25360 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 422

[HCFA–1011–IFC]

RIN 0938–AI83

Medicare Program; Waiver

Requirements and Solvency Standards

for Provider-Sponsored Organizations

AGENCY: Health Care Financing

Administration (HCFA), HHS.

ACTION: Interim final rule with comment

period.

SUMMARY: This interim final rule with a

request for comments implements

authority to waive, in the case of

provider-sponsored organizations

(PSOs) that meet certain criteria, the

requirement that Medicare+Choice

organizations be licensed by a State as

risk-bearing entities. The waivers will

be approved only under certain

conditions where the State has denied

or failed to act on an application for

licensure.

This rule also establishes solvency

standards that certain entities must meet

to contract as PSOs under the new

Medicare+Choice program. These

standards apply to PSOs that have

received a waiver of the requirement

that Medicare+Choice organizations be

licensed by a State as risk-bearing

entities.

DATES: Effective date: These regulations

are effective on June 8, 1998.

Comment date: Comments will be

considered if we receive them at the

appropriate address, as provided below,

by 5 p.m. on July 6, 1998.

ADDRESSES: Mail an original and 3

copies of written comments to the

following address: Health Care

Financing Administration, Department

of Health and Human Services,

Attention: HCFA–1011–IFC, P.O. Box

26688, Baltimore, MD 21207–5187.

If you prefer, you may deliver an

original and 3 copies of your written

comments to one of the following

addresses:

Room 309–G, Hubert H. Humphrey

Building, 200 Independence Avenue,

SW., Washington, DC 20201, or

Room C5–09–26, 7500 Security

Boulevard, Baltimore, MD 21244–

1850.

Because of staffing and resource

limitations, we cannot accept comments

by facsimile (FAX) transmission. In

commenting, please refer to file code

HCFA–1011–IFC. Comments received

timely will be available for public

inspection as they are received,

generally beginning approximately 3

weeks after publication of a document,

in Room 309–G of the Department’s

offices at 200 Independence Avenue,

SW., Washington, DC, on Monday

through Friday of each week from 8:30

a.m. to 5 p.m. (phone: (202) 690–7890).

If you wish to submit comments on

the information collection requirements

contained in this interim final rule, you

may submit comments to:

Health Care Financing Administration,

Office of Information Services,

Information Technology Investment

Management Group, Division of

HCFA Enterprise Standards, Room

C2–26–17, 7500 Security Boulevard,

Baltimore, MD 21244–1850, Attn:

John Burke, HCFA–1011–IFC

Office of Management and Budget,

Room 10235, New Executive Office

Building, Washington, DC 20503,

Attn: Allison Herron Eydt, HCFA

Desk Officer

FOR FURTHER INFORMATION CONTACT:

Aaron Brown, (410) 786–1033—general

policy

Maureen Miller, (410) 786–1097—

general policy

Philip Doer (410) 786–1059—program

operations

Greg Snyder, (410) 786–0329—program

operations

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Medicare Contracting

Program

Sections 1876 (g)(1) and (h)(1) of the

Social Security Act (the Act) authorize

the Secretary to enter into risk-sharing

and cost contracts with eligible

organizations to provide certain health

benefits to members. Section 1876(b) of

the Act requires an eligible organization,

that may be a health maintenance

organization (HMO) or a competitive

medical plan (CMP), to be organized

under the laws of a State. Additionally,

section 1876(b) requires that such

entities assume full financial risk on a

prospective basis for the provision of

health care services, and make adequate

provisions against the risk of

insolvency.

B. Current Regulations

Regulations at title 42 of the Code of

Federal Regulations (CFR), Part 417,

reflect the above requirement that

Medicare contracting organizations be

organized under State law, and make

adequate provision against the risk of

insolvency. Specifically, regulations at

42 CFR 417.120 require that Medicare

contracting HMOs and CMPs have a

fiscally sound operation as

demonstrated by the following:

• Total assets greater than total

unsubordinated liabilities.

• Sufficient cash flow and adequate

liquidity to meet obligations as they

become due.

• A net operating surplus or a

financial plan.

• An insolvency protection plan.

• A fidelity bond or bonds, procured

and maintained by the HMO, in an

amount fixed by its policy-making body

but not less than $100,000 per

individual, covering each officer and

employee entrusted with handling of its

funds. The bond may have reasonable

deductibles based upon the financial

strength of the HMO.

• Insurance policies or other

arrangements, secured and maintained

by the HMO and approved by HCFA to

insure the HMO against losses arising

from professional liability claims, fire,

theft, fraud, embezzlement and other

casualty risks.

Since section 1876 of the Act requires

that Medicare contracting HMOs and

CMPs be organized under the laws of

any State, these entities are subject to

State laws regarding financial solvency.

Many States follow the financial

solvency provisions of the HMO Model

Act of the National Association of

Insurance Commissioners (NAIC). The

financial requirements of the Model

HMO Act are distinct from those of the

Health Care Financing Administration

(HCFA).

C. Balanced Budget Act of 1997

Section 4001 of the Balanced Budget

Act of 1997 (BBA) (Public Law 105–33),

enacted August 5, 1997, added new

sections 1851 through 1859 to the Act.

Those sections establish a new

Medicare+Choice (M+C) program under

part C of title XVIII of the Act. Part C

is designed to give beneficiaries access

to health plan choices that go beyond

the original Medicare fee-for-service

program and existing Medicare HMOs.

Once the M+C program is implemented,

an individual entitled to Medicare Part

A and Part B will be able to elect

benefits either through original

Medicare or an M+C plan, depending on

availability in their area. Under Part C,

the M+C plans that may be offered are

coordinated care plans (e.g., HMOs,

provider-sponsored organizations

(PSOs), and preferred provider

organizations (referred to as PPOs)),

private-fee-for service plans, and

demonstration medical savings account

(MSA) plans (that is, a combination of

a high deductible, catastrophic

insurance plan with a contribution to a

Medicare+Choice account).
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25361

Regulations for the overall

implementation of the M+C program are

required by the BBA to be published by

June 1, 1998. Those regulations will be

incorporated into Part 422 of title 42 of

the CFR. Provisions enacted by the BBA

and the forthcoming M+C regulations

establish broad and comprehensive

requirements for contracting as an M+C

plan, including basic benefits, payment,

access to service, quality assurance,

beneficiary hold harmless, continuation

of benefits, appeals mechanisms,

marketing and enrollment processes.

Those overall M+C regulations will

apply to PSOs as well.

Section 1851(a)(2) of the Act

explicitly provides for participation of a

PSO in the M+C program as a

coordinated care plan. A PSO is

described in section 1855(d) of the Act

as a public or private entity—

• That is established or organized,

and operated, by a health care provider

or group of affiliated health care

providers;

• That provides a substantial

proportion of the health care items and

services directly through the provider or

affiliated group of providers; and

• With respect to which the affiliated

providers share, directly or indirectly,

substantial financial risk for the

provision of such items and services

and have at least a majority financial

interest in the entity.

We recently published an interim

final rule with an opportunity for public

comment setting out this definition,

clarifying certain terms, and

establishing related requirements. (This

PSO definitions rule established 42 CFR

Part 422 and, more specifically, Subpart

H, which is designated for the PSO

provisions.) The terms and requirements

related to the definition of a PSO are

now found at §§ 422.350 through

422.356. Here, in this interim final rule

with opportunity for public comment,

we focus on two more portions of the

law established specifically for PSOs

and the M+C program: the Federal

waiver of State licensure and the

solvency standards that will apply to

PSOs that have obtained such a waiver.

Section 1855(a)(2) of the Act

establishes a special exception for PSOs

to the otherwise applicable requirement

for State licensure if certain conditions

occur. This interim final rule

implements the PSO waiver provisions

specified in the BBA, and makes

clarifications. In order to assist

organizations that are considering

applying to become PSOs under the

M+C program, we determined that the

waiver provisions should not be delayed

until the June 1, 1998 regulation is

published. As with the PSO definitions

rule mentioned above, early publication

of these PSO provisions is desirable

because of requirements that must be

met before contract application.

Section 1856(a) of the Act provides

that the Secretary establish through a

negotiated rulemaking process the

solvency standards that entities will be

required to meet if they obtain a waiver

of the otherwise applicable requirement

that they be licensed by a State. We note

here that based on §§ 422.352(a) and

422.380, State-licensed organizations

that meet the PSO definition (see

§§ 422.350 through 356) may qualify for

the minimum enrollment standards

established under Section 1857(b) of the

Act but are not subject to these solvency

standards.

The solvency standards in this

interim final rule with comment period

are a product of the negotiated rule

making process. This rule does not

necessarily conclude the negotiated

rulemaking process because the

Committee may be reconvened to

consider public comments that are

received.

II. Waiver of State Licensure

Requirement

A. Background

1. Statutory Basis

A fundamental requirement of the

M+C program, as set forth under new

section 1855(a)(1) of the Act, is that an

M+C organization must be ‘‘organized

and licensed under State law as a riskbearing entity eligible to offer health

insurance or health benefits coverage in

each State in which it offers an M+C

plan.’’ However, section 1855(a)(2) of

the Act establishes an exception to this

requirement by allowing certain

organizations established or operated

and controlled by providers, and known

in the BBA as PSOs, to obtain from the

Secretary a Federal waiver of the State

licensure requirement under certain

circumstances. This interim final rule

with comment sets forth regulations for

implementing that waiver.

Unlike the regulations contained in

this rule relating to PSO solvency and

capital adequacy, the waiver provisions

were not developed through the

negotiated rulemaking process. The

regulations described in this section

were developed by HCFA under its

rulemaking authority.

2. State Licensure and the Medicare

Program

Under section 1876(b) of the Act and

implementing regulations at 42 CFR Part

417, Medicare contracting HMOs and

CMPs must be organized under the laws

of a State. As used in section 1876 of the

Act, the term ‘‘HMO’’ means a Federally

qualified HMO and the term ‘‘CMP’’

means a prepaid health plan that is

likely regulated by the State as an HMO,

but is not Federally qualified. Thus a

provider sponsored health plan could

apply to contract with HCFA as an HMO

or a CMP if it became Federally

qualified or met the definition of CMP,

and satisfied other section 1876

requirements. In recent years, several

States have adopted licensure laws for

PSOs (sometimes known as integrated

or organized delivery systems), thereby

creating another licensure vehicle and

avenue for contracting with Medicare.

(Some State PSO laws, however, are

limited in scope and licensed entities

would not meet the CMP requirements).

3. Federal Waivers and PSO

Applications

As indicated above, section 1855(a)(1)

requires that M+C organizations be

licensed as risk-bearing entities under

the laws of the State. Section 1855(a)(2)

of the Act provides an exception to this

requirement for PSOs. PSOs are the only

organization eligible to participate in

M+C without State licensure. It is clear

from the statute, however, that all

organizations, including those

established by providers, must seek

State licensure as the initial step toward

an M+C contract. Only under specific

conditions, as described below, will the

organization be permitted to forego the

preliminary and fundamental

requirement to be State-licensed as a

risk-bearing entity.

If an organization believes that the

circumstances of its State application

comply with one of the conditions for

a waiver, it must submit to HCFA a

completed waiver request form. The

request form, that the Office of

Management and Budget approved on

April 2, 1998, (form #0938–0722) is

available through HCFA, and is posted

on the HCFA web site at http://

www.hcfa.gov/Medicare/mplusc.htm.

HCFA will make a determination to

approve or disapprove a waiver within

60 days of receipt of a substantially

complete request. If the waiver request

is approved, the organization will be

considered eligible for a waiver, and

then may submit its contract application

to HCFA. (The PSO application form

will be posted at the aforementioned

Internet address in the near future.) It is

through the application process that the

organization must demonstrate to

HCFA’s satisfaction that it meets the

PSO definitions and requirements as set

forth in 42 CFR 422.350 through

422.356, as well as the solvency

standards established later in this

interim final rule. If it meets the
25362 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

definition, the organization will be

considered a PSO and remains eligible

for a waiver.

Given the 60-day time period

permitted HCFA to approve a waiver

request under section 1855(a)(2)(F) of

the Act, we felt it would be impossible

in many cases to simultaneously process

the waiver request and determine

whether an organization is a PSO as

defined under § 422.350 through

§ 422.356. This determination may

require an extensive review and

verification of the organization’s

structure, ownership or partnership

arrangements, contracts and payment

arrangements. Therefore, as described

above, the 60-day maximum time period

will apply to determining whether the

organization is eligible for a waiver, as

required by law. The determination that

the organization is in fact a PSO will

occur once it is eligible for a waiver and

has submitted an application for an

M+C contract.

B. Waiver Provisions

In this interim final rule, we are

establishing new provisions at § 422.370

through § 422.378 for purposes of

implementing section 1855(a)(2) of the

Act. Because entities applying for a

waiver as yet will not have been

determined to meet the PSO definition

and requirements of subpart H, the

regulation text refers to these entities as

‘‘organizations.’’

