules for services 

furnished by noncontract providers. 

(a) * * * 

46962 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(1) Any provider (other than a 

provider of services as defined in 

section 1861(u) of the Act) that does not 

have in effect a contract establishing 

payment amounts for services furnished 

to a beneficiary enrolled in an MA 

coordinated care plan, an MSA plan, or 

an MA private fee-for-service plan must 

accept, as payment in full, the amounts 

that the provider could collect if the 

beneficiary were enrolled in original 

Medicare. 

* * * * * 

(b) Services furnished by section 

1861(u) providers of service. Any 

provider of services as defined in 

section 1861(u) of the Act that does not 

have in effect a contract establishing 

payment amounts for services furnished 

to a beneficiary enrolled in an MA 

coordinated care plan, an MSA plan, or 

an MA private fee-for-service plan must 

accept, as payment in full, the amounts 

(less any payments under § 412.105(g) 

and § 413.86(d) of this chapter) that it 

could collect if the beneficiary were 

enrolled in original Medicare. (Section 

412.105(g) concerns indirect medical 

education payment to hospitals for 

managed care enrollees. Section 

413.86(d) concerns calculating payment 

for direct medical education costs.) 

43. Subpart F is removed. 

44. New subpart F is added to read as 

follows: 

Subpart F—Submission of Bids, Premiums, 

and Related Information and Plan Approval 

Secs. 

422.250 Basis and scope. 

422.252 Terminology. 

422.254 Submission of bids. 

422.256 Review, negotiation, and approval 

of bids. 

422.258 Calculation of benchmarks. 

422.262 Beneficiary premiums. 

422.264 Calculation of savings. 

422.266 Beneficiary rebates. 

422.270 Incorrect collections of premiums 

and cost sharing. 

Subpart F—Submission of Bids, 

Premiums, and Related Information 

and Plan Approval 

§ 422.250 Basis and scope. 

This subpart is based largely on 

section 1854 of the Act, but also 

includes provisions from section 1853 

and section 1858 of the Act. It sets forth 

the requirements for the Medicare 

Advantage bidding payment 

methodology, including CMS’

calculation of benchmarks, submission 

of plan bids by Medicare Advantage 

(MA) organizations, establishment of 

beneficiary premiums and rebates 

through comparison of plan bids and 

benchmarks, and negotiation and 

approval of bids by CMS. 

§ 422.252 Terminology. 

Annual MA capitation rate means a 

county payment rate for an MA local 

area (county) for a calendar year. The 

terms ‘‘per capita rate’’ and ‘‘capitation 

rate’’ are used interchangeably to refer 

to the annual MA capitation rate. 

MA local area means a payment area 

consisting of county or equivalent area 

specified by CMS. Payments to MA 

local plans are based on the payment 

amount for each MA local area in the 

local plan’s service area. 

MA monthly basic beneficiary 

premium means the premium amount 

an MA plan (except an MSA plan) 

charges an enrollee for benefits under 

the original Medicare fee-for-service 

program option (if any), and is 

calculated as described at § 422.262. 

MA monthly MSA premium means 

the amount of the plan premium for 

coverage of benefits under the original 

Medicare program through an MSA 

plan, as set forth at § 422.254(e). 

MA monthly prescription drug 

beneficiary premium is the MA–PD plan 

base beneficiary premium, defined at 

section 1860D–13(a)(2) of the Act, as 

adjusted to reflect the difference 

between the plan’s bid and the national 

average bid (as described in 

§ 422.256(c)) less the amount of rebate 

the MA–PD plan elects to apply, as 

described at § 422.266(b)(2). 

MA monthly supplemental 

beneficiary premium is the portion of 

the plan bid attributable to mandatory 

and/or optional supplemental health 

care benefits described under § 422.102, 

less the amount of beneficiary rebate the 

plan elects to apply to a mandatory 

supplemental benefit, as described at 

§ 422.266(b)(2)(i). 

MA–PD plan means an MA local or 

regional plan that provides prescription 

drug coverage under Part D of the Social 

Security Act. 

Monthly aggregate bid amount means 

the total monthly plan bid amount for 

coverage of an MA eligible beneficiary 

with a nationally average risk profile for 

the factors described in § 422.308(c), 

and this amount is comprised of the 

following: 

(1) The unadjusted MA statutory nondrug monthly bid amount for coverage 

of original Medicare benefits; 

(2) The amount for coverage of basic 

prescription drug benefits under Part D 

(if any); and 

(3) The amount for provision of 

supplemental health care benefits (if 

any). 

Plan basic cost sharing means cost 

sharing that would be charged by a plan 

for benefits under the original Medicare 

fee-for-service program option before 

any reductions resulting from 

mandatory supplemental benefits. 

Unadjusted MA area-specific nondrug monthly benchmark amount 

means, for local MA plans serving one 

county, the county capitation rate CMS 

publishes annually, and for local MA 

plans serving multiple counties it is the 

weighted average of county rates in a 

plan’s service area, weighted by the 

plan’s projected enrollment per county. 

Unadjusted MA region-specific nondrug monthly benchmark amount 

means, for MA regional plans, the 

amount described at § 422.258(b). 

Unadjusted MA statutory non-drug 

monthly bid amount means a plan’s 

estimate of its average monthly required 

revenue to provide coverage of original 

Medicare benefits to an MA eligible 

beneficiary with a nationally average 

risk profile for the risk factors CMS 

applies to payment calculations as set 

forth at § 422.308(c). 

§ 422.254 Submission of bids. 

(a) General rules. (1) No later than the 

first Monday in June, each MA 

organization must submit to CMS an 

aggregate monthly bid amount for each 

MA plan (other than an MSA plan) the 

organization intends to offer in the 

upcoming year in the service area (or 

segment of such an area if permitted 

under § 422.262(c)(2)) that meets the 

requirements in paragraph (b) of this 

section. With each bid submitted, the 

MA organization must provide the 

information required in paragraph (c) of 

this section. 

(2) CMS has the authority to 

determine whether and when it is 

appropriate to apply the bidding 

methodology described in this section to 

ESRD MA enrollees. 

(b) Bid requirements. (1) The monthly 

aggregate bid amount submitted by an 

MA organization for each plan is the 

organization’s estimate of the revenue 

required for the following categories for 

providing coverage to an MA eligible 

beneficiary with a national average risk 

profile for the factors described in 

§ 422.308(c): 

(i) The statutory non-drug bid 

amount, which is the MA plan’s 

estimated average monthly required 

revenue for providing benefits under the 

original Medicare fee-for-service 

program option (as defined in 

§ 422.252). 

(ii) The amount to provide basic 

prescription drug coverage, if any 

(defined at section 1860D–2(a)(3) of the 

Act). 

(iii) The amount to provide 

supplemental health care benefits, if 

any. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46963 

(2) Each bid is for a uniform benefit 

package for the service area. 

(3) Each bid submission must contain 

all estimated revenue required by the 

plan, including administrative costs and 

return on investment. Plan assumptions 

about revenue requirements must 

include adjustments for the effect that 

providing reductions in Part C and/or 

Part D cost sharing has on utilization. 

(4) The bid amount is for plan 

payments only but must be based on 

plan assumptions about the amount of 

revenue required from enrollee costsharing. The estimate of plan basic costsharing for plan basic benefits must 

reflect the requirement that the level of 

cost sharing MA plans charge to 

enrollees must be actuarially equivalent 

to the level of cost sharing (deductible, 

copayments, or coinsurance) charged to 

beneficiaries under the original 

Medicare program option. 

(c) Information required for 

coordinated care plans and MA private 

fee-for-service plans. MA organizations’

submission of bids for coordinated care 

plans, including regional MA plans and 

specialized MA plans for special needs 

beneficiaries (described at 

§ 422.4(a)(1)(iv)), and for MA private 

fee-for-service plans must include the 

following information: 

(1) The plan type for each plan. 

(2) The monthly aggregate bid amount 

for the provision of all items and 

services under the plan, as defined in 

§ 422.252 and discussed in paragraph (a) 

of this section. 

(3) The proportions of the bid amount 

attributable to—

(i) The provision of benefits under the 

original Medicare fee-for-service 

program option (as defined at 

§ 422.100(c)); 

(ii) The provision of basic 

prescription drug coverage (as defined 

at section 1860D–2(a)(3) of the Act; and 

(iii) The provision of supplemental 

health care benefits (as defined 

§ 422.102). 

(4) The projected number of enrollees 

in each MA local area used in 

calculation of the bid amount, and the 

enrollment capacity, if any, for the plan. 

(5) The actuarial basis for determining 

the amount under paragraph (c)(2) of 

this section and the proportions under 

paragraph (c)(3) of this section, and 

additional information as CMS may 

require to verify actuarial bases and the 

projected number of enrollees. 

(6) A description of deductibles, 

coinsurance, and copayments applicable 

under the plan and the actuarial value 

of the deductibles, coinsurance, and 

copayments. 

(7) For qualified prescription drug 

coverage, the information required 

under section 1860D–11(b) of the Act 

with respect to coverage. 

(8) For the purposes of calculation of 

risk corridors under § 422.458, MA 

organizations offering regional MA 

plans in 2006 and/or 2007 must submit 

the following information developed 

using the appropriate actuarial bases. 

(i) Projected allowable costs (defined 

in § 422.458(a)). 

(ii) The portion of projected allowable 

costs attributable to administrative 

expenses incurred in providing these 

benefits. 

(iii) The total projected costs for 

providing rebatable integrated benefits 

(as defined in § 422.458(a)) and the 

portion of costs that is attributable to 

administrative expenses. 

(d) Beneficiary rebate information. In 

the case of a plan required to provide a 

monthly rebate under § 422.266 for a 

year, the MA organization offering the 

plan must inform CMS how the plan 

will distribute the beneficiary rebate 

among the options described at 

§ 422.266(b). 

(e) Information required for MSA 

plans. MA organizations intending to 

offer MA MSA plans must submit—

(1) The enrollment capacity (if any) 

for the plan; 

(2) The amount of the MSA monthly 

premium for basic benefits under the 

original Medicare fee-for-service 

program option; and 

(3) The amount of the plan 

deductible; 

(4) The amount of the beneficiary 

supplemental premium, if any. 

(f) For plans with Part B only 

enrollees, MA organizations must 

submit separate bids for their Part A and 

Part B enrolled members and their Part 

B only members. 

§ 422.256 Review, negotiation, and 

approval of bids. 

(a) Authority. Subject to paragraphs 

(a)(2), (d), and (e) of this section, CMS 

has the authority to review the aggregate 

bid amounts submitted under § 422.252 

and conduct negotiations with MA 

organizations regarding these bids 

(including the supplemental benefits) 

and the proportions of the aggregate bid 

attributable to basic benefits, 

supplemental benefits, and prescription 

drug benefits. 

(1) When negotiating bid amounts and 

proportions, CMS has authority similar 

to that provided the Director of the 

Office of Personnel Management for 

negotiating health benefits plans under 

5 U.S.C. chapter 89. 

(2) Noninterference. (i) In carrying out 

Parts C and D under this title, CMS may 

not require any MA organization to 

contract with a particular hospital, 

physician, or other entity or individual 

to furnish items and services. 

(ii) CMS may not require a particular 

price structure for payment under such 

a contract, with the exception of 

payments to Federally qualified health 

centers as set forth at § 422.316. 

(b) Standards of review. Subject to 

paragraphs (d) and (e) of this section, 

CMS can only accept bid amounts or 

proportions described in paragraph (a) 

of this section if CMS determines the 

following standards have been met: 

(1) The bid amount and proportions 

are supported by the actuarial bases 

provided by MA organizations under 

§ 422.254. 

(2) The bid amount and proportions 

should reflect the plan’s estimated 

revenue requirements for providing the 

benefit package, as the term revenue 

requirements is used in section 1302(8) 

of the Public Health Service Act. 

(3) Limitation on enrollee cost 

sharing. For coordinated care plans 

(including regional MA plans and 

specialized MA plans) and private feefor-service plans (other than MSA 

plans): 

(i) The actuarial value of plan basic 

cost sharing, reduced by any 

supplemental benefits, may not 

exceed—

(ii) The actuarial value of deductibles, 

coinsurance, and copayments that 

would be applicable for the benefits to 

individuals entitled to benefits under 

Part A and enrolled under Part B in the 

plan’s service area with a national 

average risk profile for the factors 

described in § 422.308(c) if they were 

not members of an MA organization for 

the year. 

(c) Negotiation process. The 

negotiation process may include the 

resubmission of information to allow 

MA organizations to modify their initial 

bid submissions to account for the 

outcome of CMS’ regional benchmark 

calculations required under § 422.258(b) 

and the outcome of CMS’ calculation of 

the national average monthly bid 

amount required under section 1860D–

13(a)(4) of the Act. 

(d) Exception for private fee-forservice plans. For private fee-for-service 

plans defined at § 422.4(a)(3), CMS will 

not review, negotiate, or approve the bid 

amount, proportions of the bid, or the 

amounts of the basic beneficiary 

premium and supplemental premium. 

(e) Exception for MSA plans. CMS 

does not review, negotiate, or approve 

amounts submitted with respect to MA 

MSA plans, except to determine that the 

deductible does not exceed the statutory 

maximum, defined at § 422.103(d). 

46964 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

§ 422.258 Calculation of benchmarks. 

(a) The term ‘‘MA area-specific nondrug monthly benchmark amount’’

means, for a month in a year: 

(1) For MA local plans with service 

areas entirely within a single MA local 

area, 1/12th of the annual MA 

capitation rate (described at § 422.306) 

for the area, adjusted as appropriate for 

the purpose of risk adjustment. 

(2) For MA local plans with service 

areas including more than one MA local 

area, an amount equal to the weighted 

average of annual capitation rates for 

each local area (county) in the plan’s 

service area, using as weights the 

projected number of enrollees in each 

MA local area that the plan used to 

calculate the bid amount, and adjusted 

as appropriate for the purpose of risk 

adjustment. 

(b) For MA regional plans, the term 

MA region-specific non-drug monthly 

benchmark amount is: 

(1) The sum of two components: the 

statutory component (based on a 

weighted average of local benchmarks in 

the region, as described in paragraph 

(b)(3) of this section; and the plan bid 

component (based on a weighted 

average of plan bids in the region as 

described in paragraph (b)(5) of this 

section). 

(2) Announced before November 15 of 

each year, but after CMS has received 

the plan bids. 

(c) Calculation of MA regional nondrug benchmark amounts. CMS 

calculates the monthly regional nondrug benchmark amounts as follows: 

(1) Reference month. For all 

calculations that follow, CMS will 

determine the number of MA eligible 

individuals in each local area, in each 

region, and nationally as of the 

reference month, which is a month in 

the previous calendar year CMS 

identifies. 

(2) Statutory market share. CMS will 

determine the statutory national market 

share percentage as the proportion of 

the MA eligible individuals nationally 

who were not enrolled in an MA plan. 

(3) Statutory component of the regionspecific benchmark. (i) CMS calculates 

the unadjusted region-specific non-drug 

amount by multiplying the county 

capitation rate by the county’s share of 

the MA eligible individuals residing in 

the region (the number of MA eligible 

individuals in the county divided by the 

number of MA eligible individuals in 

the region), and then adding all the 

enrollment-weighted county rates to a 

sum for the region. 

(ii) CMS then multiplies the 

unadjusted region-specific non-drug 

amount from paragraph (c)(3)(i) of this 

section by the statutory market share to 

determine the statutory component of 

the regional benchmark. 

(4) Plan-bid component of the regionspecific benchmark. For each plan 

offered in a region, CMS will multiply 

the plan’s unadjusted region-specific 

non-drug bid amount by the plan’s share 

of enrollment (as determined under 

paragraph (c)(5) of this section) and then 

sum these products across all plans 

offered in the region. CMS then 

multiples this by 1 minus the statutory 

market share to determine the plan-bid 

component of the regional benchmark. 

(5) Plan’s share of enrollment. CMS 

will calculate the plan’s share of MA 

enrollment in the region as follows: 

(i) In the first year, any MA regional 

plan is being offered, and more than one 

MA plan is being offered: CMS will 

determine each plan’s share of 

enrollment based on one of two possible 

approaches. CMS may base this on 

equal division among plans, so that each 

plan’s share will be 1 divided by the 

number of plans offered. Alternatively, 

CMS may base this on each plan’s 

estimate of projected enrollment. In that 

case, each plan’s share will be the plan’s 

projected enrollment divided by the 

total projected enrollment among all 

plans being offered in the region. Plan 

enrollment projections are subject to 

review and adjustment by CMS to 

assure reasonableness. 

(ii) If two or more regional plans are 

offered in a region and were offered in 

the reference month: The plan’s share of 

enrollment will be the number of MA 

eligible individuals enrolled in the plan 

divided by the number of MA eligible 

individuals enrolled in all of the plans 

in the region, as of the reference month. 

(iii) If a single regional plan is being 

offered in the region: The plan’s share 

of enrollment is equal to 1. 

§ 422.262 Beneficiary premiums. 

(a) Determination of MA monthly 

basic beneficiary premium. (1) For an 

MA plan with an unadjusted statutory 

non-drug bid amount that is less than 

the relevant unadjusted non-drug 

benchmark amount, the basic 

beneficiary premium is zero. 

(2) For an MA plan with an 

unadjusted statutory non-drug bid 

amount that is equal to or greater than 

the relevant unadjusted non-drug 

benchmark amount, the basic 

beneficiary premium is the amount by 

which (if any) the bid amount exceeds 

the benchmark amount. All approved 

basic premiums must be charged; they 

cannot be waived. 

(b) Consolidated monthly premiums. 

Except as specified in paragraph (b)(2) 

of this section, MA organizations must 

charge enrollees a consolidated monthly 

MA premium. 

(1) The consolidated monthly 

premium for an MA plan (other than a 

MSA plan) is the sum of the MA 

monthly basic beneficiary premium (if 

any), the MA monthly supplementary 

beneficiary premium (if any), and the 

MA monthly prescription drug 

beneficiary premium (if any). 

(2) Special rule for MSA plans. For an 

individual enrolled in an MSA plan 

offered by an MA organization, the 

monthly beneficiary premium is the 

supplemental premium (if any). 

(c) Uniformity of premiums—(1) 

General rule. Except as permitted under 

§ 422.106(d), for MA contracts with 

employers and labor organizations, the 

MA monthly bid amount submitted 

under § 422.254, the MA monthly basic 

beneficiary premium, the MA monthly 

supplemental beneficiary premium, the 

MA monthly prescription drug 

premium, and the monthly MSA 

premium of an MA organization may 

not vary among individuals enrolled in 

an MA plan (or segment of the plan as 

provided for local MA plans under 

paragraph (b)(2) of this section). In 

addition, the MA organization cannot 

vary the level of cost-sharing charged for 

basic benefits or supplemental benefits 

(if any) among individuals enrolled in 

an MA plan (or segment of the plan). 

(2) Segmented service area option. An 

MA organization may apply the 

uniformity requirements in paragraph 

(b)(1) of this section to segments of an 

MA local plan service area (rather than 

to the entire service area) as long as 

such a segment is composed of one or 

more MA payment areas. The 

information specified under § 422.256 is 

submitted separately for each segment. 

This provision does not apply to MA 

regional plans. 

(d) Monetary inducement prohibited. 

An MA organization may not provide 

for cash or other monetary rebates as an 

inducement for enrollment or for any 

other reason or purpose. 

(e) Timing of payments. The MA 

organization must permit payments of 

MA monthly basic and supplemental 

beneficiary premiums and monthly 

prescription drug beneficiary premiums 

on a monthly basis and may not 

terminate coverage for failure to make 

timely payments except as provided in 

§ 422.74(b)(1). 

(f) Beneficiary payment options. An 

MA organization must permit each 

enrollee, at the enrollee’s option, to 

make payment of premiums (if any) 

under this part to the organization 

through—

(1) Withholding from the enrollee’s 

Social Security benefit payments, in the 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46965 

manner that the Part B premium is 

withheld; 

(2) An electronic funds transfer 

mechanism (such as automatic charges 

of an account at a financial institution 

or a credit or debit card account); 

(3) Payment by an employer or under 

employment-based retiree health 

coverage on behalf of an employee, 

former employee (or dependent), or by 

other third parties such as a State; or 

(4) According to additional CMS 

guidelines. 

(5) Regarding the option in paragraph 

(f)(1) of this section, MA organizations 

may not impose a charge on 

beneficiaries for the election of this 

option. 

§ 422.264 Calculation of savings. 

(a) Computation of risk adjusted bids 

and benchmarks—(1) The risk adjusted 

MA statutory non-drug monthly bid 

amount is the unadjusted plan bid 

amount for coverage of original 

Medicare benefits (defined at § 422.254), 

adjusted using the factors described in 

paragraph (c) of this section for local 

plans and paragraph (e) for regional 

plans. 

(2) The risk adjusted MA area-specific 

non-drug monthly benchmark amount is 

the unadjusted benchmark amount for 

coverage of original Medicare benefits 

by a local MA plan (defined at 

§ 422.258), adjusted using the factors 

described in paragraph (c) of this 

section. 

(3) The risk adjusted MA regionspecific non-drug monthly benchmark 

amount is the unadjusted benchmark for 

coverage of original Medicare benefits 

amount by a regional MA plan (defined 

at § 422.258) adjusted using the factors 

described in paragraph (e) of this 

section. 

(b) Computation of savings for MA 

local plans. The average per capita 

monthly savings for an MA local plan is 

100 percent of the difference between 

the plan’s risk-adjusted statutory nondrug monthly bid amount (described in 

paragraph (a)(1) of this section) and the 

plan’s risk-adjusted area-specific nondrug monthly benchmark amount 

(described in paragraph (a)(2) of this 

section). Plans with bids equal to or 

greater than plan benchmarks will have 

zero savings. 

(c) Risk adjustment factors for 

determination of savings for local plans. 

CMS will publish the first Monday in 

April before the upcoming calendar year 

the risk adjustment factors described in 

paragraph (c)(1), (c)(2), or (c)(3) of this 

section determined for the purpose of 

calculating savings amounts for MA 

local plans. 

(1) Statewide average risk adjustment 

factors. The statewide factor for each 

State is the average of the risk factors 

calculated under § 422.308(c), based on 

all enrollees in MA local plans in that 

State in the previous year. 

(2) In the case of a State in which no 

local MA plan was offered in the 

previous year, CMS will estimate an 

average and may base this average on 

average risk adjustment factors applied 

to comparable States or applied on a 

national basis. 

(3) For the purpose of calculating 

savings for MA local plans CMS has the 

authority to apply risk adjustment 

factors determined on a basis other than 

States, including a plan-specific basis. 

(d) Computation of savings for MA 

regional plans. The average per capita 

monthly savings for an MA local plan 

and year is 100 percent of the difference 

between the plan’s risk-adjusted 

statutory non-drug monthly bid amount 

(described in paragraph (a)(1) of this 

section) and the plan’s risk-adjusted 

region-specific non-drug monthly 

benchmark amount (described in 

paragraph (a)(3) of this section), using 

the risk adjustment factors described in 

paragraph (e) of this section. Plans with 

bids equal to or greater than plan 

benchmarks will have zero savings. 

(e) Risk adjustment factors for 

determination of savings for regional 

plans. CMS will publish the first 

Monday in April before the upcoming 

calendar year the risk adjustment factors 

described in paragraph (e)(1), (e)(2), or 

(e)(3) of this section determined for the 

purpose of calculating savings amounts 

for MA regional plans. 

(1) Region-wide average risk 

adjustment factors. The region-wide 

factor for each MA region is the average 

of the risk factors calculated under 

§ 422.308(c), based on all enrollees in 

MA regional plans in that region in the 

previous year. 

(2) In the case of a region in which no 

regional plan was offered in the 

previous year, CMS will estimate an 

average and may base this average on 

average risk adjustment factors applied 

to comparable regions or applied on a 

national basis. 

(3) For the purpose of calculating 

savings for MA regional plans, CMS has 

the authority to apply risk adjustment 

factors determined on a basis other than 

MA regions, including a plan-specific 

basis. 

§ 422.266 Beneficiary rebates. 

(a) General rule. An MA organization 

must provide to the enrollee a monthly 

rebate equal to 75 percent of the average 

per capita savings (if any) described in 

§ 422.264(b) for MA local plans and 

§ 422.264(d) for MA regional plans. 