Section 422.370 implements the

authority under section 1855(a)(2)(A) of

the Act to waive the State licensure

requirement for M+C organizations

contained in section 1855(a)(1) and

restates the two basic conditions for

doing this. First, the rule requires

organizations interested in a waiver to

file a request by no later than November

1, 2002, a time limit specified by the

statute. Second, HCFA must determine

whether the organization meets one of

the grounds for a waiver listed in

§ 422.372.

Section 422.372 of the rule establishes

the basis for a waiver as set forth in

sections 1855(a)(2)(B), (C), and (D) of the

Act. These three conditions and a fourth

condition identified by HCFA are

described below. In order for three of

the conditions to be effectuated, the

organization must have applied for a

State license before requesting a waiver.

By requiring that the organization apply

for ‘‘the most closely appropriate’’

license (or authority), we are clarifying

that the type of license must relate to

the nature of M+C coordinated care

plans; that is, health plans providing

coordinated, comprehensive benefits

through a health care delivery net work

on a fixed, prepayment basis. We are

requiring this to ensure that

organizations requesting and obtaining

waivers will likely meet the PSO

definition and M+C requirements

during the application stage. We expect

that for most States the most appropriate

license available will be an HMO

license, although this may change as

States adopt PSO or modify current

licensure laws. It is very unlikely that

we will approve a PSO waiver based on

an application for an indemnity

insurance license, a PPO license, any

license or authority to provide limited

health services, or a limited license to

bear risk for an HMO as a downstream

contractor.

Section 422.372(a) sets out the first

basis on which an organization may

establish waiver eligibility, that is, the

State failed to complete action on the

licensing application within 90 days of

the date the State received a

substantially complete application. (See

section 1855(a)(2)(B).) The 90-day

period may begin any time after

enactment of the BBA. It is counted

from the date the State received a

‘‘substantially complete application.’’ In

order to clarify the term ‘‘substantially

complete application,’’ we consulted

several parties for technical assistance,

and intend to make determinations as

follows:

(1) If the State has notified the

organization, in writing, that the

organization has submitted a

substantially complete application, the

date of that notification will be

considered the date the State received a

substantially complete application.

(2) If the State has not notified the

organization, in writing, as to the

completeness of its application within

60 days of the date of submission of an

application, we will consider the date

the organization submitted its initial

application to be the date the State

received a substantially complete

application.

(3) If the organization can

demonstrate to HCFA that it has

submitted all of the information

requested in an incompleteness

notification from the State and the State

still regards the application as

incomplete or fails to notify the

organization as to the status of its

application within 30 days from the

date it receives the organization’s

submission of the additional

information requested, then HCFA will

consider the date the State received the

additional information requested to be

the date the State received a

substantially complete application.

(4) In a dispute between an

organization and the State over whether

the organization has submitted a

substantially complete application or

over the date the State received a

substantially complete application,

HCFA will make the final determination

based on consultation with the

organization and the State.

We believe that this process for

determining the date the State received

a substantially complete application is

consistent with Congressional intent

that an organization must make an

earnest attempt to become State licensed

before requesting a waiver. This earnest

attempt includes working with the State

in good faith to submit all of the

information necessary to have a license

either approved or denied. At the same

time, however, we also believe that

State licensing agencies should be

working in good faith with the

organization to either approve or deny

an application in a timely manner.

We believe the process outlined above

balances the concerns of the States and

of the organization. However, given the

complexity of implementing this

provision, we invite comment on this

approach.

Paragraph (b) of § 422.372 establishes

the second basis for a waiver. Here,

waiver eligibility results from the

organization experiencing

discriminatory treatment in the State’s

denial of its application. As provided in

the statute, discriminatory treatment can

occur in two ways, as follows:

• The State has denied the licensure

application on the basis of any material

requirements, procedures or standards

(other than solvency requirements) that

the State does not generally apply to

other entities engaged in a substantially

similar business.

• The State required, as a condition of

licensure, that the organization offer any

product or plan other than an M+C plan.

Thus, an organization will be eligible

for a waiver under this provision if the

State imposes different requirements,

and these different requirements are the

basis of a license denial. In addition, the

organization must demonstrate what

requirement, procedure, or standard it

failed to meet, and how this differs from

what is generally applied to other

similar plans. In order to demonstrate

that the State does not ‘‘generally

apply’’ the requirement on which the

denial was made, the organization must

show that the requirement is more of an

exception and not usually applied to

similar health plans. For example, if a

pattern exists where most HMOs within

a State are not held to a requirement, the

PSO will be eligible for a waiver based

on discriminatory treatment.

By ‘‘substantially similar business’’

we mean entities that provide and

manage a comprehensive set of health
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25363

care services, and are prepaid a fixed

amount in advance and without regard

to the frequency or cost of services

when utilized. Such entities are likely to

include HMOs, and may include certain

PPOs and State-licensed PSOs. We do

not anticipate considering indemnity

insurers, PPOs reimbursed on a

discounted fee-for-service basis, or

‘‘single-service’’ managed care plans as

being engaged in a ‘‘substantially

similar business’’ to the waiverrequesting organization.

We considered a broader use of the

term ‘‘engaged in a substantially similar

business’’, but believe our interpretation

is consistent with the PSO provisions in

section 1855 of the Act. We believe an

expanded interpretation, which

includes all risk-bearing entities (for

example, indemnity insurers) does not

comply with the language of the statute.

In processing waiver requests under this

provision at this time, we anticipate

looking to the requirements, procedures

and standards that a State places on

HMOs.

The second criterion for

discriminatory treatment, set forth in

§ 422.372(b)(2), is that the State requires

the organization to offer its health plan

to other than the Medicare population.

Here, an organization would have to

demonstrate only that it was denied a

license because the health plan would

serve only Medicare beneficiaries. We

believe this provision permits the

establishment of Medicare-only PSOs,

and establishes a Federal preemption

over any State laws that would prevent

it.

Paragraph (c) of § 422.372, the third

basis for approving a waiver of the State

licensure requirement, pertains to a

State imposing different requirements

related to financial solvency. Two

conditions, or criteria are specifically

addressed in this paragraph. (See

1855(a)(2)(D)(i) and (ii).) Under

§ 422.372(c)(1), a waiver may be granted

if the State has denied the licensure

application, in whole or in part, based

on the organization’s failure to meet

solvency requirements that are different

from those set forth in §§ 422.380

through 422.390. This provision

incorporates the new regulatory citation

for PSO solvency standards developed

through negotiated rulemaking as

established in this rule.

An issue arose regarding waiver

eligibility when a State has adopted the

Medicare PSO solvency standards and

denies a license based solely on a

provision of the solvency standards that

give the regulator discretion. For

example, it is likely that while using the

same solvency standards, HCFA and

States could reach different decisions

regarding the acceptance of

administrative infrastructure to reduce

the minimum net worth amount

requirement. If a State does not permit

such a reduction, the issue arose

whether HCFA would consider this a

basis for a waiver. We have decided to

permit requests for waivers in these

situations. As documentation, we will

require organizations to submit all

information relevant to the specific

solvency requirement in question,

including any State correspondence. As

part of our review, we will likely seek

input from the State. If we concur with

the State’s determination regarding the

specific discretionary issue, the waiver

request will be denied. However, if we

make a decision, that differs from the

State’s, then the waiver will be

approved and the organization may

submit an M+C application. We

considered acceding to States’ decisions

where a regulator’s discretion is

warranted under the PSO solvency

rules, but concluded that this might

overly restrict the availability of

waivers.

The second condition, for a waiver

under § 422.372(c) is that the State has

imposed documentation or information

requirements, or other requirements,

procedures or standards related to

solvency or other material requirements

that are different from those imposed by

HCFA in carrying out §§ 422.380

through 422.390. As with the previous

condition, we believe that a PSO may

seek a waiver if a State denies a license

based on its exercise of discretion in

requiring different information or

documentation than HCFA. Therefore,

documentation, information, and other

requirements which may stem from

such discretion can be the sole basis for

granting a waiver under this particular

provision. Our position on this issue is

based upon the intent of the Congress,

as reflected in the Conference Report

accompanying the BBA, that the State

not impose documentation or

information requirements ‘‘that are

dilatory or unduly burdensome and that

are not generally applied to other

entities engaged in a substantially

similar business.’’ (H.R. Rep. No.105–

217, 105th Congress, Session 632

(1997))

The fourth basis for approving a

waiver of the State licensure

requirement, paragraph (d) of § 422.372,

is that the appropriate State licensing

authority has notified the organization

in writing that it will not accept their

licensure application. While this

grounds for approval is not in the Act,

we are using our authority under section

1856(b)(1) to establish standards to add

this provision based on concerns that

the Act allows for a waiver only if the

PSO submits an application to the State.

We have identified a concern that some

State agencies may refuse to accept

licensing applications from PSO-like

organizations, thus preventing these

organizations from requesting a waiver

until 90 days have transpired.

We believe this provision facilitates

the waiver process and conforms with

the intent of section 1855(a)(2) of the

Act. If it is clear that a State licensing

agency will not act on an application as

described here, both the State and the

organization can save time and

resources by permitting the organization

to go directly to HCFA for a waiver.

In § 422.374 we clarify certain

conditions and provisions related to the

waiver request and approval process.

Paragraph (a) clarifies section

1855(a)(2)(f) of the Act, which requires

organizations seeking a waiver to submit

a substantially complete waiver request.

Section 422.374(a) specifies that to be

substantially complete, a request must

clearly demonstrate and document the

organization’s eligibility for a waiver.

HCFA will notify the organization if the

request is not complete, and will work

with the organization to determine the

information necessary to make a

decision on the request. HCFA will have

final discretion in determining whether

a waiver request is substantially

complete.

Paragraphs (b) and (c) of § 422.374

provide that HCFA will act promptly

(within 60 days) to grant or deny a

substantially complete waiver request

and allow organizations that have been

denied a waiver request to submit

subsequent requests until November 1,

2002. (See section 1855(a)(2)(F).)

Paragraph (d) of § 422.374 establishes

that the waiver will take effect upon the

effective date of the M+C contract. We

have added this provision to clarify that

a waiver is linked to the contract and is

not active, or operable, without an

effective M+C contract. This provision

helps organizations seeking a waiver,

because the waiver is limited to a onetime, three-year period. If the waiver is

made effective immediately upon

approval of a waiver request and the

approval of the M+C contract takes

longer than anticipated, the three-year

waiver period would be running and the

organization could lose a significant

amount of time that it is eligible to

operate without a State license. If the

contract application is denied, an even

greater amount of time may elapse by

the time the organization can develop,

submit and gain approval of a revised

contract application.

Paragraph (e) of § 422.374 gives HCFA

the right to revoke a waiver if we
25364 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

subsequently find that the

organization’s M+C application is

significantly different from the

application submitted to the State.

Because Congress intended for

organizations to make an earnest

attempt to obtain a State license before

applying for a Federal waiver, we

believe that significant changes from the

State application to the M+C waiver

application could undermine this

policy. We believe that requiring that

the M+C contract application be very

similar to the application submitted for

a State license addresses two possible

situations. First, it prevents

organizations from circumventing the

intent for them to achieve State

licensure if possible. It also assures

States the right to license an

organization that has evolved or

reorganized from the time of its first

application; that is, the organization has

undergone some significant changes and

the application for all intent and

purposes is ‘‘new.’’

Organizations that reapply for an M+C

contract because they were not

successful M+C applicants do not have

to reapply to the State or re-submit a

waiver request as long as the revised

application does not invoke paragraph

(e) of § 422.374.

Section 422.376 is added to establish

parameters of the waiver. Paragraph (a)

of this section restates section

1855(a)(2)(E)(i) of the Act, the waiver is

effective only for the particular State for

which it is granted and does not apply

to any other State. It also clarifies that

an organization must be licensed or

request and gain waiver approval for

each State where it wishes to operate an

M+C plan.

Paragraph (b) of § 422.376

incorporates section 1855(a)(2)(E)(ii) of

the Act by limiting the waiver to a 36-

month period. We have modified this

provision, however, to extend the

period through the end of the calendar

year in which the 36-month period ends

unless the waiver is revoked based on

paragraph (c) of this section. We made

this modification because we were

concerned about terminating the waiver

and the M+C contract during the middle

of a contract year. Such mid-year

terminations are unreasonable,

disruptive, costly, and could

unnecessarily jeopardize the health care

of beneficiaries enrolled in a PSO. By

waiting until the end of the contract

year to end a waiver (and thus the M+C

contract), beneficiaries will be able to

transition into other M+C plans through

the annual enrollment process.

Paragraph (c) of § 422.376, mid-period

revocation, was added to clarify that the

waiver will cease before the end of the

36 month period if the organization’s

M+C contract is terminated or if the

organization becomes State licensed.

This provision emphasizes again the

relationship between the waiver and the

contract; namely that the waiver is not

effective without a contract in effect,

and the contract cannot be effective

without the waiver. It also restates the

Act by conditioning the waiver upon the

organization’s compliance with State

consumer protection and quality

standards as discussed further below.

The last section of the waiver

provisions, § 422.378, addresses the

relationship between State law and

waivered organizations, or PSOs. These

provisions are a codification of sections

1855(a)(2)(E)(iii) and (iv), and

1855(a)(2)(G) of the Act. Section

422.378(a) establishes a general Federal

preemption of any State law related to

licensing the organization that interferes

with contracting under the M+C

program. Section 422.378(b), on the

other hand, establishes the State’s right

to require waivered organizations to

comply with consumer protection and

quality standards applicable to all other

M+C plans in the State, as long as the

standards are consistent with Medicare

requirements. Paragraphs (c) and (d) of

§ 422.378 establish processes for

ensuring compliance with § 422.378(b).

We are developing a memorandum of

understanding with the NAIC to

implement §§ 422.378 (b), (c) and (d).

III. PSO Solvency Standards

A. Background

1. Negotiated Rulemaking Act

The Negotiated Rulemaking Act (Pub.

L. 101–648), establishes a framework for

the conduct of negotiated rulemaking.

Negotiated rulemaking is a process

whereby a rule (generally a proposed

rule) is developed by a committee of

representatives of interests that are

likely to be significantly affected under

the rule and includes a Federal

government representative. The goal of

the process is to reach consensus on the

text or content of the rule and then

publish that text for public comment.

Consensus is defined in the Negotiated

Rulemaking Act as unanimous

concurrence among the interests

represented. However, the committee

could agree on another specified

definition. The committee is assisted by

a neutral facilitator.

The agency responsible for the rule

may use the services of an impartial

convener to identify potential

participants in the negotiation,

determine whether they are willing to

participate, inform them about the

process, discuss issues with potential

participants, and make

recommendations regarding how to

make the process work. The committee

must be chartered under the Federal

Advisory Committee Act (FACA) (5

U.S.C. App.2).

2. Establishing the Process

To expedite the development of PSO

solvency standards, Congress modified

the negotiated rulemaking process by

requiring that this rule be published as

an interim final rule with comment,

shortening the period for forming the

committee, establishing a shortened

period for committee negotiations, and

setting a target date for publication of

the interim final rule for April 1, 1998.

(See section 1856(a) of the Act.)

We selected the Department of Health

and Human Services Departmental

Appeals Board (DAB) to serve as the

convener and facilitator for these

negotiations because of their reputation

for impartiality, as well as their

experience and availability. The DAB

has familiarity with HHS programs and

experience convening and facilitating

negotiated rulemaking on Medicare

issues such as the Medicare Hospice

Wage Index and the Shared-risk

Exemption to Federal Health Care AntiKickback Provisions. Further, a poll of

parties interested in the development of

PSO solvency standards indicated

unanimous support for using the DAB to

facilitate the negotiated rulemaking.

During the convening process, the

DAB interviewed over 50 individuals

from outside the Federal government,

representing over 25 different

associations, coalitions or companies.

On September 8, 1997, the DAB issued

a convening report recommending

participants for the negotiated

rulemaking committee (the Committee).

This recommendation was based on an

evaluation of the potential effects of the

rule on groups that indicated a desire to

serve on the Committee. When any

differences among groups were

identified, the convener sought

information about how these differences

were relevant with respect to solvency

standards, whether those differences

could be adequately represented by

other groups, and whether there had

been demonstrated concern about

solvency standards during the

legislative debate. The report also

identified issues to be negotiated and

potential barriers to consensus.

On September 23, 1997, we published

in the Federal Register (62 FR 49649) a

notice of intent to form a negotiated

rulemaking committee and notice of

meetings. Based on the

recommendations contained in the

convener’s report, the notice appointed
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25365

representatives of interests likely to be

affected by PSO solvency standards to

the negotiated rulemaking Committee.

Committee members included the—

American Association of Health Plans,

American Association of Retired Persons,

American Hospital Association,

American Medical Association,

American Medical Group Association,

Blue Cross/Blue Shield Association,

Consortium on Citizens with Disabilities,

Federation of American Health Systems,

Health Insurance Association of America,

National Association of Insurance

Commissioners,

National Rural Health Association

Coalition of the Catholic Hospital

Association and Premier Health Care

Coalition of the American Association of

Homes and Services for the Aging, the

American Health Care Association, the Home

Health Services and Staffing Association, and

the National Association for Home Care; and

Coalition of the Independent Practice

Association of America and the National

Independent Practice Association.

In addition the Committee included a

representative from HCFA.

We requested public comment on

whether we had identified the key

solvency issues to be negotiated by the

Committee; if we had identified the

interests that will be affected by key

issues listed; and whether the party we

were proposing to serve as the neutral

facilitator was acceptable. We also

sought comments on several key

definitions related to the negotiated

rulemaking and the forthcoming

rulemaking for Medicare+Choice

organizations. In general, commenters

supported the notice and as a result no

changes were made to the Committee

membership or issues to be discussed.

3. Summary of the Committee Process

The Committee met seven times from

October 1997 to March 1998. Notices of

meetings were published in the Federal

Register on September 23, 1997 (62 FR

49649) and February 13, 1998 (63 FR

7359). Minutes for each of these

meetings are posted on the M+C web

page at http://www.hcfa.gov/Medicare/

mplusc.htm. At the first meeting, held

October 20, 21, and 22, 1997, business

and health industry analysts made

presentations that related to health plan

solvency. Also the Committee discussed

how to address the principle solvency

issues and how to proceed in

developing solvency standards. The

Committee devoted the remaining series

of 3-day meetings, and a final 1-day

meeting, primarily to substantive

discussion of solvency standards for

Federally waived PSOs.

The Committee’s deliberations

focused on the following issues: the

stages at which to evaluate a PSO’s

financial solvency, the amount,

composition, and location of assets and

liabilities that PSOs must maintain to be

considered financially solvent; the

planning and data collection necessary

to track PSO solvency; and the

mechanisms needed to protect

beneficiaries if a PSO becomes

insolvent.

On March 5, 1998, the Committee

reached consensus on a PSO solvency

standards proposal. All Committee

members signed an agreement

indicating unanimous concurrence with

a written Committee statement of the

Committee’s recommendations for PSO

solvency standards.

In the agreement, HCFA agreed that,

to the maximum extent possible and

consistent with legal obligations, it will

draft an interim final rule consistent

with the Committee statement. We

believe that the PSO solvency

provisions of the interim final rule

published herein are fully consistent

with the Committee’s recommendations,

with some additional clarifications.

Committee members have agreed not to

submit negative comments on the

interim final rule. If, however, a member

believes any provision of this rule

incorrectly reflects the Committee

statement, the member may comment on

the matter. If necessary, the Committee

will be reconvened at a later date.

4. Summary of the Committee’s

Deliberations

The Committee agreed that there are

three stages at which to consider

solvency standards: initially at start-up,

as an ongoing business operation, and

during insolvency. While these stages

are only concepts that do not have exact

starting or finishing points, the

Committee felt that they are a useful

framework for setting solvency

standards at different stages of

operation. These stages are translated in

regulation to the application stage, the

stage during which the M+C contract is

in effect, and insolvency.

The initial stage represents the period

of activity prior to the first day of actual

operation as an M+C contracting PSO. It

includes the periods when an

organization will request a Federal

waiver of State licensure and will apply

for an M+C contract. In this preamble

and the regulation, the term PSO is

reserved for organizations that are:

approved for a Federal waiver,

determined to meet the definition and

related requirements of a PSO, and

awarded a Medicare+Choice contract.

The ongoing stage represents the

period that begins when a PSO’s M+C

contract becomes effective. This is when

a PSO will assume responsibility for

providing services to Medicare

beneficiaries for a fixed payment.

During this stage, the appropriate

solvency standards are affected by the

number of Medicare enrollees for which

a PSO is responsible. Lastly, the

insolvent stage represents the period

beginning when a PSO’s total liabilities

exceed its total assets.

Using this three stage framework, the

Committee developed alternate

proposals regarding the amount,

composition, and status of assets and

liabilities that PSOs must maintain in

order to be considered fiscally sound

and financially solvent. The alternate

proposals reflected the various interests

of the Committee members and their

constituencies. These proposals formed

the basis for negotiations and the

subsequent Committee statement and

consensus agreement.

To develop the solvency standards,

the Committee considered what

financial, capital and other factors must

be present to assure that a PSO is

fiscally sound. Specifically, the

Committee considered requirements for

net worth, financial plans, liquidity,

financial indicators, and beneficiary

protection.

B. Net Worth Amount Requirements

The Committee considered the net

worth requirements for the initial and

ongoing stages. In each stage, the

Committee deliberated on the

appropriate amount and composition of

assets to be counted toward the net

worth requirement. The Committee

agreed that in the initial stage an

organization should have an initial

minimum net worth amount of

$1,500,000. This is the same minimum

net worth amount that is specified in

the HMO Model Act, with a significant

difference. The Committee agreed to

allow HCFA to reduce the net worth

requirement by up to $500,000 if the

PSO has available to it an administrative

infrastructure that HCFA considers

appropriate to reduce, control or

eliminate start-up costs associated with

the administration of the organization.

Such infrastructure would include

office space and equipment, computer

systems, software, management services

contracts and personnel recruitment

fees. In recognizing a reduction of up to

$500,000 for these costs, the Committee

acknowledged that the minimum net

worth drops from $1,500,000 to

$1,000,000 as soon as the PSO is

approved and that the $500,000

difference was to account for start-up

costs. HCFA has the discretion to

approve the administrative costs that an

organization offers to obtain a reduction

of up to $500,000.
25366 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

For the ongoing stage, the Committee

agreed that the minimum net worth

should be at least $1,000,000. This is the

minimum specified in the HMO Model

Act for the ongoing stage. The difference

between the ongoing minimum net

worth and the initial minimum net

worth reflects the Committee belief that

PSOs will incur administrative costs in

the initial stage that will not be repeated

in the ongoing stage. While the floor on

the minimum net worth amount in the

ongoing stage is $1,000,000, the

Committee agreed to subject PSOs to a

series of ‘‘greater of’’ tests to determine

an appropriate minimum net worth. The

‘‘greater of’’ tests link the minimum net

worth amount to the size of annual

premium revenues, the amount of

uncovered health care expenditures,

and the amount of health care

expenditures paid to non-capitated and

non-affiliated providers. These factors

are indirectly related to the size of the

plan (that is, number of enrollees) and

the amount of risk being assumed.

The Committee discussed whether to

include, among the factors considered

in setting the ongoing net worth amount

for PSOs, the authorized control level

(i.e., the point in a financial crisis where

a State regulator is authorized to take

control of an organization) capital

requirement derived from the NAIC

Health Care Organization Risk Based

Capital (RBC) Formula. RBC is a new

formula adopted by the NAIC to

determine the minimum capital level

that an organization should have before

regulators become concerned about its

solvency. The RBC level depends on the

riskiness of the company’s assets,

investments, and products. RBC has

several trigger points. As currently

envisioned, if a company’s actual net

worth falls below the trigger point

called the authorized control level, the

State’s insurance commissioner may

take control of the company. The RBC

for health organizations has not yet been

adopted by States for setting minimum

net worth requirements.

The RBC formula by design will be

used by States to monitor the financial

viability of State-regulated managed

care plans. It has not yet been adopted

by States in setting the minimum net

worth amount requirements. The

Committee agreed that HCFA should

consider adding that RBC authorized

control level factor to the ongoing net

worth amount requirements after

evaluating whether the RBC is a valid

indicator of Medicare PSO solvency and

after considering the manner in which

States have regulated managed care

plans using the RBC authorized control

level. In 1999, after PSOs have begun to

operate and report financial data, HCFA

will issue a notice requesting comment

on adding this factor to the net worth

calculation for PSOs. As part of HCFA’s

normal data collection process for all

M+C plans, HCFA expects to be

collecting information necessary to

perform the RBC calculations.

With regard to the composition of the

minimum net worth amount, the

Committee agreed upon the following

requirements—

• At least $750,000 of the minimum

net worth must be in cash or cash

equivalents. After the effective date of

the contract, however, the Committee

agreed that $750,000 or 40 percent of

the minimum net worth amount must be

in cash or cash equivalents.

• Up to 10 percent of the minimum

net worth amount can be comprised of

intangible assets in the initial stage.

However, in the initial stage, if a PSO

keeps $1,000,000 in cash or cash

equivalents and does not use the

administrative reduction, then up to 20

percent of that PSO’s minimum net

worth can be comprised of intangible

assets. In the ongoing stage, a PSO must

keep the greater of $1,000,000 or 67

percent of the ongoing minimum net

worth in cash or cash equivalents to

qualify for the 20 percent level on

intangibles.