(b) Form of rebate. The rebate 

required under this paragraph must be 

provided by crediting the rebate amount 

to one or more of the following: 

(1) Supplemental health care benefits. 

MA organizations may apply all or some 

portion of the rebate toward 

supplemental health care benefits for 

enrollees as described in § 422.102, 

which may include the reduction of cost 

sharing and additional health care 

benefits that are not benefits under 

original Medicare. MA organizations 

may also credit some part, or all, of the 

rebate, toward an MA monthly 

supplemental beneficiary premium (if 

any). The rebate, or portion of rebate, 

applied toward supplemental benefits 

may only be applied to a mandatory 

supplemental benefit, and cannot be 

used to fund an optional supplemental 

benefit. 

(2) Payment of premium for 

prescription drug coverage. MA 

organizations that offer a prescription 

drug benefit may credit some or all of 

the rebate toward reduction of the MA 

monthly prescription drug beneficiary 

premium. 

(3) Payment toward Part B premium. 

MA organizations that offer a 

prescription drug benefit may credit 

some or all of the rebate toward 

reduction of the Medicare Part B 

premium (determined without regard to 

the application of subsections (b), (h), 

and (i) of section 1839 of the Act). 

(c) Disclosure relating to rebates. MA 

organizations must disclose to CMS 

information on the amount of the rebate 

provided, as required at § 422.254(d). 

§ 422.270 Incorrect collections of 

premiums and cost-sharing. 

(a) Definitions. As used in this 

section—

(1) Amounts incorrectly collected—

(i) Means amounts that—

(A) Exceed the limits approved under 

§ 422.262; 

(B) In the case of an MA private feefor-service plan, exceed the MA 

monthly basic beneficiary premium or 

the MA monthly supplemental premium 

submitted under § 422.262; and 

(C) In the case of an MA MSA plan, 

exceed the MA monthly beneficiary 

supplemental premium submitted under 

§ 422.262, or exceed permissible cost 

sharing amounts after the deductible has 

been met per § 422.103; and 

(ii) Includes amounts collected from 

an enrollee who was believed to be 

entitled to Medicare benefits but was 

later found not to be entitled. 

(2) Other amounts due are amounts 

due for services that were—

46966 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(i) Emergency, urgently needed 

services, or other services obtained 

outside the MA plan; or 

(ii) Initially denied but, upon appeal, 

found to be services the enrollee was 

entitled to have furnished by the MA 

organization. 

(b) Basic commitments. An MA 

organization must agree to refund all 

amounts incorrectly collected from its 

Medicare enrollees, or from others on 

behalf of the enrollees, and to pay any 

other amounts due the enrollees or 

others on their behalf. 

(c) Refund methods—(1) Lump-sum 

payment. The MA organization must 

use lump-sum payments for the 

following: 

(i) Amounts incorrectly collected that 

were not collected as premiums. 

(ii) Other amounts due. 

(iii) All amounts due if the MA 

organization is going out of business or 

terminating its MA contract for an MA 

plan(s). 

(2) Premium adjustment or lump-sum 

payment, or both. If the amounts 

incorrectly collected were in the form of 

premiums, or included premiums as 

well as other charges, the MA 

organization may refund by adjustment 

of future premiums or by a combination 

of premium adjustment and lump-sum 

payments. 

(3) Refund when enrollee has died or 

cannot be located. If an enrollee has 

died or cannot be located after 

reasonable effort, the MA organization 

must make the refund in accordance 

with State law. 

(d) Reduction by CMS. If the MA 

organization does not make the refund 

required under this section by the end 

of the contract period following the 

contract period during which an amount 

was determined to be due to an enrollee, 

CMS will reduce the premium the MA 

organization is allowed to charge an MA 

plan enrollee by the amounts incorrectly 

collected or otherwise due. In addition, 

the MA organization would be subject to 

sanction under subpart O of this part for 

failure to refund amounts incorrectly 

collected from MA plan enrollees. 

47. Subpart G is removed. 

48. New subpart G is added to read as 

follows: 

Subpart G—Payments to Medicare 

Advantage Organizations 

Sec. 

422.300 Basis and scope. 

422.304 Monthly payments. 

422.306 Annual MA capitation rates. 

422.308 Adjustments to capitation rates, 

benchmarks, bids, and payments. 

422.310 Risk adjustment data. 

422.312 Announcement of annual 

capitation rate, benchmarks, and 

methodology changes. 

422.314 Special rules for beneficiaries 

enrolled in MA MSA plans. 

422.316 Special rules for payments to 

Federally qualified health centers. 

422.318 Special rules for coverage that 

begins or ends during an inpatient 

hospital stay. 

422.320 Special rules for hospice care. 

422.322 Source of payment and effect of 

MA plan election on payment. 

422.324 Payments to MA organizations for 

graduate medical education costs. 

Subpart G—Payments to Medicare 

Advantage Organizations 

§ 422.300 Basis and scope. 

This subpart is based on sections 

1853, 1854, and 1858 of the Act. It sets 

forth the rules for making payments to 

Medicare Advantage (MA) organizations 

offering local and regional MA plans, 

including calculation of MA capitation 

rates and benchmarks, conditions under 

which payment is based on plan bids, 

adjustments to capitation rates 

(including risk adjustment), and other 

payment rules. 

See § 422.458 in subpart J for rules on 

risk sharing payments to MA regional 

organizations. 

§ 422.304 Monthly payments. 

(a) General rules. Except as provided 

in paragraph (b) of this section, CMS 

makes advance monthly payments of 

the amounts determined under 

paragraphs (a)(1) and (a)(2) of this 

section for coverage of original fee-forservice benefits for an individual in an 

MA payment area for a month. 

(1) Payment of bid for plans with bids 

below benchmark. For MA plans that 

have average per capita monthly savings 

(as described at § 422.264(b) for local 

plans and § 422.264(d) for regional 

plans), CMS pays: 

(i) The unadjusted MA statutory nondrug monthly bid amount defined in 

§ 422.252, risk-adjusted as described at 

§ 422.308(c) and adjusted (if applicable) 

for variations in rates within the plan’s 

service area (described at 

§ 422.258(a)(2)) and for the effects of 

risk adjustment on beneficiary 

premiums (described at § 422.262); and 

(ii) The amount (if any) of the rebate 

described in paragraph (a)(3) of this 

section. 

(2) Payment of benchmark for plans 

with bids at or above benchmark. For 

MA plans that do not have average per 

capita monthly savings (as described at 

§ 422.264(b) for local plans and 

§ 422.264(d) for regional plans), CMS 

pays the unadjusted MA area-specific 

non-drug monthly benchmark amount 

specified at § 422.258, risk-adjusted as 

described at § 422.308(c) and adjusted 

(if applicable) for variations in rates 

within the plan’s service area (described 

at § 422.258(a)(2)) and for the effects of 

risk adjustment on beneficiary 

premiums (described at § 422.262). 

(3) Payment of rebate for plans with 

bids below benchmarks. The rebate 

amount under paragraph (a)(1)(ii) of this 

section is the amount of the monthly 

rebate computed under § 422.266(a) for 

that plan, less the amount (if any) 

applied to reduce the Part B premium, 

as provided under § 422.266(b)(3)). 

(b) Separate payment for Federal drug 

subsidies. In the case of an enrollee in 

an MA–PD plan, defined at § 422.252, 

the MA organization offering such a 

plan also receives—

(1) Direct and reinsurance subsidy 

payments for qualified prescription drug 

coverage, described at section 1860D–

15(a) and (b) of the Act (other than 

payments for fallback prescription drug 

plans described at section 1860D–

11(g)(5) of the Act); and 

(2) Reimbursement for premium and 

cost sharing reductions for low-income 

individuals, described at section 

1860D–14 of the Act. 

(c) Special rules—(1) Enrollees with 

end-stage renal disease. (i) For enrollees 

determined to have end-stage renal 

disease (ESRD), CMS establishes special 

rates that are actuarially equivalent to 

rates in effect before the enactment of 

the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003. 

(ii) CMS publishes annual changes in 

these capitation rates no later than the 

first Monday in April each year, as 

provided in § 422.312. 

(iii) CMS applies appropriate 

adjustments when establishing the rates, 

including risk adjustment factors. 

(iv) CMS reduces the payment rate for 

each renal dialysis treatment by the 

same amount that CMS is authorized to 

reduce the amount of each composite 

rate payment for each treatment as set 

forth in section 1881(b)(7) of the Act. 

These funds are to be used to help pay 

for the ESRD network program in the 

same manner as similar reductions are 

used in original Medicare. 

(2) MSA enrollees. In the case of an 

MSA plan, CMS pays the unadjusted 

MA area-specific non-drug monthly 

benchmark amount for the service area 

less 1⁄12 of the annual lump sum amount 

(if any) CMS deposits to the enrollee’s 

MA MSA, determined in accordance 

with § 422.314(c), risk adjustment as set 

forth at § 422.308(c). 

(3) RFB plan enrollees. For RFB plan 

enrollees, CMS adjusts the capitation 

payments otherwise determined under 

this subpart to ensure that the payment 

level is appropriate for the actuarial 

characteristics and experience of these 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46967 

enrollees. That adjustment can be made 

on an individual or organization basis. 

(d) Payment areas—(1) General rule. 

Except as provided in paragraph (e) of 

this section—

(i) An MA payment area for an MA 

local plan is an MA local area defined 

at § 422.252. 

(ii) An MA payment area for an MA 

regional plan is an MA region, defined 

at § 422.455(b)(1). 

(2) Special rule for ESRD enrollees. 

For ESRD enrollees, the MA payment 

area is a State or other geographic area 

specified by CMS. 

(e) Geographic adjustment of payment 

areas for MA local plans—(1) 

Terminology. ‘‘Metropolitan Statistical 

Area’’ and ‘‘Metropolitan Division’’

mean any areas so designated by the 

Office of Management and Budget in the 

Executive Office of the President. 

(2) State request. A State’s chief 

executive may request, no later than 

February 1 of any year, a geographic 

adjustment of the State’s payment areas 

for MA local plans for the following 

calendar year. The chief executive may 

request any of the following adjustments 

to the payment area specified in 

paragraph (c)(1)(i) of this section: 

(i) A single statewide MA payment 

area. 

(ii) A metropolitan-based system in 

which all non-metropolitan areas within 

the State constitute a single payment 

area and any of the following constitutes 

a separate MA payment area: 

(A) All portions of each single 

Metropolitan Statistical Area within the 

State. 

(B) All portions of each Metropolitan 

Statistical Area within each 

Metropolitan Division within the State. 

(iii) A consolidation of noncontiguous 

counties. 

(3) CMS response. In response to the 

request, CMS makes the payment 

adjustment requested by the chief 

executive. This adjustment cannot be 

requested or made for payments to 

regional MA plans. 

(4) Budget neutrality adjustment for 

geographically adjusted payment areas. 

If CMS adjusts a State’s payment areas 

in accordance with paragraph (d)(2) of 

this section, CMS at that time, and each 

year thereafter, adjusts the capitation 

rates so that the aggregate Medicare 

payments do not exceed the aggregate 

Medicare payments that would have 

been made to all the State’s payments 

areas, absent the geographic adjustment. 

§ 422.306 Annual MA capitation rates. 

Subject to adjustments at § 422.308(b) 

and § 422.308(g), the annual capitation 

rate for each MA local area is 

determined under paragraph (a) of this 

section for 2005 and each succeeding 

year, except for years when CMS 

announces under § 422.312(b) that the 

annual capitation rates will be 

determined under paragraph (b) of this 

section. 

(a) Minimum percentage increase rate. 

The annual capitation rate for each MA 

local area is equal to the minimum 

percentage increase rate, which is the 

greater of—

(1) 102 percent of the annual 

capitation rate for the preceding year; or 

(2) The annual capitation rate for the 

area for the preceding year increased by 

the national per capita MA growth 

percentage (defined at § 422.308(a)) for 

the year, but not taking into account any 

adjustment under § 422.308(b) for a year 

before 2004. 