• Subject to the above provisions,

health care delivery assets (HCDAs) may

be admitted at 100 percent of their value

according to generally accepted

accounting principles (GAAP).

• Subject to the above provisions,

other assets may be admitted according

to their value under Statutory

Accounting Practices (SAP).

• Subordinated debts and

subordinated liabilities can be excluded

from the calculation of liabilities for the

purposes of determining net worth.

• Deferred acquisition costs are

excluded from the net worth

calculation.

The Committee also agreed that HCFA

will look at SAP codification upon its

completion and will consider whether

to adopt codification standards on the

asset concentration and quality of

HCDAs for waivered PSOs. SAP

codification standards are currently

being developed by the NAIC to make

SAP more consistent among the States.

HCFA will request public comment on

whether to use any such standards in

the notice on the NAIC RBC (see above).

Meanwhile, HCFA may apply

judgement in evaluating HCDAs for

concentration and quality.

In the Committee’s deliberations the

concepts of net worth and liquidity

were closely related. Some Committee

members suggested that because PSOs

have the potential to provide ‘‘sweat

equity,’’ these organizations could

operate under different solvency

standards for net worth and liquidity

than might be acceptable for other forms

of integrated delivery systems. The term

‘‘sweat equity’’ was used to represent

the value of health services that a PSO

could provide directly. One premise

presented to the Committee was that

PSOs could continue to furnish services

during financial crises because the

‘‘owners’’ actually provide health care

services, whereas other managed care

systems that contract for the delivery of

care may not be able to continue to

operate. In addition, PSOs could adopt

contingent reimbursement arrangements

with their providers. Under such

arrangements, the affiliated providers’

payments could be reduced until the

PSO had weathered the financial crisis.

The consensus was not to explicitly

recognize sweat equity in the solvency

standards. This position evolved

because of the difficulty in developing

an administrable solvency standard

based upon sweat equity. Further, the

solvency standards implicitly recognize

sweat equity in other areas (e.g., the

financial plan).

C. Liquidity Requirements

In conjunction with a minimum net

worth amount requirement, the

Committee discussed a standard for

meeting financial obligations on time.

The Committee adopted, for both the

initial and the ongoing stages, the

liquidity standard that a PSO have

sufficient cash flow to meet its

obligations as they become due. Also,

the Committee recommended that in the

initial and ongoing stages HCFA should

use the same factors to determine the

ability of a PSO to meet the liquidity

standard: (1) the timeliness of PSO

payments of obligations, (2) the extent

to which the current ratio is maintained

at 1:1 or whether there is a change in the

current ratio over a period of time, and

(3) the availability to a PSO of outside

financial resources to meet its

obligations.

The current ratio focuses on a period

that is up to one year long. It compares

all assets that are convertible to cash

within that period with all liabilities

that will come due in that same period

using the following formula:

Current ratio = Current Assets

Current Liabilities

The Committee agreed that PSOs

should maintain a current ratio of at

least 1:1. That is, current assets should

be equal to or greater than current

liabilities. The Committee also agreed

that the current ratio is a target rather

than an absolute standard. This position
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25367

recognizes that valid reasons may exist

for a PSO’s current ratio to go below 1:1

for short periods of time. However, there

were also concerns by some Committee

members that the current ratio is an

important indicator of an organization’s

condition and a current ratio of under

1:1 should trigger some regulatory

action. Therefore, the current ratio will

be used to identify trends or sudden

major shifts in a PSO’s financial

performance.

D. Financial Plan Requirements

Several presenters before the

Committee identified poor planning and

management control as the primary

reasons for the early HMO failures. As

a standard to encourage good planning

and strong management, the Committee

agreed that a financial plan is essential

for PSOs. Further, such plans should be

prospective, reasonable, and consistent.

The Committee used the financial plan

standard for contractors under section

1876 of the Act to develop the PSO

standard, but specified certain

provisions differently. The specific

requirements of the financial plan are

presented in the discussion of

provisions, below.

The Committee believed that the

financial plan standard they agreed to

represents the minimum needed to

monitor Federally waived PSOs. The

Committee agreed that HCFA should

have the discretion to modify the

financial plan to require additional or

different information as necessary to

evaluate the financial position of a

Federally waived PSO.

The Committee agreed that in the

initial stage, at the time of application,

organizations must submit financial

plans covering the period from the most

recent financial audit until 12 months

after the effective date of an M+C

contract. If, however, a financial plan

projects losses, then the time horizon

must extend further, to 12 months after

the point that the financial plan projects

two consecutive quarters of net

operating surplus.

E. Pre-Funding of Projected Losses

One area of the financial plan that the

Committee discussed considerably was

a requirement that PSOs must identify

all sources of funding for projected

losses (and in certain circumstances

actually have the cash available). A key

issue in this discussion was if and how

to recognize such financing methods as

guarantees and letters of credit (LOC).

Some Committee members expressed

concern about quickly securing money

that was pledged to a PSO in a

guarantee or letter of credit during a

financial crisis. For a PSO that is under

financial strain, the timely availability

of cash is crucial to both the PSO and

HCFA in attempting to protect Medicare

enrollees. A delay in securing needed

cash—if, for example, the guarantor

stalls or reneges on its obligation—could

exacerbate a financial crisis and further

threaten the quality and continuity of

care for enrollees.

Other Committee members contended

that guarantees and LOC are a common

and accepted means of obtaining capital

for integrated health delivery systems.

Furthermore, many providers who are

candidates to become Federally waived

PSOs could not participate unless

guarantees or LOC, or both, are allowed.

Advocates of guarantees and LOC felt

that they should be admitted for two

purposes: meeting the net worth

requirements and funding projected

losses.

As a compromise, the Committee

agreed to accept guarantees, but only for

funding projected losses that are

reported by a PSO in its financial plan.

As previously mentioned, the solvency

standards contained herein require

PSOs to fund all projected losses in the

financial plan from the effective date of

their M+C contracts until they achieve

two consecutive quarters of net

operating surplus. The Committee

agreed that guarantees are an acceptable

means to fund projected losses provided

certain conditions are met. Further, the

Committee agreed that each PSO’s

guarantee would be subject to a trial

period of one-year from the effective

date of the PSO’s M+C contract. During

this period, guarantees would be

accepted, but cash or cash equivalents

equaling the obligations covered by the

guarantee would have to be on a PSO’s

balance sheet six months prior to the

date actually needed. After a year,

assuming that the guarantee obligations

are met timely, the Committee agreed

that a PSO should be permitted to notify

HCFA of its intent to reduce or

eliminate the pre-funding period. The

Committee further agreed that HCFA

should have up to 60 days after the

receipt of such notice to exercise its

discretion and modify or reject the

notice. However, if the guarantee

obligations are not properly met on a

timely basis, the Committee agreed that

HCFA should have the discretion to

require a PSO to fund projected losses

through other methods or further in

advance.

HCFA presented the Committee with

draft standards on guarantees. The

Committee generally supported the draft

with some revisions, but did not

officially adopt the standards as part of

the Agreement before needing to vote on

consensus.

The Committee agreed that it should

recognize LOC as a means to fund

projected losses. To be accepted, LOC

must be irrevocable, clean, and

unconditional. Additionally, LOCs must

be capable of being promptly paid upon

presentation of a sight draft under the

LOC without further reference to any

other agreement, document or entity.

The Committee also agreed that

beginning one year after the effective

date of an M+C contract, a PSO should

be allowed to use the following other

means to fund projected losses: (1) lines

of credit from regulated financial

institutions, (2) legally binding capital

contribution agreements, and (3) other

legally binding contracts of similar

reliability.

The Committee recognized that HCFA

should have discretion regarding the

acceptance of guarantees, LOCs and

other means to fund projected losses.

Accordingly, use of these vehicles is

subject to an appropriateness standard.

That is, guarantees, LOCs and other

means of funding projected losses may

only be used in a combination or

sequence that HCFA determines is

appropriate.

F. Reporting

The Committee agreed that PSOs must

meet HCFA requirements for compiling,

maintaining and reporting such

financial information as the agency

determine is necessary. HCFA should

have the discretion to specify the

contents, method of calculation, and the

schedule for reporting such financial

indicators. We believe that this

discretion is necessary for proper

oversight of Federally waived

organizations as they evolve and as

market conditions evolve. The

Committee recommended that the

general reporting format be the NAIC’s

Official Annual Statement Blank—HMO

Edition (the Orange Blank). HCFA will

modify data obtained from this form for

application to PSOs. Use of this form

will not prohibit HCFA from requesting

additional information if the agency

determines that such information is

necessary to accurately assess a PSO’s

financial condition.

The Committee agreed that the

common practice should be to require

quarterly or annual reports. If a PSO has

not achieved a net operating surplus,

the Committee felt that HCFA could

require financial reporting as frequently

as monthly. Monthly reporting would be

necessary to enable HCFA to maintain

better oversight of PSOs that are at

heightened financial risk.
25368 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

G. Insolvency Protections

The Committee’s deliberation in the

area of insolvency focused upon

protecting beneficiaries. The Committee

considered five issues regarding

insolvency: an insolvency deposit

requirement, a hold harmless

requirement, a continuation of coverage

provision, reserves for uncovered

expenditures, and termination of an

M+C contract.

The Committee agreed that an

insolvency deposit should be required.

The insolvency deposit would be used

to pay for the costs associated with

receivership or liquidation. Committee

discussions focused on the amount of

the insolvency deposit rather than the

need for a deposit. For the insolvency

deposit requirement, the Committee

considered a range between $100,000

and $300,000. Committee members

supporting a $300,000 deposit

contended that a lower deposit would

be quickly exhausted and inadequate in

a financial crisis. Committee members

who supported the $100,000 deposit

countered that a higher deposit would

be too onerous when combined with the

cash reserves required to meet the

minimum net worth amount. The

consensus position was to allow the

lower insolvency deposit of $100,000,

provided that the requirement for the

cash portion of the minimum net worth

amount be set at $750,000. Additionally,

the Committee agreed that the

insolvency deposit would be counted

toward the minimum net worth

requirement although not toward the

$750,000 cash requirement.

With regard to uncovered

expenditures, the Committee adopted

the HMO Model Act standard. The

Model Act requires that whenever

uncovered expenditures exceed 10

percent of total health care

expenditures, an entity must create a

deposit equal to 120 percent of

outstanding liabilities for uncovered

expenditures. Rather than being

available for a State insurance

commissioner, the deposit would be

restricted for HCFA’s use in the event of

an insolvency to pay claims and

administration costs.

While the Committee discussed the

issues of Federal bankruptcy/State

receivership, hold harmless, and

continuation of coverage, they

concluded that these issues were

beyond the scope of the negotiations.

Further, Federal bankruptcy and State

receivership matters are not within the

purview of HCFA. The hold harmless

and continuation of benefits provisions

will be considered as part of the overall

M+C regulation due to be published

later this year.

H. Solvency Standards for Rural PSOs

In pre-consensus Committee

discussion, there was vigorous

discussion of separate solvency

standards for rural PSOs. (See

§ 422.352(c) for a definition of rural

PSO.) Some Committee members

contended that rural providers would

find it particularly difficult to meet the

solvency standards, especially the cash

requirements. Rural providers, as

compared to their urban counterparts

tend to have high portions of their assets

concentrated in health care delivery

assets and intangible assets. To rural

PSOs, an excessive cash requirement

may amount to an undue barrier to

entry.

The Committee’s consensus on this

issue was to develop one solvency

standard for all PSOs. The underlying

premise was that the experience of an

unexpected, major claim would harm

rural PSOs more because rural PSOs

tend to have smaller enrollments than

urban PSOs, and therefore a smaller

revenue base for absorbing sudden

financial fluctuations. The Committee

believed that financial instability in a

rural PSO could be more easily triggered

by lower solvency standards.

However, recognizing the unique

needs of rural communities, the

Committee directed HCFA to solicit

public comment on the issue of separate

solvency standards for rural PSOs.

Thus, we are hereby seeking comments

on this matter, particularly on the

appropriateness of the net worth and

liquidity requirements of this interim

final rule for rural PSOs. HCFA is

interested in the merit and

appropriateness of separate standards,

alternative proposals, relevant analysis,

and administrative simplicity.

I. Credit for Reinsurance

As directed by the BBA, the

Committee considered whether to allow

a credit for reinsurance. Several

Committee members advocated that

reinsurance reduces the risk that PSOs

will have to bear and would be

particularly valuable during the initial

stage where PSOs are likely to have

fewer enrollees and claims are harder to

predict. Committee members who

opposed reinsurance argued that many

HMO reinsurance contracts contain

termination clauses that are triggered

once an organization starts losing

money. Underlying this contract issue is

a broader problem; namely there would

need to be provisions developed for

Federal regulation and oversight of PSO

reinsurers given the Federal waiver of

State licensure. Without proper

regulation and safeguards, reinsurance

policies could not be relied upon to

protect beneficiaries in the event of a

financial crisis. Opponents also

indicated that reinsurance is an

essential part of a sound business plan.