(b) Greater of the minimum 

percentage increase rate or local area 

fee-for-service costs. The annual 

capitation rate for each MA local area is 

the greater of—

(1) The minimum percentage increase 

rate under paragraph (a) of this section; 

or 

(2) The amount determined, no less 

frequently than every 3 years, to be the 

adjusted average per capita cost for the 

MA local area, as determined under 

section 1876(a)(4) of the Act, based on 

100 percent of fee-for-service costs for 

individuals who are not enrolled in an 

MA plan for the year, with the following 

adjustments: 

(i) Adjusted as appropriate for the 

purpose of risk adjustment; 

(ii) Adjusted to exclude costs 

attributable to payments under section 

1886(h) of the Act for the costs of direct 

graduate medical education; and 

(iii) Adjusted to include CMS’

estimate of the amount of additional per 

capita payments that would have been 

made in the MA local area if individuals 

entitled to benefits under this title had 

not received services from facilities of 

the Department of Defense or the 

Department of Veterans Affairs. 

§ 422.308 Adjustments to capitation rates, 

benchmarks, bids, and payments. 

CMS performs the following 

calculations and adjustments to 

determine rates and payments: 

(a) National per capita growth 

percentage. The national per capita 

growth percentage for a year, applied 

under § 422.306, is CMS’ estimate of the 

rate of growth in per capita 

expenditures under this title for an 

individual entitled to benefits under 

Part A and enrolled under Part B. CMS 

may make separate estimates for aged 

enrollees, disabled enrollees, and 

enrollees who have ESRD. 

(b) Adjustment for over or under 

projection of national per capita growth 

percentages. CMS will adjust the 

minimum percentage increase rate at 

§ 422.306(a)(2) and the adjusted average 

per capita cost rate at § 422.306(b)(2) for 

the previous year to reflect any 

differences between the projected 

national per capita growth percentages 

for that year and previous years, and the 

current estimates of those percentages 

for those years. CMS will not make this 

adjustment for years before 2004. 

(c) Risk adjustment—(1) General rule. 

CMS will adjust the payment amounts 

under § 422.304(a)(1), (a)(2), and (a)(3) 

for age, gender, disability status, 

institutional status, and other factors 

CMS determines to be appropriate, 

including health status, in order to 

ensure actuarial equivalence. CMS may 

add to, modify, or substitute for risk 

adjustment factors if those changes will 

improve the determination of actuarial 

equivalence. 

(2) Risk adjustment: Health status—(i) 

Data collection. To adjust for health 

status, CMS applies a risk factor based 

on data obtained in accordance with 

§ 422.310. 

(ii) Implementation. CMS applies a 

risk factor that incorporates inpatient 

hospital and ambulatory risk adjustment 

data. This factor is phased as follows: 

(A) 100 percent of payments for ESRD 

MA enrollees in 2005 and succeeding 

years. 

(B) 75 percent of payments for aged 

and disabled enrollees in 2006. 

(C) 100 percent of payments for aged 

and disabled enrollees in 2007 and 

succeeding years. 

(3) Uniform application. Except as 

provided for MA RFB plans under 

§ 422.304(b)(3), CMS applies this 

adjustment factor to all types of plans. 

(d) Adjustment for intra-area 

variations. CMS makes the following 

adjustments to payments. 

(1) Intra-regional variations. For 

payments to MA regional plans, CMS 

will adjust the payment amounts 

specified at § 422.304(a)(1) and (a)(2) to 

take into account variations in local 

payments rates among the different MA 

local areas included in the region. 

(2) Intra-service area variations. For 

payments to MA local plans with 

service areas covering more than one 

MA local area (county), CMS will adjust 

the payment amounts specified in 

§ 422.304(a)(1) and (a)(2) to take into 

account variations in local payment 

rates among the different MA local areas 

included in the plan’s service area. 

(e) Adjustment relating to risk 

adjustment and beneficiary premiums. 

CMS will adjust payments to an MA 

plan as necessary to ensure that the sum 

of CMS’ monthly payment made under 

§ 422.304(a) and the plan’s monthly 

46968 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

basic beneficiary premium equals the 

unadjusted MA statutory non-drug bid 

amount adjusted for risk and for intraarea or intra-regional payment variation. 

(f) Adjustment of payments to reflect 

number of Medicare enrollees—(1) 

General rule. CMS adjusts payments 

retroactively to take into account any 

difference between the actual number of 

Medicare enrollees and the number on 

which it based an advance monthly 

payment. 

(2) Special rules for certain enrollees. 

(i) Subject to paragraph (f)(2)(ii) of this 

section, CMS may make adjustments, for 

a period (not to exceed 90 days) that 

begins when a beneficiary elects a group 

health plan (as defined in § 411.1010) 

offered by an MA organization, and 

ends when the beneficiary is enrolled in 

an MA plan offered by the MA 

organization. 

(ii) CMS does not make an adjustment 

unless the beneficiary certifies that, at 

the time of enrollment under the MA 

plan, he or she received from the 

organization the disclosure statement 

specified in § 422.111. 

(g) Adjustment for national coverage 

determination (NCD) services and 

legislative changes in benefits. If CMS 

determines that the cost of furnishing an 

NCD service or legislative change in 

benefits is significant, as defined in 

§ 422.109, CMS will adjust capitation 

rates, or make other payment 

adjustments, to account for the cost of 

the service or legislative change in 

benefits. Until the new capitation rates 

are in effect, the MA organization will 

be paid for the significant cost NCD 

service or legislative change in benefits 

on a fee-for-service basis as provided 

under § 422.109(b). 

(h) Adjustments to payments to 

regional MA plans for purposes of risk 

corridor payments. For the purpose of 

calculation of risk corridors under 

§ 422.458, MA organizations offering 

regional MA plans in 2006 and/or 2007 

must submit, after the end of a contract 

year and before a date CMS specifies, 

the following information: 

(1) Actual allowable costs (defined in 

§ 422.458(a)) for the previous contract 

year. 

(2) The portion of the costs 

attributable to administrative expenses 

incurred in providing these benefits. 

(3) The total costs for providing 

rebatable integrated benefits (as defined 

in § 422.458(a)) and the portion of the 

costs that is attributable to 

administrative expenses in addition to 

the administrative expenses described 

in paragraph (h)(2) of this section. 

§ 422.310 Risk adjustment data. 

(a) Definition of risk adjustment data. 

Risk adjustment data are all data that are 

used in the application of a risk 

adjustment payment model. 

(b) Data collection: Basic rule. Each 

MA organization must submit to CMS 

(in accordance with CMS instructions) 

the data necessary to characterize the 

context and purposes of each service 

provided to a Medicare enrollee by a 

provider, supplier, physician, or other 

practitioner. CMS may also collect data 

necessary to characterize the functional 

limitations of enrollees of each MA 

organization. 

(c) Sources and extent of data. (1) To 

the extent required by CMS, risk 

adjustment data must account for the 

following: 

(i) Services covered under the original 

Medicare program. 

(ii) Medicare covered services for 

which Medicare is not the primary 

payer. 

(iii) Other additional or supplemental 

benefits that the MA organization may 

provide. 

(2) The data must account separately 

for each provider, supplier, physician, 

or other practitioner that would be 

permitted to bill separately under the 

original Medicare program, even if they 

participate jointly in the same service. 

(d) Other data requirements. (1) MA 

organizations must submit data that 

conform to the requirements for 

equivalent data for Medicare fee-forservice when appropriate, and to all 

relevant national standards. 

Alternatively, MA organizations may 

submit data according to an abbreviated 

format, as specified by CMS. 

(2) The data must be submitted 

electronically to the appropriate CMS 

contractor. 

(3) MA organizations must obtain the 

risk adjustment data required by CMS 

from the provider, supplier, physician, 

or other practitioner that furnished the 

services. 

(4) MA organizations may include in 

their contracts with providers, 

suppliers, physicians, and other 

practitioners, provisions that require 

submission of complete and accurate 

risk adjustment data as required by 

CMS. These provisions may include 

financial penalties for failure to submit 

complete data. 

(e) Validation of risk adjustment data. 

MA organizations and their providers 

and practitioners will be required to 

submit a sample of medical records for 

the validation of risk adjustment data, as 

required by CMS. 

(f) Use of data. CMS uses the data 

obtained under this section to determine 

the risk adjustment factor used to adjust 

payments, as required under 

§ 422.304(a)(1), (a)(2), and (a)(3). CMS 

may also use the data for other purposes 

except for medical records data. 

(g) Deadlines for submission of risk 

adjustment data. Risk adjustment 

factors for each payment year are based 

on risk adjustment data submitted for 

services furnished during the 12-month 

period before the payment year that is 

specified by CMS. As determined by 

CMS, this 12-month period may include 

a 6-month data lag that may be changed 

or eliminated as appropriate. (For 

example, the interim risk adjustment 

factors for CY 2004 were based on data 

for services furnished during the period 

July 1, 2002 through June 30, 2003, and 

the final risk adjustment factors for CY 

2004 were based on data for services 

furnished during the period January 1, 

2003 through December 31, 2003.) 

(1) The annual deadline for risk 

adjustment data submission is the first 

Friday in September for risk adjustment 

data reflecting services furnished during 

the 12-month period ending the prior 

June 30, and the first Friday in March 

for data reflecting services furnished 

during the 12-month period ending the 

prior December 31. (For example, the 

deadline for submission of data for the 

period July 1, 2002 through June 30, 

2003 was September 5, 2003, and the 

deadline for the period January 1, 2003 

through December 31, 2003 was March 

5, 2004.) 

(2) CMS allows a reconciliation 

process to account for late data 

submissions. CMS continues to accept 

risk adjustment data submitted after the 

September and March deadlines until 

June 30 and December 31 of the 

payment year, respectively. (For 

example, until June 30, 2004 for data 

from the period July 1, 2002 through 

June 30, 2003; and, until December 31, 

2004 for data from the period January 1, 

2003 through December 31, 2003.) After 

the payment year is completed, CMS 

recalculates the risk factors for affected 

individuals to determine if adjustments 

to payments are necessary. Risk 

adjustment data that are received after 

the annual December 31 late data 

submission deadline will not be 

accepted for the purposes of the 

reconciliation. 

§ 422.312 Announcement of annual 

capitation rate, benchmarks, and 

methodology changes. 

(a) Capitation rates—(1) Initial 

announcement. Not later than the first 

Monday in April each year, CMS 

announces to MA organizations and 

other interested parties the following 

information for each MA payment area 

for the following calendar year: 

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(i) The annual MA capitation rate. 

(ii) The risk and other factors to be 

used in adjusting those rates under 

§ 422.308 for payments for months in 

that year. 

(2) CMS includes in the 

announcement an explanation of 

assumptions used and a description of 

the risk and other factors. 

(3) Regional benchmark 

announcement. Before the beginning of 

each annual, coordinated election 

period under § 422.62(a)(2), CMS will 

announce to MA organizations and 

other interested parties the MA regionspecific non-drug monthly benchmark 

amount for the year involved for each 

MA region and each MA regional plan 

for which a bid was submitted under 

§ 422.256. 

(b) Advance notice of changes in 

methodology. (1) No later than 45 days 

before making the announcement under 

paragraph (a)(1) of this section, CMS 

notifies MA organizations of changes it 

proposes to make in the factors and the 

methodology it used in the previous 

determination of capitation rates. 

(2) The MA organizations have 15 

days to comment on the proposed 

changes. 

§ 422.314 Special rules for beneficiaries 

enrolled in MA MSA plans. 

(a) Establishment and designation of 

medical savings account (MSA). A 

beneficiary who elects coverage under 

an MA MSA plan—

(1) Must establish an MA MSA with 

a trustee that meets the requirements of 

paragraph (b) of this section; and 

(2) If he or she has more than one MA 

MSA, designate the particular account 

to which payments under the MA MSA 

plan are to be made. 

(b) Requirements for MSA trustees. An 

entity that acts as a trustee for an MA 

MSA must—

(1) Register with CMS; 

(2) Certify that it is a licensed bank, 

insurance company, or other entity 

qualified, under sections 408(a)(2) or 

408(h) of the IRS Code, to act as a 

trustee of individual retirement 

accounts; 

(3) Agree to comply with the MA 

MSA provisions of section 138 of the 

IRS Code of 1986; and 

(4) Provide any other information that 

CMS may require. 

(c) Deposit in the MA MSA. (1) The 

payment is calculated as follows: 

(i) The monthly MA MSA premium is 

compared with 1⁄12 of the benchmark 

amount for the area determined under 

§ 422.306. 

(ii) If the monthly MA MSA premium 

is less than 1⁄12 of the annual capitation 

rate, the difference is the amount to be 

deposited in the MA MSA for each 

month for which the beneficiary is 

enrolled in the MSA plan. 

(2) CMS deposits the full amount to 

which a beneficiary is entitled under 

paragraph (c)(1)(ii) of this section for the 

calendar year, beginning with the month 

in which MA MSA coverage begins. 

(3) If the beneficiary’s coverage under 

the MA MSA plan ends before the end 

of the calendar year, CMS recovers the 

amount that corresponds to the 

remaining months of that year. 

§ 422.316 Special rules for payments to 

federally qualified health centers. 

If an enrollee in an MA plan receives 

a service from a federally qualified 

health center (FQHC) that has a written 

agreement with the MA organization 

offering the plan concerning the 

provision of this service (including the 

agreement required under section 

1857(e)(3) of the Act and as codified in 

§ 422.527)—

(a) CMS will pay the amount 

determined under section 1833(a)(3)(B) 

of the Act directly to the FQHC at a 

minimum on a quarterly basis; and 

(b) CMS will not reduce the amount 

of the monthly payments under this 

section as a result of the application of 

paragraph (a) of this section. 

§ 422.318 Special rules for coverage that 

begins or ends during an inpatient hospital 

stay. 

(a) Applicability. This section applies 

to inpatient services in a ‘‘subsection (d) 

hospital’’ as defined in section 

1886(d)(1)(B) of the Act, a rehabilitation 

hospital described in section 

1886(d)(1)(B)(ii) of the Act, a distinct 

part rehabilitation unit described in the 

matter following clause (v) of section 

1886(d)(1)(B) of the Act, or a long-term 

care hospital (described in section 

1886(d)(1)(B)(iv)). 

(b) Coverage that begins during an 

inpatient stay. If coverage under an MA 

plan offered by an MA organization 

begins while the beneficiary is an 

inpatient in one of the facilities 

described in paragraph (a) of this 

section—

(1) Payment for inpatient services 

until the date of the beneficiary’s 

discharge is made by the previous MA 

organization or original Medicare, as 

appropriate; 

(2) The MA organization offering the 

newly-elected MA plan is not 

responsible for the inpatient services 

until the date after the beneficiary’s 

discharge; and 

(3) The MA organization offering the 

newly-elected MA plan is paid the full 

amount otherwise payable under this 

subpart. 

(c) Coverage that ends during an 

inpatient stay. If coverage under an MA 

plan offered by an MA organization 

ends while the beneficiary is an 

inpatient in one of the facilities 

described in paragraph (a) of this 

section—

(1) The MA organization is 

responsible for the inpatient services 

until the date of the beneficiary’s 

discharge; 

(2) Payment for those services during 

the remainder of the stay is not made by 

original Medicare or by any succeeding 

MA organization offering a newlyelected MA plan; and 

(3) The MA organization that no 

longer provides coverage receives no 

payment for the beneficiary for the 

period after coverage ends. 

§ 422.320 Special rules for hospice care. 

(a) Information. An MA organization 

that has a contract under subpart K of 

this part must inform each Medicare 

enrollee eligible to select hospice care 

under § 418.24 of this chapter about the 

availability of hospice care (in a manner 

that objectively presents all available 

hospice providers, including a 

statement of any ownership interest in 

a hospice held by the MA organization 

or a related entity) if—

(1) A Medicare hospice program is 

located within the plan’s service area; or 

(2) It is common practice to refer 

patients to hospice programs outside 

that area. 

(b) Enrollment status. Unless the 

enrollee disenrolls from the MA plan, a 

beneficiary electing hospice continues 

his or her enrollment in the MA plan 

and is entitled to receive, through the 

MA plan, any benefits other than those 

that are the responsibility of the 

Medicare hospice. 

(c) Payment. (1) No payment is made 

to an MA organization on behalf of a 

Medicare enrollee who has elected 

hospice care under § 418.24 of this 

chapter, except for the portion of the 

payment attributable to the beneficiary 

rebate for the MA plan, described in 

§ 422.266(b)(1) plus the amount of the 

monthly prescription drug beneficiary 

premium (described at § 422.252). This 

no-payment rule is effective from the 

first day of the month following the 

month of election to receive hospice 

care, until the first day of the month 

following the month in which the 

election is terminated. 

(2) During the time the hospice 

election is in effect, CMS’ monthly 

capitation payment to the MA 

organization is reduced to the sum of—

(i) An amount equal to the beneficiary 

rebate for the MA plan, as described in 

§ 422.304(a)(3) or to zero for plans with 

46970 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

no beneficiary rebate, described at 

§ 422.304(a)(2); and 

(ii) The amount of the monthly 

prescription drug beneficiary premium 

(if any). 

(3) In addition, CMS pays through the 

original Medicare program (subject to 

the usual rules of payment)—

(i) The hospice program for hospice 

care furnished to the Medicare enrollee; 

and 

(ii) The MA organization, provider, or 

supplier for other Medicare-covered 

services to the enrollee. 

§ 422.322 Source of payment and effect of 

MA plan election on payment. 

(a) Source of payments. (1) Payments 

under this subpart for original fee-forservice benefits to MA organizations or 

MA MSAs are made from the Federal 

Hospital Insurance Trust Fund or the 

Supplementary Medical Insurance Trust 

Fund. CMS determines the proportions 

to reflect the relative weight that 

benefits under Part A, and benefits 

under Part B represents of the actuarial 

value of the total benefits under title 

XVIII of the Act. 

(2) Payments to MA–PD organizations 

for statutory drug benefits provided 

under this title are made from the 

Medicare Prescription Drug Account in 

the Federal Supplementary Medical 

Insurance Trust Fund. 

(b) Payments to the MA organization. 

Subject to § 412.105(g) and § 413.86(d) 

of this chapter and § 422.109, § 422.264, 

and § 422.266, CMS’ payments under a 

contract with an MA organization 

(described in § 422.304) with respect to 

an individual electing an MA plan 

offered by the organization are instead 

of the amounts which (in the absence of 

the contract) would otherwise be 

payable under original Medicare for 

items and services furnished to the 

individual. 

(c) Only the MA organization entitled 

to payment. Subject to § 422.314, 

§ 422.318, § 422.320, and § 422.520 and 

sections 1886(d)(11) and 1886(h)(3)(D) 

of the Act, only the MA organization is 

entitled to receive payment from CMS 

under title XVIII of the Act for items and 

services furnished to the individual. 

§ 422.324 Payments to MA organizations 

for graduate medical education costs. 

(a) MA organizations may receive 

direct graduate medical education 

payments for the time that residents 

spend in non-hospital provider settings 

such as freestanding clinics, nursing 

homes, and physicians’ offices in 

connection with approved programs. 

(b) MA organizations may receive 

direct graduate medical education 

payments if all of the following 

conditions are met: 

(1) The resident spends his or her 

time assigned to patient care activities. 

(2) The MA organization incurs ‘‘all or 

substantially all’’ of the costs for the 

training program in the non-hospital 

setting as defined in § 413.86(b) of this 

chapter. 

(3) There is a written agreement 

between the MA organization and the 

non-hospital site that indicates the MA 

organization will incur the costs of the 

resident’s salary and fringe benefits and 

provide reasonable compensation to the 

non-hospital site for teaching activities. 

(c) An MA organization’s allowable 

direct graduate medical education costs, 

subject to the redistribution and 

community support principles specified 

in § 413.85(c) of this chapter, consist 

of—

(1) Residents’ salaries and fringe 

benefits (including travel and lodging 

where applicable); and 

(2) Reasonable compensation to the 

non-hospital site for teaching activities 

related to the training of medical 

residents. 

(d) The direct graduate medical 

education payment is equal to the 

product of—

(1) The lower of—

(i) The MA organization’s allowable 

costs per resident as defined in 

paragraph (c) of this section; or 

(ii) The national average per resident 

amount; and 

(2) Medicare’s share, which is equal to 

the ratio of the number of Medicare 

beneficiaries enrolled to the total 

number of individuals enrolled in the 

MA organization. 

(e) Direct graduate medical education 

payments made to MA organizations 

under this section are made from the 

Federal Supplementary Medical 

Insurance Trust Fund. 

Subpart I—Organization Compliance 

With State Law and Preemption by 

Federal Law 

49. Section 422.402 is revised to read 

as follows: 

§ 422.402 Federal preemption of State law. 

The standards established under this 

part supersede any State law or 

regulation (other than State licensing 

laws or State laws relating to plan 

solvency) with respect to the MA plans 

that are offered by MA organizations. 

50. Amend § 422.404 by revising 

paragraph (a) to read as follows: 

§ 422.404 State premium taxes prohibited. 

(a) Basic rule. No premium tax, fee, or 

other similar assessment may be 

imposed by any State, the District of 

Columbia, the Commonwealth of Puerto 

Rico, the Virgin Islands, Guam, and 

American Samoa, or any of their 

political subdivisions or other 

governmental authorities with respect to 

any payment CMS makes on behalf of 

MA enrollees under subpart G of this 

part, or with respect to any payment 

made to MA plans by beneficiaries, or 

payment to MA plans by a third party 

on a beneficiary’s behalf. 

* * * * * 

51. A new subpart J is added to read 

as follows: 

Subpart J—Special Rules for MA Plans 

Sec. 

422.451 Moratorium on new local preferred 

provider organization plans. 

422.455 Special rules for MA plans. 

422.458 Risk sharing with regional MA 

organizations for 2006 and 2007. 

Subpart J—Special Rules for MA Plans 

§ 422.451 Moratorium on new local 

preferred provider organization plans. 

CMS will not approve the offering of 

a local preferred provider organization 

plan during 2006 or 2007 in a service 

area unless the plan was offered before 

December 31, 2005. 

§ 422.455 Special rules for MA plans. 

(a) Coverage of entire MA region. The 

service area for an MA regional plan 

will consist of an entire MA region 

established under paragraph (b) this 

section, and an MA region may not be 

segmented as described in 

§ 422.262(c)(2). 

(b) Establishment of MA regions—(1) 

MA region. The term ‘‘MA region’’

means a region within the 50 States and 

the District of Columbia as established 

by CMS under this section. 

(2) Establishment—(i) Initial 

establishment. By January 1, 2005, CMS 

will establish and publish the MA 

regions. 

(ii) Periodic review and revision of 

service areas. CMS may periodically 

review MA regions and may revise the 

regions if it determines the revision to 

be appropriate. 

(3) Requirements for MA regions. CMS 

will establish, and may revise, MA 

regions in a manner consistent with the 

following: 

(i) Number of regions. There will be 

no fewer than 10 regions, and no more 

than 50 regions. 

(ii) Maximizing availability of plans. 

The main purpose of the regions is to 

maximize the availability of MA 

regional plans to all MA eligible 

individuals without regard to health 

status, or geographic location, especially 

those residing in rural areas. 

(4) Market survey and analysis. Before 

establishing MA regions, CMS will 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46971 

conduct a market survey and analysis, 

including an examination of current 

insurance markets, to assist CMS in 

determining how the regions should be 

established. 

(c) National plan. An MA regional 

plan can be offered in more than one 

MA region (including all regions). 

§ 422.458 Risk sharing with regional MA 

organizations for 2006 and 2007. 

(a) Terminology. For purposes of this 

section—

Allowable costs means, with respect 

to an MA regional plan offered by an 

organization for a year, the total amount 

of costs that the organization incurred in 

providing benefits covered under the 

original Medicare fee-for-service 

program option for all enrollees under 

the plan in the region in the year and 

in providing rebatable integrated 

benefits, as defined in this paragraph, 

reduced by the portion of those costs 

attributable to administrative expenses 

incurred in providing these benefits. 

Rebatable integrated benefits means 

those non-drug supplemental benefits 

that are funded through beneficiary 

rebates (described at § 422.266(b)(1)) 

and that CMS determines are: additional 

health benefits not covered under the 

original Medicare program option; and 

benefits that require expenditures by the 

plan. For purposes of the calculation of 

risk corridors, these are the only 

supplemental benefits that count 

towards allowable costs. 