Therefore, it should not be treated as an

optional credit against the minimum net

worth amount. Lastly, to the extent that

reinsurance will reduce a PSO’s current

and projected losses, reinsurance is

implicitly recognized in the financial

plan. The consensus was not to admit

reinsurance as a credit against the

minimum net worth amount. The

Committee felt that to the extent that

reinsurance reduces projected losses, it

is implicitly recognized in the financial

plan.

J. Financial Solvency Standards

Provisions

The requirements of this interim final

rule are found in 42 CFR Part 422,

Subpart H, Provider-Sponsored

Organizations. Here we set forth the

solvency requirements for organizations

that are applying for and are operating

under an M+C contract.

Section § 422.350, Basis, Scope and

Definitions, is amended to include

definitions and terminology for new

terms related to the solvency standards

for PSOs.

Section § 422.380 sets forth the

general requirement that a PSO must

have a fiscally sound operation that

meets the requirements of the following

provisions.

Section 422.382 sets forth the

minimum net worth amount

requirements. There is a minimum net

worth amount requirement for

organizations that are in the process of

applying for a PSO M+C contract, and

another for organizations that are

operating as a PSO under an M+C

contract.

Paragraph (a) of § 422.382 sets forth

the requirements that must be met at the

time of application. An organization

must have a $1,500,000 minimum net

worth amount. This is the same amount

that is specified in the HMO Model Act,

except that under this regulation, HCFA

has the discretion to reduce this amount

by up to $500,000 for organizations that

at the time of application have available

administrative infrastructure that will

reduce, control or eliminate

administrative costs.

Paragraph (b) of § 422.382 sets forth

the requirements that must be met after

the effective date of an M+C contract. A

PSO must have a minimum net worth

amount of at least $1,000,000. The

minimum net worth amount is

determined by a ‘‘greater of’’ test. The
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‘‘greater of test’’ requires a PSO to have

a minimum net worth amount equal to

the greater of—

• $1,000,000;

• Two percent of annual premium

revenues up to and including the first

$150,000,000 of annual premiums and 1

percent of annual premium revenues on

premiums in excess of $150,000,000;

• An amount health care

expenditures; or

• An amount equal to the sum of 8

percent of annual health care

expenditures paid on a non-capitated

basis to non-affiliated providers, and 4

percent of annual health care

expenditures paid on a capitated basis

to non-affiliated providers plus annual

health care expenditures paid on a noncapitated basis to affiliated providers.

Annual health care expenditures that

are paid on a capitated basis to affiliated

providers are not included in this

calculation. In essence, the ‘‘greater of’’

test establishes a minimum net worth

requirement above $1,000,000 that

varies in proportion to the size of the

PSO’s operation.

Section 422.382(c) establishes the

composition of assets that are needed to

meet the minimum net worth

requirement. The objective of the

minimum net worth requirement is to

enable PSOs to avoid a financial crisis

or to mitigate the effects of a crisis. To

achieve this, organizations applying to

become PSOs are required to have on

their balance sheets a minimum level of

cash or cash equivalents. In paragraph

(c)(1) of § 422.382, the minimum cash

requirement is set at $750,000 at

application, and at $750,000 or 40

percent of the minimum net worth

amount after the effective date of the

contract. After the effective date of an

M+C contract the cash requirement

above $750,000 is proportional to the

minimum net worth amount. Lower

cash requirements were proposed, but

the Committee was unable to reach

consensus on them. As discussed below,

organizations that maintain a higher

cash level are permitted to use a greater

proportion of intangible assets to meet

the minimum net worth requirement.

Other provisions of the paragraph

address assets besides cash or cash

equivalents that may be included in

determining the minimum net worth,

and limitations. Paragraph (c)(2) of

§ 422.382 establishes the proportion of

the minimum net worth amount that

may be comprised of intangible assets,

depending on an organization’s cash

level. Intangible assets can comprise up

to 10 percent of the minimum net worth

amount, at the time of application for an

organization with $750,000 (and less

than $1,000,000) in cash or cash

equivalents. However, an organization

that has $1,000,000 in cash or cash

equivalents at application can satisfy up

to 20 percent of its minimum net worth

amount requirement with intangible

assets. After the effective date of the

contract, an organization must maintain

the greater of $1,000,000 or 67 percent

of the minimum net worth amount in

cash or cash equivalents to qualify for

the admission of intangible assets up to

20 percent of the minimum net worth

amount.

Under paragraph (c)(3) of § 422.382,

HCDAs are admissible to satisfy the

minimum net worth amount

requirement, subject to the cash

requirement. They are valued at 100

percent of their value according to

GAAP. Section 1856(a) of the Act

directed the Secretary to take into

account ‘‘the delivery system assets of

[provider sponsored organizations].’’

The recognition of HCDAs under GAAP,

that often times is limited under SAP,

was adopted to recognize that large

portions of PSOs’ assets are HCDAs. The

Committee agreed that if the cash

requirement were set at the appropriate

level, then any perceived risk from

recognizing HCDAs was reduced.

Under paragraph (c)(4) of § 422.382,

other assets that are not used in the

delivery of health care are admissible to

satisfy the minimum net worth amount.

However, they are admitted at their

value according to State SAP which

generally are more conservative than

GAAP. Because SAP are determined at

the State level, organizations will have

to follow the accounting methodology

approved by the insurance

commissioner in the State in which they

operate.

As set out in paragraph (c)(5) of

§ 422.382, an organization does not have

to include subordinated debts or

subordinated liabilities for the purpose

of calculating the minimum net worth.

(Subordinated liability is a new concept

that the Committee defined to mean

claims liablities otherwise due to

providers that are retained by the PSO

to meet the net worth requirements.)

The Committee discussed this provision

in the context of provider

reimbursement arrangements that

withhold a portion of payment

contingent upon certain budget or

utilization targets being met. The

Committee agreed that if these payments

are fully subordinated to all other

creditors, then they should not be

included in the calculation of a PSOs

net worth for the purpose of meeting the

minimum net worth amount

requirement. We believe that this

provision is another example how the

concept of sweat equity is implicitly

considered in these solvency standards.

In paragraph (c)(6) of § 422.382,

deferred acquisition costs are not

permitted to be included in the

calculation of the minimum net worth

amount. The Committee believed that in

an insolvency situation, these would

have little or no value.

Paragraphs (a) (b) and (c) of § 422.384

sets forth the financial plan

requirement. The same documents

required of Medicare contracting HMOs

and CMPs under section 417.120(a)(2) of

the Medicare regulations are required

here; namely marketing plans,

statements of revenue and expense,

statements of sources and uses of funds,

balance sheets, detailed justifications

and assumptions supporting the

financial plan, and statements of the

availability of financial resources to

meet projected losses.

PSOs should anticipate the need to

utilize the services of qualified actuaries

(e.g., a member in good standing with

the American Academy of Actuaries) in

(a) the preparation of financial plans

consistent with the PSO’s business plan,

(b) the development of claim costs for

the benefits to be offered by the PSO

and (c) the analysis of claim liabilities

and the necessary liquid assets to meet

obligations on a timely basis.

Accordingly, the Committee agreed that

the financial plan must be satisfactory to

HCFA. HCFA expects and, at its

discretion, will ascertain that the

information contained in the financial

plan has been certified by reputable and

qualified actuaries.

Paragraph (d) of § 422.384 sets forth

the requirement that organizations that

are projecting a loss must have the

resources to fund those projected losses.

This section also defines the conditions

under which HCFA will recognize

various arrangements as acceptable

funding of projected losses. The general

rule is that organizations must have on

their balance sheets assets that they

identify to fund projected losses.

Exceptions are made for guarantees,

LOCs, and other means provided that

certain conditions are met.

Paragraph (e) of § 422.384 sets forth

the exception to the ‘‘on the balance

sheet’’ requirement that applies when

guarantees are used to fund projected

losses. Guarantees are permitted, but

they are subject to a trial period. For the

first year after the effective date of an

M+C contract any organization using a

guarantee must have from the guarantor,

in cash or cash equivalents, funds to

cover projected losses six months in

advance of when needed. For example,

prior to the effective date of an M+C

contract, a PSO must have funding from
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the guarantor equal to the projected

losses for the first two quarters (6

months) of the contract. Before the start

of the second quarter, funding of

projected losses through the third

quarter must be added to the balance

sheet of the PSO. Because of the time it

takes to bring a new contractor onto the

HCFA systems, the first two quarters

funding will need to be in the PSO, that

is, on its balance sheet at least 45 days

before the effective date of the contract.

Quarters, or 90-day periods, will be

counted from the effective date of a

PSO’s M+C contract.

If guarantee funding is timely during

the first year, a PSO may reduce or

eliminate the period of pre-funding in

future years by providing notice to

HCFA. Upon receipt of such notice,

HCFA will have up to 60 days in which

to modify or reject any changes in the

period of prefunding. If the guarantee

funding is not timely, then HCFA may

take appropriate action including

requiring an organization to use other

methods or timing to fund projected

losses. Lastly, guarantors and guarantees

must meet the requirements specified

under § 422.390, discussed below.

Paragraph (f) of § 422.384 sets forth

the exception to the ‘‘on the balance

sheet’’ requirement that applies when

LOCs are used to fund projected losses.

LOCs are admissible to fund projected

losses on the condition that they are

provided by a high quality source and

be irrevocable, unconditional and

satisfactory to HCFA. Additionally,

LOCs must be capable of being promptly

paid upon presentation of a sight draft

under the LOCs without further

reference to any other agreement,

document or entity. The Committee

agreed that HCFA should have the

discretion to accept or reject a letter of

credit.

Paragraph (g) of § 422.384 sets forth

the exception to the ‘‘on the balance

sheet’’ requirement that applies when

other means are used to fund projected

losses. Other means of funding such as

LOCs credit, legally binding capital

contribution agreements, and other

legally binding contracts of similar

quality are admissible to fund projected

losses. However, these methods are

available only after an organization has

had an M+C contract for at least one

year.

Paragraph (h) of § 422.384 sets forth

the general rule that HCFA will have the

discretion to decide whether a PSO is

using guarantees, LOCs or other means

in a combination or sequence that HCFA

deems appropriate. We note here that

the BBA directed the Secretary to take

into account alternative means of

protecting against insolvency including

guarantees, LOCs and other means. The

Committee considered whether to admit

guarantees, LOCs, and other means to

reduce the minimum net worth amount,

as well as to fund projected losses.

However, the consensus was to

recognize them only toward meeting the

requirement to fund projected losses.

Section 422.386(a) sets forth the

general liquidity requirement that a PSO

must have sufficient cash flow to meet

its financial obligations as they become

due and payable. This requirement is

consistent with the standard that is

applied to Medicare contracting HMOs

and CMPs under 42 CFR § 417.120.

Paragraph (b) of § 422.386 contains

three tests to determine whether an

organization is able to meet its financial

obligations as they become due and

payable: (a) history for timeliness in

meeting current obligations, (b) the

extent to which a PSO maintains a

current ratio of 1:1, and (c) the

availability of outside financial

resources to the PSO. The Committee

adopted (a) because such a history is a

strong signal of management’s

commitment to maintaining a fiscally

sound organization.

The second test requires more

discussion. We define ‘‘current ratio’’ as

total current assets divided by total

current liabilities, where the word

‘‘current’’ means less than one year. A

current ratio of 1:1 means that an

organization’s current assets are

sufficient to meet its current liabilities.

The possibility exists that in the course

of normal business operations PSOs

may miss the current ratio slightly for

short, nonrecurring periods of time. In

light of this, HCFA is using a 1:1 current

ratio as a target rather than as an

absolute standard. Accordingly, HCFA

will monitor PSOs that drop below the

1:1 ratio and act where a PSO

experiences a long-term, declining trend

or a sudden, large decline in its current

ratio.

The use of trends in the current ratio

allows HCFA to recognize certain

situations where current assets do not

have to equal or exceed current

liabilities. For HMOs and PSOs in their

early years, the reported current ratio

results will likely produce misleading

trends. The amount of pre-funding of

projected losses ‘‘within’’ versus

‘‘outside’’ the organization may change

over time, distorting trends. Changing

patterns of liabilities (for example, 30-

day business expenses unpaid or

estimates of unreported claims) can also

distort the current ratio from one based

on consistent underlying data.

Consequently, the PSO has an obligation

to monitor underlying true trends and to

provide such information, together with

a projection of continuing current

liabilities consistent with its business

plans. The information should be

certified by a qualified actuary and

presented to HCFA prior to the filing of

a timely financial report with a current

ratio below standard.