Target amount means, with respect to 

an MA regional plan offered by an 

organization in a year, the total amount 

of payments made to the organization 

for enrollees in the plan for the year 

(which includes payments attributable 

to benefits under the original Medicare 

fee-for-service program option as 

defined in § 422.100(c)(1), the total of 

the MA monthly basic beneficiary 

premium collectable for those enrollees 

for the year, and the total amount of 

rebatable integrated benefits), reduced 

by the amount of administrative 

expenses assumed in the portion of the 

bid attributable to benefits under 

original Medicare fee-for-service 

program option and rebatable integrated 

benefits. 

(b) Application of risk corridors for 

benefits covered under original fee-forservice Medicare—(1) General rule. This 

section will only apply to MA regional 

plans offered during 2006 or 2007. 

(2) Notification of allowable costs 

under the plan. In the case of an MA 

organization that offers an MA regional 

plan in an MA region in 2006 or 2007, 

the organization must notify CMS, 

before that date in the succeeding year 

as CMS specifies, of—

(i) Its total amount of costs that the 

organization incurred in providing 

benefits covered under the original 

Medicare fee-for-service program option 

for all enrollees under the plan (as 

described in paragraph (a) of this 

section). 

(ii) Its total amount of costs that the 

organization incurred in providing 

rebatable integrated benefits for all 

enrollees under the plan (as described 

in paragraph (a) of this section), and, 

with respect to those benefits, the 

portion of those costs that is attributable 

to administrative expenses that is in 

addition to the administrative expense 

incurred in provision of benefits under 

the original Medicare fee-for-service 

program option. 

(c) Adjustment of payment—(1) No 

adjustment if allowable costs within 3 

percent of target amount. If the 

allowable costs for the plan for the year 

are at least 97 percent, but do not 

exceed 103 percent of the target amount 

for the plan and year, there will be no 

payment adjustment under this section 

for the plan and year. 

(2) Increase in payment if allowable 

costs above 103 percent of target 

amount—(i) Costs between 103 and 108 

percent of target amount. If the 

allowable costs for the plan for the year 

are greater than 103 percent, but not 

greater than 108 percent of the target 

amount for the plan and year, CMS will 

increase the total of the monthly 

payments made to the organization 

offering the plan for the year under 

§ 422.302(a) (section 1853(a) of the Act) 

by an amount equal to 50 percent of the 

difference between those allowable 

costs and 103 percent of that target 

amount. 

(ii) Costs above 108 percent of target 

amount. If the allowable costs for the 

plan for the year are greater than 108 

percent of the target amount for the plan 

and year, CMS will increase the total of 

the monthly payments made to the 

organization offering the plan for the 

year under section 1853(a) of the Act by 

an amount equal to the sum of—

(A) 2.5 percent of that target amount; 

and 

(B) 80 percent of the difference 

between those allowable costs and 108 

percent of that target amount. 

(3) Reduction in payment if allowable 

costs below 97 percent of target 

amount—(i) Costs between 92 and 97 

percent of target amount. If the 

allowable costs for the plan for the year 

are less than 97 percent, but greater than 

or equal to 92 percent, of the target 

amount for the plan and year, CMS will 

reduce the total of the monthly 

payments made to the organization 

offering the plan for the year under 

§ 422.302(a) (section 1853(a) of the Act) 

by an amount (or otherwise recover 

from the plan an amount) equal to 50 

percent of the difference between 97 

percent of the target amount and those 

allowable costs. 

(ii) Costs below 92 percent of target 

amount. If the allowable costs for the 

plan for the year are less than 92 percent 

of the target amount for the plan and 

year, CMS will reduce the total of the 

monthly payments made to the 

organization offering the plan for the 

year under § 422.302(a) (section 1853(a) 

of the Act) by an amount (or otherwise 

recover from the plan an amount) equal 

to the sum of—

(A) 2.5 percent of that target amount; 

and 

(B) 80 percent of the difference 

between 92 percent of that target 

amount and those allowable costs. 

(d) Disclosure of information—(1) 

General rule. Each MA organization 

offering an MA regional plan must 

provide CMS with information as CMS 

determines is necessary to implement 

this section; and 

(2) According to existing 

§ 422.502(d)(1)(iii) (section 

1857(d)(2)(B) of the Act), CMS has the 

right to inspect and audit any books and 

records of the organization that pertain 

to the information regarding costs 

provided to CMS under paragraph (b)(2) 

of this section. 

(3) Restriction on use of information. 

Information disclosed or obtained for 

the purposes of this section may be used 

by officers, employees, and contractors 

of DHHS only for the purposes of, and 

to the extent necessary, in implementing 

this section. 

(e) Organizational and financial 

requirements—(1) General rule. In the 

case of an MA organization that is 

offering an MA regional plan in an MA 

region, the following rules apply: 

(i) The MA organization must be 

licensed to bear risk in at least one State 

of the region. 

(ii) For the other States in a region in 

which the organization is not licensed 

to bear risk, if it demonstrates to CMS 

that it has filed the necessary 

application to meet those requirements, 

CMS may temporarily waive the 

licensing requirement with respect to 

each State for a period of time as CMS 

determines appropriate for the timely 

processing of the application by the 

State or States. 

(iii) If the State licensing application 

or applications are denied, CMS may 

extend the licensing waiver through the 

end of the plan year or as CMS 

determines appropriate to provide for a 

transition. 

46972 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(2) Selection of appropriate State. In 

the case of an MA organization to which 

CMS grants a waiver and that is licensed 

in more than one State in a region, the 

MA organization will select one of the 

States and CMS will apply its licensing 

rules in States where the organization is 

not licensed for the period of the 

waiver. 

(f) Regional stabilization fund—(1) 

Establishment. The MA Regional Plan 

Stabilization Fund (referred to in this 

paragraph as the ‘‘Fund’’) is available 

beginning in 2007 for two purposes: 

(i) Plan entry. To provide incentives 

to have MA regional plans offered in 

each MA region under paragraph (f)(4) 

of this section. 

(ii) Plan retention. To provide 

incentives to retain MA regional plans 

in certain MA regions with belownational-average MA market penetration 

under paragraph (f)(5) of this section. 

(2) Availability of funding from 

savings. Funds made available under 

section 1853(f) of the Act are transferred 

into a special account in the Treasury 

from the Federal Hospital Insurance 

Trust Fund and the Federal 

Supplementary Medical Insurance Trust 

Fund in the proportion specified in 

section 1853(f) of the Act, ‘‘payments 

From Trust Funds,’’ on a monthly basis. 

(3) Funding limitation—(i) General 

rule. The total amount expended from 

the Fund as a result of the application 

of this section through the end of a 

calendar year may not exceed the 

amount available to the Fund as of the 

first day of that year. For purposes of 

this section, amounts that are expended 

under this title insofar as those amounts 

would not have been expended but for 

the application of this section will be 

counted as amounts expended as a 

result of that application. 

(ii) Application of limitation. CMS 

will obligate funds from the Fund for a 

year only if the Chief Actuary of CMS 

and the appropriate budget officer 

certify that there are available in the 

Fund at the beginning of the year 

sufficient amounts to cover all of those 

obligations incurred during the year 

consistent with paragraph (f)(3)(i) of this 

section. CMS will take those steps, in 

connection with computing additional 

payment amounts under paragraphs 

(f)(4) and (f)(5) of this section and 

including limitations on enrollment in 

MA regional plans receiving those 

payments, to ensure that sufficient 

funds are available to make those 

payments for the entire year. 

(4) Plan entry funding—(i) General 

rule. Funding is available under this 

paragraph for a year in the following 

situations: 

(A) National plan. For a national 

bonus payment described in paragraph 

(f)(4)(ii) of this section, when a single 

MA organization offers an MA regional 

plan in each MA region in the year, but 

only if there was not a national plan 

offered in each region in the previous 

year. Funding under this paragraph is 

only available with respect to any 

individual MA organization for a single 

year, but may be made available to more 

than one such organization in the same 

year. 

(B) Regional plans. Subject to 

paragraph (f)(4)(i)(C) of this section, for 

an increased amount under paragraph 

(f)(4)(iv) of this section for an MA 

regional plan offered in an MA region 

that did not have any MA regional plan 

offered in the prior year. 

(C) Limitation on regional plan 

funding in case of national plan. There 

will be no payment adjustment under 

paragraph (f)(4)(iii) of this section for a 

year for which a national bonus 

payment is made under paragraph 

(f)(4)(ii) of this section. 

(ii) National bonus payment. The 

national bonus payment under this 

paragraph will—

(A) Be available to an MA 

organization only if the organization 

offers MA regional plans in every MA 

region; 

(B) Be available for all MA regional 

plans of the organization regardless of 

whether any other MA regional plan is 

offered in any region; and 

(C) Be subject to amounts available 

under paragraph (f)(3) of this section for 

a year and be equal to 3 percent of the 

benchmark amount otherwise 

applicable for each MA regional plan 

offered by the organization. 

(iii) Regional payment adjustment—

(A) General rule. The increased amount 

under this paragraph for an MA regional 

plan in an MA region for a year must be 

an amount, determined by CMS, based 

on the bid submitted for that plan (or 

plans) and will be available to all MA 

regional plans offered in that region and 

year. That amount may be based on the 

mean, mode, or median or other 

measure of those bids and may vary 

from region to region. CMS will not 

limit the number of plans or bids in a 

region. 

(B) Multi-year funding. Subject to 

amounts available under paragraph 

(f)(3) of this section, funding will be 

available for a period determined by 

CMS. 

(C) Application to all plans in a 

region. Funding under this paragraph 

for an MA region will be made available 

for all MA regional plans offered in the 

region. 

(D) Limitation on availability of plan 

retention funding in next year. If plans 

receive plan entry funding in a year, 

plans in that region are prohibited from 

receiving plan retention funding in the 

following year. 

(iv) Application. Any additional 

payment under this section provided for 

an MA regional plan for a year will be 

treated as if it were an addition to the 

benchmark amount otherwise 

applicable to that plan and year, but 

will not be taken into account in the 

computation of any benchmark amount 

for any subsequent year. 

(5) Plan retention funding—(i) 

General rule. Funding is available under 

this paragraph for a year with respect to 

MA regional plans offered in an MA 

region for the increased amount 

specified in paragraph (f)(5)(ii) of this 

section but only if the region meets the 

requirements of paragraphs (f)(5)(iii)(A), 

(f)(5)(iii)(B), (f)(5)(iii)(C) and (f)(5)(iii)(E) 

of this section. 

(ii) Payment increase. The increased 

amount under this paragraph for an MA 

regional plan in an MA region for a year 

will be an amount, determined by CMS, 

that does not exceed the greater of—

(A) 3 percent of the benchmark 

amount applicable in the region; or 

(B) The amount as (when added to the 

benchmark amount applicable to the 

region) will result in the ratio of—

(1) That additional amount plus the 

benchmark amount computed under 

section 1854(b)(4)(B)(i) of the Act, ‘‘the 

risk-adjusted benchmark amount’’ for 

the region and year, to the adjusted 

average per capita cost for the region 

and year, as estimated by CMS under 

section 1876(a)(4) of the Act and 

adjusted as appropriate for the purpose 

of risk adjustment; being equal to—

(2) The weighted average of those 

benchmark amounts for all the regions 

and that year, to the average per capita 

cost for the United States and that year, 

as estimated by CMS under section 

1876(a)(4) of the Act and adjusted as 

appropriate for the purpose of risk 

adjustment. 

(iii) Regional requirements. The 

requirements of this paragraph for an 

MA region for a year are as follows: 

(A) Notification of plan exit. CMS has 

received notice (as specified by CMS) 

before a new contract year, that one or 

more MA regional plans that were 

offered in the region in the previous 

year will not be offered in the 

succeeding year. 

(B) Regional plans available from 

fewer than two MA organizations in the 

region. CMS determines that if the plans 

referred to in paragraph (f)(5)(ii)(A) of 

this section are not offered in the year, 

fewer than two MA organizations will 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46973 

be offering MA regional plans in the 

region in the year involved. 

(C) Percentage enrollment in MA 

regional plans below national average. 

For the previous year, CMS determines 

that the average percentage of MA 

eligible individuals residing in the 

region who are enrolled in MA regional 

plans is less than the average percentage 

of those individuals in the United States 

enrolled in those plans. 

(D) Application. Any additional 

payment under this paragraph provided 

for an MA regional plan for a year will 

be treated as if it were an addition to the 

benchmark amount otherwise 

applicable to that plan and year, but 

will not be taken into account in the 

computation of any benchmark amount 

for any subsequent year. 

(E) 2-consecutive-year limitation. In 

no case will plan retention funding be 

available under this paragraph in an MA 

region for more than 2 consecutive 

years. 

Subpart K—Contracts With Medicare 

Advantage Organizations 

§ 422.501, § 422.502, and § 422.504 

[Redesignated] 

52. Redesignate § 422.501, § 422.502, 

and § 422.504 as § 422.503, § 422.504, 

and § 422.505 respectively. 

53. Add new § 422.501 to read as 

follows: 

§ 422.501 Application requirements. 

(a) Scope. This section sets forth 

application requirements for entities 

that seek a contract as an MA 

organization offering an MA plan. 

(b) Completion of an application. (1) 

In order to obtain a determination on 

whether it meets the requirements to 

become an MA organization and is 

qualified to provide a particular type of 

MA plan, an entity, or an individual 

authorized to act for the entity (the 

applicant) must complete a certified 

application, in the form and manner 

required by CMS, including the 

following: 

(i) Documentation of appropriate State 

licensure or State certification that the 

entity is able to offer health insurance 

or health benefits coverage that meets 

State-specified standards applicable to 

MA plans, and is authorized by the 

State to accept prepaid capitation for 

providing, arranging, or paying for the 

comprehensive health care services to 

be offered under the MA contract; or 

(ii) For regional plans, documentation 

of application for State licensure in any 

State in the region that the organization 

is not already licensed. 

(2) The authorized individual must 

thoroughly describe how the entity and 

MA plan meet, or will meet, the 

requirements described in this part. 

(c) Responsibility for making 

determinations. CMS is responsible for 

determining whether an entity qualifies 

as an MA organization and whether 

proposed MA plans meet the 

requirements of this part. 

(d) Resubmittal of application. An 

application that has been denied by 

CMS may not be resubmitted for 4 

months after the date of the notice from 

CMS denying the application. 

(e) Disclosure of application 

information under the Freedom of 

Information Act. An applicant 

submitting material that he or she 

believes is protected from disclosure 

under 5 U.S.C. 552, the Freedom of 

Information Act, or because of 

exceptions provided in 45 CFR part 5 

(the Department’s regulations providing 

exceptions to disclosure), should label 

the material ‘‘privileged’’ and include an 

explanation of the applicability of an 

exception described in 45 CFR part 5. 

54. Add new § 422.502 to read as 

follows: 

§ 422.502 Evaluation and determination 

procedures. 

(a) Basis for evaluation and 

determination. (1) CMS evaluates an 

application for an MA contract on the 

basis of information contained in the 

application itself and any additional 

information that CMS obtains through 

other means such as on-site visits, 

public hearings, and any other 

appropriate procedures. 

(2) If the application is incomplete, 

CMS notifies the contract applicant and 

allows 30 days from the date of the 

notice for the contract applicant to 

furnish the missing information. 

(3) After evaluating all relevant 

information, CMS determines whether 

the contract applicant’s application 

meets the applicable requirements of 

§ 422.501. 

(b) Use of information from a prior 

contracting period. If an MA 

organization has failed to comply with 

the terms of a previous contract with 

CMS under title XVIII of the Act, or has 

failed to complete a corrective action 

plan during the term of the contract, 

CMS may deny an application from a 

contract applicant based on the contract 

applicant’s failure to comply with that 

prior contract with CMS even if the 

contract applicant meets all of the 

current requirements. 

(c) Notice of determination. Within 

timeframes determined by CMS, it 

notifies each applicant that applies for 

an MA contract under this part of its 

determination and the basis for the 

determination. The determination may 

be approval, intent to deny, or denial. 

(d) Approval of application. If CMS 

approves the application, it gives 

written notice to the contract applicant, 

indicating that it meets the requirements 

for an MA contract. 

(e) Intent to deny. (1) If CMS finds 

that the contract applicant does not 

appear to be able to meet the 

requirements for an MA organization 

within 60 days, CMS gives the contract 

applicant notice of intent to deny the 

application for an MA contract and a 

summary of the basis for this 

preliminary finding. 

(2) Within 60 days from the date of 

the intent to deny notice, the contract 

applicant may respond in writing to the 

issues or other matters that were the 

basis for CMS’ preliminary finding and 

may revise its application to remedy any 

defects CMS identified. 

(f) Denial of application. If CMS 

denies the application, it gives written 

notice to the contract applicant 

indicating—

(1) That the contract applicant does 

not meet the contract requirements 

under Part C of title XVIII of the Act; 

(2) The reasons why the contract 

applicant does not meet the contract 

requirements; and 

(3) The contract applicant’s right to 

request reconsideration in accordance 

with the procedures specified in subpart 

N of this part. 

(g) Oversight of continuing 

compliance. (1) CMS oversees an MA 

organization’s continued compliance 

with the requirements for an MA 

organization. 

(2) If an MA organization no longer 

meets those requirements, CMS 

terminates the contract in accordance 

with § 422.510. 

§ 422.503 [Amended] 

55. Amend newly redesignated 

§ 422.503 by—

A. Redesignating paragraphs (b)(1) 

through (b)(5) as paragraphs (b)(2) 

through (b)(6) respectively. 

B. Adding new paragraph (b)(1). 

C. Revising newly redesignated 

paragraph (b)(4)(ii). 

D. Revising newly redesignated 

paragraph (b)(4)(vi)(F). 

E. Adding new paragraphs 

(b)(4)(vi)(G)(1), (2), and (3). 

F. Revising newly redesignated 

paragraph (b)(6) introductory text. 

G. Revising newly redesignated 

paragraph (b)(6)(i). 

The revisions read as follows: 

§ 422.503 General provisions. 

* * * * * 

(b) * * * 

46974 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

(1) Complete an application as 

described in § 422.501. 

* * * * * 

(4) * * * 

(ii) Personnel and systems sufficient 

for the M+C organization to organize, 

implement, control, and evaluate 

financial and marketing activities, the 

furnishing of services, the quality 

assurance program, and the 

administrative and management aspects 

of the organization. 

* * * * * 

(vi) * * * 

(F) Procedures for internal monitoring 

and auditing. 

(G) * * * 

(1) If the MA organization discovers 

from any source evidence of misconduct 

related to payment or delivery of health 

benefits under the contract, it must 

conduct a timely, reasonable inquiry 

into that misconduct. 

(2) If, after reasonable inquiry, the MA 

organization has determined that the 

misconduct may violate criminal, civil 

or administrative law, the sponsor must 

report the existence of the misconduct 

to the appropriate Government authority 

within a reasonable period, but not 

more than 60 days after the 

determination that a violation may have 

occurred. If the potential violation 

relates to Federal criminal law, the civil 

False Claims Act, Federal Anti-Kickback 

provisions, the civil monetary penalties 

authorities (primarily under section 

1128A and 1857 of the Social Security 

Act), or related statutes enforced by the 

HHS Office of Inspector General, the 

report must be made to that Office. 

(3) The PDP sponsor must conduct 

appropriate corrective actions (for 

example, repayment of overpayments, 

disciplinary actions against responsible 

employees, etc.) in response to the 

potential violation referenced above. 

* * * * * 

(6) The MA organization’s contract 

must not have been non-renewed under 

§ 422.506 within the past 2 years 

unless—

(i) During the 6-month period 

beginning on the date the organization 

notified CMS of the intention to nonrenew the most recent previous 

contract, there was a change in the 

statute or regulations that had the effect 

of increasing MA payments in the 

payment area or areas at issue; or 

* * * * * 

§ 422.504 [Amended] 

56. Amend newly redesignated 

§ 422.504 by—

A. Revising paragraph (e)(4) 

introductory text. 

B. Revising paragraph (e)(4)(ii) 

C. Revising paragraph (e)(4)(iii). 

D. Removing paragraph (f)(2)(vii). 

E. Redesignating paragraph (f)(2)(viii) 

as paragraph (f)(2)(vii). 

F. Revising paragraph (i)(3)(ii). 

The revisions read as follows: 

§ 422.504 Contract provisions. 

* * * * * 

(e) * * * 

(4) HHS, the Comptroller General, or 

their designee’s right to inspect, 

evaluate, and audit extends through 6 

years from the end of the final contract 

period or completion of audit, 

whichever is later unless—

* * * * * 

(ii) There has been a termination, 

dispute, or allegation of fraud or similar 

fault by the MA organization, in which 

case the retention may be extended to 6 

years from the date of any resulting final 

resolution of the termination, dispute, 

fraud, or similar fault; or 

(iii) CMS determines that there is a 

reasonable possibility of fraud or similar 

fault, in which case CMS may inspect, 

evaluate, and audit the MA organization 

at any time. 

* * * * * 

(i) * * * 

(3) * * * 

(ii) Accountability provisions that 

indicate that the MA organization may 

only delegate activities or functions to a 

provider, related entity, contractor, or 

subcontractor in a manner consistent 

with the requirements set forth at 

paragraph (i)(4)of this section. 

* * * * * 

57. Amend § 422.506 by—

A. Revising paragraph (a)(2)(i). 

B. Revising paragraph (a)(2)(ii). 

C. Revising paragraph (a)(3) 

introductory text. 

The revisions read as follows: 

§ 422.506 Nonrenewal of contract. 

(a) * * * 

(2) * * * 

(i) CMS in writing, by the first 

Monday in June of the year in which the 

contract would end; 

(ii) Each Medicare enrollee, at least 90 

days before the date on which the 

nonrenewal is effective. This notice 

must include a written description of 

alternatives available for obtaining 

Medicare services within the service 

area, including alternative MA plans, 

Medigap options, and original Medicare 

and must receive CMS approval prior to 

issuance. 

* * * * * 

(3) CMS may accept a nonrenewal 

notice submitted after the first Monday 

in June if—

* * * * * 

58. Amend § 422.510 by revising 

paragraph (a)(4) to read as follows: 

§ 422.510 Termination of Contract by CMS. 

(a) * * * 

(4) There is credible evidence that the 

PDP sponsor committed or participated 

in false, fraudulent, or abusive activities 

affecting the Medicare program, 

including submission of false or 

fraudulent data. 

* * * * * 

§ 422.520 [Amended] 

59. Amend § 422.520 by—

A. Revising the section heading. 

B. Revising paragraph (a)(3). 

C. Redesignating paragraph (b) 

introductory text as paragraph (b)(1). 

D. Adding new paragraph (b)(2). 

E. Adding new paragraph (d). 

The revisions and additions read as 

follows: 

§ 422.520 Prompt payment by MA 

organization. 

(a) * * * 

(3) All other claims from noncontracted providers must be paid or 

denied within 60 calendar days from the 

date of the request. 

(b) * * * 

(2) The MA organization is obligated 

to pay contracted providers under the 

terms of the contract between the MA 

organization and the provider. 

* * * * * 

(d) A CMS decision to not conduct a 

hearing under paragraph (c) of this 

section does not disturb any potential 

remedy under State law for 

1866(a)(1)(O) of the Act. 

60. Add new § 422.527 at the end of 

subpart K to read as follows: 

§ 422.527 Agreements with federally 

qualified health centers. 

The contract between the MA 

organization and CMS must contain the 

following provisions: 

(a) The MA organization must pay a 

federally qualified health center (FQHC) 

a similar amount to what it pays other 

providers for similar services. 

(b) Under such a contract, the FQHC 

must accept this payment as payment in 

full, except for allowable cost sharing 

which it may collect. 

Subpart M—Grievances, Organization 

Determinations and Appeals 

61. Amend § 422.560 by adding 

paragraph (a)(3) to read as follows: 

§ 422.560 Basis and scope. 

(a) * * * 

(3) Section 1869 of the Act specifies 

the amount in controversy needed to 

pursue a hearing and judicial review 

and authorizes representatives to act on 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46975 

behalf of individuals that seek appeals. 

These provisions are incorporated for 

MA appeals by section 1852(g)(5) of the 

Act. 