The third test for evaluating liquidity

highlights in several ways the

importance of having outside financial

resources available to a PSO. First, such

resources fill a practical role by

providing a cushion in the event of a

financial crisis. Second, if such

resources are available from a parent or

affiliate organization, it signals a

continuing commitment to the PSO.

Third, the availability of such resources

from outside the corporation, either

from a private or a commercial source,

indicates continuing market confidence

that the organization is a viable ongoing

business concern.

Paragraph (c) of § 422.386 requires

that if HCFA determines that an

organization is not in compliance with

the liquidity requirement, it will require

the organization to initiate corrective

action to pay all overdue obligations.

Paragraphs (d) and (e) of § 422.386

specifies that corrective action can

include requiring the organization to

change the distribution of its assets,

reduce its liabilities, secure additional

funding, or secure funding from new

funding sources.

Section 422.388 sets forth the deposit

requirements to provide protection in

the event of an insolvency. Paragraph (a)

of § 422.388 establishes an insolvency

deposit that organizations are required

to make at the time of application and

maintain for the duration of the M+C

contract. The insolvency deposit is

$100,000. The deposit must be restricted

to use in the event of insolvency to help

assure continuation of services or pay

costs associated with receivership or

liquidation. At the time of application

and thereafter, upon HCFA’s request,

the organization must provide HCFA

with proof of the insolvency deposit, in

a form that HCFA considers appropriate.

Paragraph (b) of § 422.388 establishes

an uncovered expenditures deposit

requirement. The amount of uncovered

expenditures that a PSO experiences

will vary, and this deposit is required

any time that they exceed 10 percent of

the PSO’s total health care expenditures.

The deposit must at all times have a fair

market value of an amount that is 120

percent of the PSO’s outstanding

liability for uncovered expenditures for

enrollees, including incurred, but not

reported claims. The deposit must be

calculated as of the first day of each

month required and maintained for the

remainder of each month required. If a
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quarterly report is not otherwise

required, a report must be filed within

45 days of the end of the calendar

quarter to demonstrate compliance. The

deposit must be restricted for HCFA’s

use to protect the interests of the PSO’s

Medicare enrollees and to pay the costs

associated with administering the

insolvency. The deposit is restricted and

in trust and may be used only as

provided in § 422.388.

Under paragraph (c) of § 422.388 the

deposits may be used to satisfy the

organization’s minimum net worth

requirement. Under paragraph (d) of

§ 422.388 all income from the deposits

or trust accounts are considered assets

of the organization. Upon HCFA’s

approval, the income from the deposits

may be withdrawn.

Paragraph (e) of § 422.388 sets forth

requirements that upon HCFA’s written

approval, the income from the deposits

may be withdrawn if a substitute

deposit of cash or securities of equal

amount and value is made, the fair

market value exceeds the amount of the

required deposit, or the required deposit

is reduced or eliminated.

The deposit requirement for

uncovered expenditures is triggered by

a historical trend analysis that indicates

such expenditures are comprising an

increasing portion of total health care

expenditures. The Committee adopted

the HMO Model Act language for the

uncovered expenditures deposit.

Section 422.390 sets forth the

requirements for guarantors and

guarantees, which under § 422.384(e),

above, can be used to fund projected

losses. We are exercising caution in the

use of guarantees because we will have

to monitor the financial viability of the

PSO and the guarantor as well. We

believe we have selected a screening

approach that recognizes financially

strong guarantors and protects Medicare

enrollees, yet permits affiliated

providers or parent organizations to

support the PSO with financial backing.

Paragraph (a) of § 422.390 vests HCFA

with the discretion to approve or deny

the use of a guarantor. Paragraph (b) of

§ 422.390 initiates the approval process

with a request from the PSO, including

financial information on the guarantor.

Paragraph (c) of § 422.390 sets forth

the requirements that a guarantor must

meet to be licensed and authorized to

conduct business within a State or

territory of the United States. The

guarantor must be solvent and not be

under any Federal bankruptcy or State

proceedings, and have a net worth of at

least three times the amount of the

guarantee.

A distinction is made between

guarantors that are and are not regulated

by a State insurance commissioner. If

regulated by a State insurance

commissioner, the guarantor’s net worth

calculation need only exclude from its

assets the value of all guarantees,

investments in and loans to

organizations covered by guarantees.

But, if a guarantor is not regulated by a

State insurance commissioner, then it

must also exclude the value of

guarantees, investments and loans to

related parties (i.e., subsidiaries and

affiliates) from its assets to calculate its

net worth. We believe these

requirements ensure the stability and

financial strength of the guarantor

without being overly restrictive.

Paragraph (d) of § 422.390 contains

provisions for the guarantee document

to be submitted to HCFA by the PSO,

and signed by the guarantor. This

document is the written commitment of

the guarantor to unconditionally fulfill

its financial obligation to the PSO on a

timely basis.

In paragraph (e) of § 422.390, the PSO

is required to routinely report financial

information on the guarantor.

Paragraph (f) of § 422.390 sets forth

the requirements for modification,

substitution, and termination of the

guarantee. A PSO must have HCFA’s

approval at least 90 days before the

proposed effective date of the

modification, substitution, or

termination; demonstrate to HCFA that

insolvency will not result; and

demonstrate how the PSO will meet the

requirements of this section within 15

days, and if required by HCFA, meet a

portion of the applicable requirements

in less than the time period granted.

Paragraph (g) of § 422.390 establishes

conditions that must be met if the

guarantee is nullified. If at any time the

guarantor or the guarantee ceases to

meet the requirements of § 422.390,

HCFA will notify the PSO that it ceases

to recognize the guarantee document. In

the event of nullification, a PSO must

meet the applicable requirements of this

section within 15 business days and if

required by HCFA, meet a portion of the

applicable requirements in less than the

above time period. These requirements

and conditions are not only good

business practices, but also protect

Medicare enrollees by ensuring that a

PSO’s financial backing is sound.

IV. Applicability of These Rules

The provisions of this rule apply only

to certain PSOs and do not apply to any

other type of Medicare applicant or

contracting entity.

Organizations that may be considered

PSOs and that meet any of the criteria

as set forth in § 422.372 may be eligible

for a waiver of State licensure. As

discussed earlier, an organization

interested in entering into a contract

with Medicare as a PSO must first

contact the appropriate State agency

and, in most cases, submit an

application for a State license, or

authority. A PSO that is denied

licensure (and the denial is related to

any of the criteria cited) or is denied the

opportunity to apply for licensure,

should submit a request for a waiver to

HCFA. Organizations that have their

waiver request approved by HCFA may

then submit a PSO application. The PSO

application contains provisions for

demonstrating compliance with the PSO

definitions and solvency requirements

in addition to other contracting

requirements (a supplemental

application may be necessary after the

June regulation is published). It is

during the application process that an

organization will be determined to

qualify as a PSO for purposes of

Medicare contracting under Part C of the

Act. The waiver will take effect with

signing of the M+C contract.

The solvency standards established in

this rule apply to organizations which

have had a waiver approved, as

described above, and are applying for a

Medicare PSO contract, as well as

waivered PSOs with a Medicare contract

in effect. These rules were developed

through negotiated rulemaking

specifically for risk-bearing entities that

will enroll primarily beneficiaries of the

Medicare program. Federal and State

government agencies that may

contemplate use of these solvency

standards for other purposes or other

populations should review them

carefully, and consider the nature of the

health plans and the populations they

will serve.

Provider-sponsored managed care

plans that obtain a State license should

apply directly for an M+C contract by

completing the application for HMO/

PPOs/State-licensed PSOs (i.e., this is

the same application as used by HMOs).

These entities, whether licensed as a

PSO or HMO or other managed care

plan recognized by the State, will not

have to demonstrate compliance with

the PSO definitions in § 422.350

through 356, or with the PSO solvency

standards. However, State-licensed

PSOs or State-licensed managed care

plans that wish to meet the lower

minimum enrollment standard will

have to meet the definitions criteria of

the PSO application. These ‘‘Statelicensed PSOs’’ must meet the solvency

standards as required by their State, not

the Medicare PSO solvency standards as

established in this interim final rule.
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V. Regulatory Impact Analysis

A. Introduction

We have examined the impact of this

interim final rule as required by

Executive Order 12866 and the

Regulatory Flexibility Act (RFA) (Public

Law 96–354). Executive Order 12866

directs agencies to assess all costs and

benefits of available regulatory

alternatives and, when regulation is

necessary, to select regulatory

approaches that maximize net benefits

(including potential economic,

environmental and public health and

safety effects; distributive impacts and

equity). The Regulatory Flexibility Act

(RFA) requires agencies to analyze

options for regulatory relief for small

businesses, unless we certify that the

regulation would not have a significant

economic impact on a substantial

number of small entities. Most

hospitals, and most other providers,

physicians and health care suppliers are

small entities either by non-profit status

or by having revenues of less than $5

million annually. The impact of this

regulation will be to create a new

business opportunity for such small

entities to form provider sponsored

organizations to contract with the

Medicare program.

Section 1102(b) of the Act requires us

to prepare a regulatory impact analysis

if a final rule may have a significant

impact on the operations of a substantial

number of small rural hospitals. This

analysis must conform to the provisions

of section 604 of the RFA. For purposes

of section 1102(b) of the Act, we define

a small rural hospital as a hospital that

is located outside a Metropolitan

Statistical Area and has fewer than 50

beds. We are not preparing an analysis

for section 1102(b) of the Act because

we have determined, and we certify,

that this final rule will not have a

significant impact on the operations of

a substantial number of small rural

hospitals.

We prepared this impact analysis

because of the probability that these

waiver requirements and solvency

standards may have an impact on

certain hospitals, physicians, health

plans and other providers. We are

preparing to publish a regulation

outlining the overall provisions of the

M+C program. That regulation will

consider the impacts of PSOs and other

new provider types in greater detail

than is provided in this regulation. The

following analysis, in combination with

the rest of this interim final rule with

comment period, constitutes a

regulatory impact analysis and a

regulatory flexibility analysis.

B. Background

While the term ‘‘provider sponsored

organization’’ has been used generally

in reference to health care delivery

systems that providers own or control

and operate, the term has a more

specific meeting for purposes of the

M+C program. Accordingly, we defined,

by regulation, the fundamental

organizational requirements for entities

seeking to be PSOs. These definitions

are set forth at 42 CFR 422.350.

Organizations that meet these

definitional requirements can apply for

a Federal waiver and a M+C contract.

Having defined the term PSO in earlier

regulation, this rule has two broad

purposes: (1) To establish the

requirements and process necessary for

organizations to obtain Federal waiver

of license requirements for risk-bearing

entities; and (2) to establish standards

for financial solvency to which such

Federally waived organizations must

adhere.

With regard to the impact of the

waiver requirements and process, we

emphasize three important underlying

factors. First, waivers cannot exceed 36-

months in duration and are not

renewable. Second, the Secretary’s

authority to grant waivers ends

November 1, 2002. Finally, the

Secretary can grant waivers only to

organizations that have first applied for

a State license as a risk bearing entity,

but were denied by virtue of three

things: (1) States’ failure to act timely on

the license application; (2) States’ denial

of the application for ‘‘discriminatory’’

reasons; or (3) States’’ denial for failure

to meet different solvency standards

than are promulgated here. The first two

factors (i.e., the duration of the waiver

and the waiver authority) are important

to this impact analysis because they

indicate that, under current law, no

organization will operate under a

Federal waiver after November 1, 2005.

The third fact regarding eligibility for a

Federal waiver may have an effect on

the waiver application rate.

The solvency standards have an even

narrower focus than the waiver

requirements because the former only

effect organizations that have received a

Federal waiver and are either applying

for or actually have received an M+C

contract. Within this smaller

population, organizations will be

affected differently or not at all

depending upon the status of the

solvency standards in their respective

States. It is likely that waiver activity

will be greater in States that have

solvency standards that differ

significantly from the standards

developed in this regulation. Below we

consider the anticipated impact of this

rule.

C. Anticipated Effects

1. Effects on Providers

HCFA discussion with the industry as

part of the negotiated rule making

process suggests widespread interest in

the benefits of becoming a PSO (i.e.,

waiver of State licensure and lower

minimum enrollment standards). This

regulation benefits certain health

services providers that have been

denied a State risk-bearing license by

creating an opportunity for them to

obtain a Federal waiver of the State

license requirement and participate in

the M+C program as contractors. As

such, this regulation provides means for

such providers to gain access to a

market from which they otherwise

would be excluded. While clearly not

possible to predict how many

organizations will attempt to take

advantage of this new opportunity, we

have seen estimates that the first year

application rate will be between 25 and

150 organizations. For several reasons,

we estimate between 25 and 50

organizations will apply. In the first

year many organizations will be

interested, but we expect that the

‘‘learning curve’’ necessary to gain

familiarity with this new program will

restrain the first year application rate.

Second, the waiver process, which for

this discussion includes the prerequisite

State application process, and M+C

application process, are time intensive

steps. At a minimum, these steps could

take up to 6 six months to complete.

After the first year, however, the

number of applicant organizations will

increasingly be a function of PSOs’

performance and their reception in the

market place.

We do not expect that the waiver

process will create a substantial

additional burden for organizations. For

one thing, the waiver process is not a

mandatory burden. The waiver process

affects only organizations that

affirmatively choose to become

Federally waived PSOs. For those

organizations that apply, we estimate

that the waiver application will require

less than 20 hours to complete.

However, we do believe that waiver

applicants will face the additional task

of documenting their denial of a State

license.

Regarding the application for an M+C

contract, there are existing application

requirements for organizations that seek

to contract with Medicare under section

1876 of the Act. We do not believe that

the M+C application process, which

will be essentially the same, will be any
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25373

more burdensome than an application

under section 1876 of the Act. To the

extent that organizations that previously

have not contracted with the Medicare

program choose to seek an M+C

contract, the application will be a new

task. Given the new provider focus of

this initiative, it is plausible to expect

that many applicants have not

previously contracted directly with

Medicare. However, we believe that the

benefit to Medicare beneficiaries gained

by screening potential contractors

outweighs the burden associated with

having a reasonable application process

in place.

2. Effects on the Market Place

We expect that the advent of PSOs

will increase market competition among

health care service providers, albeit only

slightly. The increase in competition is

expected to be limited for four reasons.

First, since Federally waived PSOs are

limited to serving Medicare enrollees,

any changes in competition will be

primarily concentrated in the Medicare

sector of the health services delivery

market. We note that there may be

crossover effects to the extent that

service providers’ success with

Medicare may affect their success

generally.

Second, we believe that this rule,

primarily concerns the structure of

entities that can participate in the

market for Medicare enrollees. We

expect transfer effects; that is, existing

providers changing corporate form in

order to avail themselves of PSO status.

However, we do not anticipate a

significant increase in the aggregate

market place capacity of providers or

health service delivery assets. The

providers and hospitals that will form

PSOs are coming from the same pool

that are currently providing services. In

addition, the principle effect on

revenues will be a change in the source

of payment from Medicare parts A and

B to the new part C.

Third, to the extent that these

solvency standards are similar to

existing standards, the potential transfer

effect will be limited. Since standards

vary greatly by State, and State

standards are evolving, it is difficult to

assess the relative effect of the instant

standards. We note, however, that with

several key exceptions (e.g., different

initial minimum net worth requirement

and a lower insolvency deposit) the

instant standards track the HMO Model

Act. Therefore, we do not believe there

will be a significant transfer due to the

existence of an unlevel playing field

between PSOs and other entities. We

believe that establishing standards of

financial solvency is necessary to insure

that PSOs have the financial resources

to provide adequate quality care and to

reduce the possibility of disrupting

beneficiary care.

Finally, in the preamble to this

regulation, HCFA agreed that it will

consider the NAIC’s Risk Based Capital

formula as well as the codification of

Statutory Accounting Practices when

these methodologies become available.

If one or both of these methodologies are

adopted for the PSO solvency standards,

it would help to narrow any existing

differences between State-level and

Federal solvency standards.

3. Effects on States

This regulation will affect States in

several ways, some of which are

offsetting. First, we expect that a few

States may have to reduce their

application turnaround times in order to

avoid tolling the 90-day limit for State

review of a waiver application.

However, based upon conversations

with State insurance commissioners, we

believe in many States the application

turnaround time is at or near the 90-day

limit.

The second effect will be a reduction

in States’ oversight burden. For PSOs

that obtain a Federal waiver,

responsibility for monitoring their

financial solvency will be transferred

from the States to HCFA. This is a

temporary reduction, since waivers last

only 36 months and the Secretary’s

authority to grant waivers ends on

November 1, 2002. By the end of a

PSO’s waiver, it will need a State

license in order to continue its M+C

contract. Therefore, to ease the

transition from a Federal waiver to a

State license, we encourage PSOs to

establish a relationship with regulators

in their respective States soon after

receiving a waiver. To minimize the

chances of a gap in financial oversight,

HCFA is negotiating with the State

Insurance Commissioners via the NAIC

to develop a Memorandum of

Understanding regarding sharing

information on the financial solvency of

PSOs.

Lastly, it has been suggested that this

interim final rule may pressure States to

adopt solvency standards that mirror the

Federal standards. Currently, we do not

have a good measure of the extent to

which this will occur. However, we

emphasize that the negotiated

rulemaking committee developed these

solvency standards solely in the context

of Federally waived PSOs that will

provide services under an M+C contract.

States are cautioned not to adopt these

standards for general application

without first considering their affect on

the overall health services delivery

market in their jurisdictions.

4. Effects on Beneficiaries

We expect that this regulation will

have a positive effect on Medicare

beneficiaries since it creates a new

managed care option. We expect that the

principle source for enrollees for newly

formed PSOs will be current Medicare

fee-for-service enrollees. We expect that

the advent of PSOs and M+C in general

will have the effect of further

mainstreaming managed care plans

among Medicare enrollees. We do not

anticipate an increase in the potential

for service interruptions because these

new PSOs will be subject to the same

beneficiary hold-harmless provisions

and continuation of benefits

requirements as all M+C organizations.

Lastly, section 1855(a)(2)(G) of the Act

requires PSOs to comply with all

existing State consumer protection and

quality standards as if the PSO were

licensed under State law.

D. Conclusion

By enacting the BBA provisions

related to PSOs, Congress has indicated

its belief in the potential for provider

controlled organizations to improve the

delivery of services to Medicare

beneficiaries. While expanding the

options available to Medicare

beneficiaries, we believe that this

regulation provides an opportunity for

providers to test their ability to manage

the delivery of health care services. The

negotiated rulemaking Committee,

which included representatives from the

entire range of interested parties,

reached consensus on provisions that

were acceptable when considered as a

whole. It is safe to say that Committee

members considered the impact of these

provisions on their respective

constituencies during the negotiating

process.

We conclude that this regulation will

have an undeterminable impact on

small health service providers. However

the provisions of this interim final rule

are expected to be favorable for the

managed care community as a whole, as

well as for the beneficiaries that they

serve. We have also determined, and the

Secretary certifies that this proposed

rule will not result in a significant

economic impact on a substantial

number of small entities and would not

have a significant impact on the

operations of a substantial number of

rural hospitals. In accordance with the

provisions of Executive order 12866,

this regulation was reviewed by the

Office of Management and Budget.
25374 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

VI. Collection of Information

Requirements

Emergency Clearance: Public

Information Collection Requirements

Submitted to the Office of Management

and Budget (OMB)

In compliance with the requirement

of section 3506(c)(2)(A) of the

Paperwork Reduction Act of 1995, the

Health Care Financing Administration

(HCFA), Department of Health and

Human Services (DHHS), has submitted

to the Office of Management and Budget

(OMB) the following request for

Emergency review. We are requesting an

emergency review because the

collection of this information is needed

prior to the expiration of the normal

time limits under OMB’s regulations at

5 CFR, Part 1320. The Agency cannot

reasonably comply with the normal

clearance procedures because of the

statutory requirement, as set forth in

section 1856 of Balanced Budget Act of

1997, to implement these requirements

on June 1, 1998.

HCFA is requesting OMB review and

approval of this collection within eleven

working days, with a 180-day approval

period. Written comments and

recommendations will be accepted from

the public if received by the individual

designated below, within ten working

days of publication of this notice in the

Federal Register.

During this 180-day period HCFA will

pursue OMB clearance of this collection

as stipulated by 5 CFR. 1320.5.

In order to fairly evaluate whether an

information collection should be

approved by OMB, 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.

Therefore, we are soliciting public

comment on each of these issues for the

information collection requirements

discussed below.

Section 422.374(a), requires an

organization to submit a waiver request

if it has been denied licensure as a riskbearing entity by the State in which it

operates or wishes to operate. To

facilitate the implementation of the

requirements of this section we

developed a model waiver request form

and submitted it to OMB for emergency

clearance in compliance with section

3506(c)(2)(a) of Paperwork Reduction

Act of 1995. OMB has concurred with

the model request form, and the form

and instructions are currently on view

on the HCFA web site, the address of

which is provided in section II.A.3 of

this document. The OMB approval

number is 0938–0722 and is referenced

on the document.

A modification of this waiver request

form is necessary to incorporate the

fourth criterion for a waiver of State

licensure as established in this interim

final rule. The additional criterion

allows a PSO-type organization to forego

a lengthy application process with the

State if the State informs the

organization in writing that such an

application will not be reviewed. As

part of the waiver request, the

organization will be required to submit

a copy of the written communication

from the State. This criterion is

mentioned in the purpose section of the

form, and, with publication of this rule,

we can add it to the check list in section

III, Waiver Eligibility. We intend to

submit this modification to OMB in the

near future.

Section 422.382(c) establishes the

composition of assets the organization

must have at the time it applies to

contract with HCFA as a PSO. The

organization must demonstrate that it

has the required minimum net worth

amount as determined under paragraph

(c), demonstrate that it will maintain at

least $750,000 of the minimum net

worth amount in cash or cash

equivalents, and demonstrate that after

the effective date of a PSO’s M+C

contract, a PSO will maintain the

necessary minimum net worth.

Section 422.384 requires that at the

time of application, an organization

must submit a financial plan acceptable

to HCFA. The financial plan must

include a detailed marketing plan;

statements of revenue and expense on

an accrual basis; a cash flow statement;

balance sheets; the assumptions in

support of the financial plan; and if

applicable, statements of the availability

of financial resources to meet projected

losses. The financial plan must cover

the first 12 months after the estimated

effective date of a PSO’s M+C contract;

or if the PSO is projecting losses, cover

12 months beyond the period for which

losses are projected. Except for the use

of guarantees, LOC, and other means as

provided in paragraphs (e), (f), (g) and

(h) of § 422.384, an organization must

demonstrate that it has the resources for

meeting projected losses on its balance

sheet in cash or a form that is

convertible to cash in a timely manner,

in accordance with the PSO’s financial

plan.

Guarantees will be an acceptable

resource to fund projected losses,

provided that the guarantor complies

with the requirements in paragraph

(e)(2) of this section, and the PSO, in the

third quarter, notifies HCFA and

requests a reduction in the period of

advance funding of projected losses.

Section 422.386 sets forth the general

liquidity requirement that at the time of

application the PSO must demonstrate

that it has sufficient cash flow to meet

its financial obligations as they become

due and payable. To meet this

requirement HCFA will consider: the

PSO’s timeliness in meeting current

obligations, the extent to which the

PSO’s current ratio of assets to liabilities

is maintained at 1:1 and whether there

is a decline in the current ratio over

time, and the availability of outside

financial resources to the PSO.

Section 422.388 sets forth the deposit

requirements to provide protection in

the event of an insolvency. At the time

of application, an organization must

demonstrate that they have deposited

$100,000 in cash or securities (or any

combination thereof) into an account in

a manner that is acceptable to HCFA,

and demonstrate that the deposit will be

restricted only to use in the event of

insolvency to help assure continuation

of services or pay costs associated with

receivership or liquidation.

At the time of the PSO’s application

for an M+C contract and, thereafter,

upon HCFA’s request, a PSO must

provide HCFA with proof of the

insolvency deposit, such proof to be in

a form that HCFA considers appropriate.

If at any time uncovered expenditures

exceed 10 percent of a PSO’s total

health care expenditures, then the PSO

must demonstrate in a manner

acceptable to HCFA that it has placed an

uncovered expenditures deposit into an

account with an organization or trustee.

The PSO must also demonstrate that,

at all times the deposit will have a fair

market value of an amount that is 120

percent of the PSO’s outstanding

liability for uncovered expenditures for

enrollees, including incurred, but not

reported claims; the deposit will be

calculated as of the first day of each

month required and maintained for the

remainder of each month required; if a

PSO is not otherwise required to file a

quarterly report, it must file a report

within 45 days of the end of the

calendar quarter with information

sufficient to demonstrate compliance

with this section; the deposit required

under this section will be restricted and

in trust and may be used only as

provided under this section.

As stated above, the burden

associated with these provisions will be
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25375

captured as part of the M+C PSO

application and/or quarterly financial

reporting processes, similar to section

1876 HMO and CMP contractor

applications and quarterly financial

reporting processes. Based on section

1876 of the Act, we estimate the burden

associated with the submission of the

application to be 100 hours per

application and 62 annual hours per

organization to submit their quarterly

financial report. Based upon the current

volume of waiver reporting workload,

we estimate that on an annual basis, we

will receive 25 to 50 applications and 25

organizations will contract with us and

will be required to submit quarterly

financial reports.

Under § 422.388(d) PSOs may submit

a written request to withdraw income

from the solvency deposits. We

anticipate that, on an annual basis, we

will receive less than 10 requests.

Therefore, these requirements are not

subject to the Paperwork Reduction Act

as defined in 5 CFR 1320.3(c).