* * * * * 

62. Amend § 422.561 by revising the 

definition of ‘‘Authorized 

representative’’ to read as follows: 

§ 422.561 Definitions. 

* * * * * 

Authorized representative means an 

individual authorized by an enrollee, or 

under State law, to act on his or her 

behalf in obtaining an organization 

determination or in dealing with any of 

the levels of the appeal process, subject 

to the rules described in part 405, 

subpart I of this chapter, unless 

otherwise stated in this subpart. 

* * * * * 

63. Amend § 422.562 by—

A. Revising paragraph (b)(4)(iv). 

B. Revising paragraph (b)(4)(vi). 

C. Revising paragraph (c)(1)(ii). 

D. Revising paragraph (d). 

The revisions read as follows: 

§ 422.562 General provisions. 

* * * * * 

(b) * * * 

(4) * * * 

(iv) The right to an ALJ hearing if the 

amount in controversy is met, as 

provided in § 422.600. 

* * * * * 

(vi) The right to judicial review of the 

hearing decision if the amount in 

controversy is met, as provided in 

§ 422.612. 

(c) * * * 

(1) * * * 

(ii) The QIO review decision is subject 

only to the appeal procedures set forth 

in part 478 of this chapter. 

* * * * * 

(d) When other regulations apply. 

Unless this subpart provides otherwise, 

the regulations in part 405, subpart I of 

this chapter (concerning the 

administrative review and hearing 

processes and representation of parties 

under titles II and XVIII of the Act), 

apply under this subpart to the extent 

they are appropriate. 

64. Amend § 422.566 by revising 

paragraph (b)(4) to read as follows: 

§ 422.566 Organization determinations. 

* * * * * 

(b) * * * 

(4) Discontinuation or reduction of a 

service if the enrollee believes that 

continuation of the services is medically 

necessary. 

* * * * * 

§ 422.568 [Amended] 

65. Amend § 422.568 by—

A. Revising paragraph (a). 

B. Removing paragraph (c). 

C. Redesignating paragraph (d) as 

paragraph (c). 

D. Redesignating paragraph (e) as 

paragraph (d). 

E. Redesignating paragraph (f) as 

paragraph (e). 

F. Revising newly redesignated 

paragraph (c). 

The revisions read as follows: 

§ 422.568 Standard timeframes and notice 

requirements for organization 

determinations. 

(a) Timeframe for requests for service. 

When a party has made a request for a 

service, the MA organization must 

notify the enrollee of its determination 

as expeditiously as the enrollee’s health 

condition requires, but no later than 14 

calendar days after the date the 

organization receives the request for a 

standard organization determination. 

The MA organization may extend the 

timeframe by up to 14 calendar days if 

the enrollee requests the extension or if 

the organization justifies a need for 

additional information and how the 

delay is in the interest of the enrollee 

(for example, the receipt of additional 

medical evidence from noncontract 

providers may change an MA 

organization’s decision to deny). When 

the MA organization extends the 

timeframe, it must notify the enrollee in 

writing of the reasons for the delay, and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the MA organization’s 

decision to grant an extension. 

* * * * * 

(c) Written notice for MA organization 

denials. If an MA organization decides 

to deny service or payment in whole or 

in part, or if an enrollee disagrees with 

an MA organization’s decision to 

discontinue or reduce the level of care 

for an ongoing course of treatment, the 

organization must give the enrollee 

written notice of the determination. 

* * * * * 

66. Amend § 422.570 by revising 

paragraph (d)(2)(ii) to read as follows: 

§ 422.570 Expediting certain organization 

determinations. 

* * * * * 

(d) * * * 

(2) * * * 

(ii) Informs the enrollee of the right to 

file an expedited grievance if he or she 

disagrees with the MA organization’s 

decision not to expedite; and 

* * * * * 

67. Amend § 422.572 by revising 

paragraph (c) to read as follows: 

§ 422.572 Timeframes and notice 

requirements for expedited organization 

determinations. 

* * * * * 

(c) Confirmation of oral notice. If the 

MA organization first notifies an 

enrollee of an adverse expedited 

determination orally, it must mail 

written confirmation to the enrollee 

within 3 calendar days of the oral 

notification. 

* * * * * 

§ 422.582 [Amended] 

68. Amend § 422.582 by—

A. Revising paragraph (a). 

B. Revising paragraph (b). 

C. Revising paragraph (c)(2). 

The revisions read as follows: 

§ 422.582 Request for a standard 

reconsideration. 

(a) Method and place for filing a 

request. A party to an organization 

determination must ask for a 

reconsideration of the determination by 

making an oral or written request to—

(1) The MA organization that made 

the organization determination; or 

(2) An SSA office. 

(b) Timeframe for filing a request. 

Except as provided in paragraph (c) of 

this section, a party must file a request 

for reconsideration within 60 calendar 

days from the date of the notice of the 

organization determination. If the SSA 

receives a request, it forwards the 

request to the MA organization for its 

reconsideration. The timeframe within 

which the organization must conduct its 

review begins when it receives the 

request. 

(c) * * * 

(2) How to request an extension of 

timeframe. If the 60-day period in which 

to file a request for reconsideration has 

expired, a party to the organization 

determination may file a request for 

reconsideration with the MA 

organization or the SSA. If the SSA 

receives a request, it forwards the 

request to the MA organization for its 

reconsideration. The request for 

reconsideration and to extend the 

timeframe must—

(i) Be in writing; and 

(ii) State why the request for 

reconsideration was not filed on time. 

* * * * * 

69. Amend § 422.584 by revising 

paragraph (e) to read as follows: 

§ 422.584 Expediting certain 

reconsiderations. 

* * * * * 

(e) Action following acceptance of a 

request. If an MA organization grants a 

request for expedited reconsideration, it 

must conduct the reconsideration and 

46976 Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 

give notice in accordance with 

§ 422.590. 

* * * * * 

70. Amend § 422.590 by revising 

paragraph (d)(2) to read as follows: 

§ 422.590 Timeframes and responsibility 

for reconsiderations. 

* * * * * 

(d) * * * 

(2) Extensions. The MA organization 

may extend the 72-hour deadline by up 

to 14 calendar days if the enrollee 

requests the extension or if the 

organization justifies a need for 

additional information and how the 

delay is in the interest of the enrollee 

(for example, the receipt of additional 

medical evidence from noncontract 

providers may change an MA 

organization’s decision to deny). When 

the MA organization extends the 

timeframe, it must notify the enrollee in 

writing of the reasons for the delay, and 

inform the enrollee of the right to file an 

expedited grievance if he or she 

disagrees with the MA organization’s 

decision to grant an extension. The MA 

organization must notify the enrollee of 

its determination as expeditiously as the 

enrollee’s health condition requires but 

no later than upon expiration of the 

extension. 

* * * * * 

71. Amend § 422.600 by—

A. Revising paragraph (a). 

B. Revising paragraph (b). 

The revisions read as follows: 

§ 422.600 Right to a hearing. 

(a) If the amount remaining in 

controversy after reconsideration meets 

the threshold requirement established 

annually by the Secretary, any party to 

the reconsideration (except the MA 

organization) who is dissatisfied with 

the reconsidered determination has a 

right to a hearing before an ALJ. 

(b) The amount remaining in 

controversy, which can include any 

combination of Part A and Part B 

services, is computed in accordance 

with part 405, subpart I of this chapter. 

* * * * * 

72. Amend § 422.602 by revising 

paragraph (d) to read as follows: 

§ 422.602 Request for an ALJ hearing. 

* * * * * 

(d) Insufficient amount in 

controversy. (1) If a request for a hearing 

clearly shows that the amount in 

controversy is less than that required 

under § 422.600, the ALJ dismisses the 

request. 

(2) If, after a hearing is initiated, the 

ALJ finds that the amount in 

controversy is less than the amount 

required under § 422.600, the ALJ 

discontinues the hearing and does not 

rule on the substantive issues raised in 

the appeal. 

73. Revise § 422.608 to read as 

follows: 

§ 422.608 Medicare Appeals Council (MAC) 

review. 

Any party to the hearing, including 

the MA organization, who is dissatisfied 

with the ALJ hearing decision, may 

request that the MAC review the ALJ’s 

decision or dismissal. The regulations 

under part 405, subpart I of this chapter 

regarding MAC review apply to matters 

addressed by this subpart. 

74. Amend § 422.612 by—

A. Revising paragraph (a)(2). 

B. Revising paragraph (b). 

C. Revising paragraph (c). 

The revisions read as follows: 

§ 422.612 Judicial review. 

(a) Review of ALJ’s decision. * * * 

(2) The amount in controversy meets 

the threshold requirement established 

annually by the Secretary. 

(b) Review of MAC decision. Any 

party, including the MA organization, 

may request judicial review (upon 

notifying the other parties) of the MAC 

decision if it is the final decision of 

CMS and the amount in controversy 

meets the threshold established in 

paragraph (a)(2) of this section. 

(c) How to request judicial review. In 

order to request judicial review, a party 

must file a civil action in a district court 

of the United States in accordance with 

section 205(g) of the Act. See part 405, 

subpart I of this chapter for a 

description of the procedures to follow 

in requesting judicial review. 

75. Amend § 422.616 by revising 

paragraph (a) to read as follows: 

§ 422.616 Reopening and revising 

determinations and decisions. 

(a) An organization or reconsidered 

determination made by an MA 

organization, a reconsidered 

determination made by the independent 

entity described in § 422.592, or the 

decision of an ALJ or the MAC that is 

otherwise final and binding may be 

reopened and revised by the entity that 

made the determination or decision, 

under the rules in part 405, subpart I of 

this chapter. 

* * * * * 

76. Amend § 422.620 by—

A. Revising the section heading. 

B. Revising paragraph (b). 

C. Revising paragraph (c). 

The revisions read as follows: 

§ 422.620 How enrollees of MA 

organizations must be notified of 

noncovered inpatient hospital care. 

* * * * * 

(b) Physician concurrence required. 

Before discharging an individual or 

changing the level of care in an 

inpatient hospital setting, the MA 

organization must obtain the 

concurrence of the physician who is 

responsible for the enrollee’s inpatient 

care. 

(c) Notice to the enrollee. The written 

notice of non-coverage must be issued 

no later than the day before hospital 

coverage ends. The written notice must 

include the following elements: 

(1) The reason why inpatient hospital 

care is no longer needed or covered; 

(2) The effective date and time of the 

enrollee’s liability for continued 

inpatient care; 

(3) The enrollee’s appeal rights; 

(4) If applicable, the new lower level 

of care being covered in the hospital 

setting; and 

(5) Any additional information 

specified by CMS. 

77. Amend § 422.622 by revising 

paragraph (b)(1)(i) to read as follows: 

§ 422.622 Requesting immediate QIO 

review of noncoverage of inpatient hospital 

care. 

* * * * * 

(b) * * * 

(1) * * * 

(i) To the QIO that has an agreement 

with the hospital under part 475, 

subpart C of this chapter; 

* * * * * 

Subpart O—Intermediate Sanctions 

78. Amend § 422.752 by revising 

paragraph (a)(8) introductory text to 

read as follows: 

§ 422.752 Basis for imposing sanctions. 

(a) * * * 

(8) Employs or contracts with an 

individual or entity who is excluded 

from participation in Medicare under 

section 11128 or 1128A of the Act (or 

with an entity that employs or contracts 

with such an individual or entity) for 

the provision of any of the following: 

* * * * * 

Nomenclature Changes 

79. In part 422, remove ‘‘Departmental 

Appeals Board’’ wherever it appears and 

add in its place ‘‘Medicare Appeals 

Council’’. 

80. In part 422, remove ‘‘DAB’’

wherever it appears and add in its place 

‘‘MAC’’. 

81. In part 422, remove 

‘‘Medicare+Choice’’ wherever it appears 

and add in its place ‘‘Medicare 

Advantage’’. 

82. In part 422, remove ‘‘M+C’’

wherever it appears and add in its place 

‘‘MA’’. 

Federal Register / Vol. 69, No. 148 / Tuesday, August 3, 2004 / Proposed Rules 46977 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: May 26, 2004. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: June 28, 2004. 

Tommy G. Thompson, 

Secretary. 

[FR Doc. 04–17228 Filed 7–26–04; 12:01 pm] 

BILLING CODE 4120–01–P