Under § 422.388(e) a PSO may submit

a written request to withdraw or

substitute a deposit. We anticipate that,

on an annual basis, we will receive less

than 10 requests. Therefore, these

requirements are not subject to the PRA

as defined in 5 CFR 1320.3(c).

Under § 422.390(b), in order to apply

to use the financial resources of a

guarantor, a PSO must submit to HCFA,

documentation that the guarantor meets

the requirements for a guarantor under

paragraph (c) of this section; and the

guarantor’s independently audited

financial statements for the current yearto-date and for the two most recent

fiscal years. The financial statements

must include the guarantor’s balance

sheets, profit and loss statements, and

cash flow statements. We believe that

the initial burden associated with this

activity is most likely incurred during

the application process, for which we

have previously estimated the aggregate

burden. We expect that less than 10

PSOs per year will incur this burden in

subsequent years. Therefore, these

requirements are not subject to the

Paperwork Reduction Act as defined in

5 CFR 1320.3(c).

Under § 422.390(d), if the guarantee

request is approved, a PSO must submit

to HCFA a written guarantee document

signed by an appropriate authority of

the guarantor. The guarantee document

must state the financial obligation

covered by the guarantee; agree to

unconditionally fulfill the financial

obligation covered by the guarantee and

not subordinate the guarantee to any

other claim on the resources of the

guarantor; declare that the guarantor

will act on a timely basis (that is, in not

more than 5 business days) to satisfy the

financial obligation covered by the

guarantee; and meet other conditions as

HCFA may establish from time to time.

We believe that the initial burden

associated with this activity is most

likely incurred during the application

process, for which we have previously

estimated the aggregate burden. We

expect that less than 10 PSOs per year

will incur this burden in subsequent

years. Therefore, these requirements are

not subject to the PRA as defined in 5

CFR 1320.3(c)

A PSO must submit to HCFA the

current internal financial statements

and annual audited financial statements

of the guarantor according to the

schedule, manner, and form that HCFA

requests.

A PSO cannot modify, substitute or

terminate a guarantee unless the PSO

requests HCFA’s approval at least 90

days before the proposed effective date

of the modification, substitution, or

termination; demonstrates to HCFA’s

satisfaction that the modification,

substitution, or termination will not

result in insolvency of the PSO; and

demonstrates how the PSO will meet

the requirements of this section.

The public will be afforded several

subsequent comment periods in future

publications of Federal Register notices

announcing our intention to seek OMB

approval for the application and

quarterly reporting information

collection requirements, including a

modified version of the National Data

Reporting Requirements (the Orange

Blank), that will be submitted to OMB

in the near future.

We have submitted a copy of this rule

to OMB for its review of the information

collection requirements above. To

obtain copies of the supporting

statement and any related forms for the

proposed paperwork collections

referenced above, E-mail your request,

including your address, phone number

and HCFA regulation identifier HCFA–

1011, to Paperwork@hcfa.gov, or call the

Reports Clearance Office on (410) 786–

1326.

As noted above, comments on these

information collection and record

keeping requirements must be mailed

and/or faxed to the designee referenced

below, within ten working days of

publication of this collection in the

Federal Register:

Health Care Financing Administration,

Office of Information Services,

Information Technology Investment

Management Group, Division of

HCFA Enterprise Standards, Room

C2–26–17, 7500 Security Boulevard,

Baltimore, MD 21244–1850. Attn:

John Burke HCFA–1011. Fax Number:

(410) 786–1415, and,

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC

20503, Attn: Allison Herron Eydt,

HCFA Desk Officer. Fax Number:

(202) 395–6974 or (202) 395–5167

VII. Waiver of Notice of Proposed

Rulemaking

We ordinarily publish a notice of

proposed rulemaking in the Federal

Register to provide a period for public

comment before the provisions of a rule

are made final. Section 1871(b) of the

Act, however, provides that publication

of a notice of proposed rulemaking is

not required before issuing a final rule

where a statute specifically permits a

regulation to be issued in interim final

form. Section 1856(a)(1) of the Act, as

added by section 4001 of the BBA,

directs the Secretary to establish the

solvency standards for PSOs on an

expedited basis using a negotiated

rulemaking process. Section 1856(a)(8)

provides for the publication of solvency

standards as an interim final rule, with

an opportunity for comment to follow.

Under section 1856(a)(3), the ‘‘target

date’’ for publication of this rule was

April 1, 1998. We are promulgating the

solvency provisions in this rule

according to the expressed interim final

rule authority in section 1856(a)(8).

Section 1856(b)(1) also provides for

the publication of other standards

implementing the new M+C program in

Part C on an interim final basis, with an

opportunity for comment to follow. The

PSO waiver provisions in this rule are

being promulgated according to this

latter expressed interim final rule

authority. In addition, we may waive

publication of a notice of proposed

rulemaking if we find good cause that

prior notice and comment are

impractical, unnecessary, or contrary to

public interest. As discussed earlier in

this preamble, HCFA and the Committee

believe that we need to establish the

PSO waiver process early in order to

allow the sequence of waiver request,

application, and contract signing to

occur, and to have PSOs initiate

operations upon implementation of the

M+C program. Further, we determined

that entities considering applying to

become PSOs under the M+C program

need to know whether and how they

can qualify to participate in the program

in order to establish the complex

organizational structures necessary

under the law prior to application.

Many of these entities also need to seek

State licensure or a Federal waiver.
25376 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

Given the time required for these

events, and the clear impetus from the

Congress for implementation of the M+C

program, we believe that it is

impractical and contrary to the public

interest to publish a notice of proposed

rulemaking before establishing the

Federal waiver and solvency standards

set forth in this interim final rule. We

are providing a 60-day period for public

comment.

VIII. Response to Comments

Because of the large number of items

of correspondence we normally receive

on Federal Register documents

published for comment, 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.

List of Subjects in 42 CFR Part 422

Health Maintenance organizations

(HMO), Medicare+Choice, Provider

sponsored organizations (PSO).

42 CFR Part 422 is amended as set

forth below:

PART 422—MEDICARE+CHOICE

PROGRAM

Subpart H—Provider-Sponsored

Organizations

1. The authority citation for Part 422

continues to read as follows:

Authority: Secs. 1851, 1855 and 1856 of

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

1395w–21 through 1395w–27, and 1395hh).

2. Section 422.350(b) is amended by

adding the following definitions in

alphabetical order:

§ 422.350 Basis, scope, and definitions.

* * * * *

(b) * * *

Capitated basis is a payment method

under which a fixed per member, per

month amount is paid for contracted

services without regard to the type, cost

or frequency of services provided.

Cash equivalent means those assets

excluding accounts receivables, which

can be exchanged on an equivalent basis

as cash, or converted into cash within

90 days from their presentation for

exchange.

* * * * *

Current ratio means total current

assets divided by total current

liabilities.

Deferred acquisition costs are those

costs incurred in starting or purchasing

a business. These costs are capitalized

as intangible assets and carried on the

balance sheet as deferred charges since

they benefit the business for periods

after the period in which the costs were

incurred.

* * * * *

Generally accepted accounting

principles (GAAP) means broad rules

adopted by the accounting profession as

guides in measuring, recording, and

reporting the financial affairs and

activities of a business to its owners,

creditors and other interested parties.

Guarantor means an entity that—

(1) Has been approved by HCFA as

meeting the requirements to be a

guarantor; and

(2) Obligates its resources to a PSO to

enable the PSO to meet the solvency

requirements required to contract with

HCFA as an M+C organization.

Health care delivery assets (HCDAs)

means any tangible assets that are part

of a PSO’s operation, including

hospitals and other medical facilities

and their ancillary equipment, and such

property as may be reasonably required

for the PSO’s principal office or for such

other purposes as the PSO may need for

transacting its business.

* * * * *

Insolvency means a condition where

the liabilities of the debtor exceed the

fair valuation of its assets.

M+C stands for Medicare+Choice.

Net Worth means the excess of total

assets over total liabilities, excluding

fully subordinated debt or subordinated

liabilities.

* * * * *

Qualified Actuary means a member in

good standing of the American

Academy of Actuaries or a person

recognized by the Academy as qualified

for membership, or a person who has

otherwise demonstrated competency in

the field of actuarial determination and

is satisfactory to HCFA.

Statutory accounting practices means

those accounting principles or practices

prescribed or permitted by the

domiciliary State insurance department

in the State that PSO operates.

Subordinated debt means an

obligation that is owed by an

organization, that the creditor of the

obligation, by law, agreement, or

otherwise, has a lower repayment rank

in the hierarchy of creditors than

another creditor. The creditor would be

entitled to repayment only after all

higher ranking creditors’ claims have

been satisfied. A debt is fully

subordinated if it has a lower repayment

rank than all other classes of creditors.

Subordinated liability means claims

liabilities otherwise due to providers

that are retained by the PSO to meet net

worth requirements and are fully

subordinated to all other creditors.

Uncovered expenditures means those

expenditures for health care services

that are the obligation of an

organization, for which an enrollee may

also be liable in the event of the

organization’s insolvency and for which

no alternative arrangements have been

made that are acceptable to HCFA. They

include expenditures for health care

services for which the organization is at

risk, such as out-of-area services,

referral services and hospital services.

However, they do not include

expenditures for services when a

provider has agreed not to bill the

enrollee.

3. A new § 422.370 is added to read

as follows:

§ 422.370 Waiver of State licensure.

For an organization that seeks to

contract as an M+C plan under this

subpart, HCFA may waive the State

licensure requirement of section

1855(a)(1) of the Act if—

(1) The organization requests a waiver

no later than November 1, 2002; and

(2) HCFA determines there is a basis

for a waiver under § 422.372.

4. A new § 422.372 is added to read

as follows:

§ 422.372 Basis for waiver of State

licensure.

In response to a request from an

organization and subject to paragraphs

(a) and (e) of § 422.374, HCFA may

waive the State licensure requirement if

the organization has applied (except as

provided for in paragraph (d) of this

section) for the most closely appropriate

State license or authority to conduct

business as an M+C plan as set forth in

section 1851(a)(2)(A) of the Act and any

of the following conditions are met:

(a) Failure to act timely on

application. The State failed to

complete action on the licensing

application within 90 days of the date

the State received a substantially

complete application.

(b) Denial of application based on

discriminatory treatment. The State

has—

(1) Denied the licensure application

on the basis of material requirements,

procedures, or standards (other than

solvency requirements) not generally

applied by the State to other entities

engaged in a substantially similar

business; or

(2) Required, as a condition of

licensure, that the organization offer any

product or plan other than an M+C plan.

(c) Denial of application based on

different solvency requirements. (1) The

State has denied the licensure
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25377

application, in whole or in part, on the

basis of the organization’s failure to

meet solvency requirements that are

different from those set forth in

§§ 422.380 through 422.390; or

(2) HCFA determines that the State

has imposed, as a condition of

licensure, any documentation or

information requirements relating to

solvency or other material requirements

that are different from the requirements,

procedures, or standards set forth by

HCFA to implement, monitor and

enforce §§ 422.380 through 422.390.

(d) The appropriate State licensing

authority has notified the organization

in writing that it will not accept their

licensure application.

5. A new § 422.374 is added to read

as follows:

§ 422.374 Waiver request and approval

process.

(a) Substantially complete waiver

request. The organization must submit a

substantially complete waiver request

that clearly demonstrates and

documents its eligibility for a waiver

under § 422.372.

(b) Prompt action on waiver request.

The organization will be notified in

writing within 60 days of having

submitted to HCFA a substantially

complete waiver request whether the

waiver request has been granted or

denied.

(c) Subsequent waiver requests. An

organization that has had a waiver

request denied, may submit subsequent

waiver requests until November 1, 2002.

(d) Effective date. A waiver granted

under § 422.370 will be effective on the

effective date of the organization’s M+C

contract.

(e) Consistency in application. HCFA

reserves the right to revoke waiver

eligibility if it subsequently determines

that the organization’s M+C application

is significantly different from the

application submitted by the

organization to the State licensing

authority.

6. A new § 422.376 is added to read

as follows:

§ 422.376 Conditions of the waiver.

A waiver granted under this section is

subject to the following conditions:

(a) Limitation to State. The waiver is

effective only for the particular State for

which it is granted and does not apply

to any other State. For each State in

which the organization wishes to

operate without a State license, it must

submit a waiver request and receive a

waiver.

(b) Limitation to 36-month period.

The waiver is effective for 36 months or

through the end of the calendar year in

which the 36 month period ends unless

it is revoked based on paragraph (c) of

this section.

(c) Mid-period revocation. During the

waiver period (set forth in paragraph (b)

of this section), the waiver is

automatically revoked upon—

(1) Termination of the M+C contract;

(2) The organization’s compliance

with the State licensure requirement of

section 1855(a)(1) of the Act; or

(3) The organization’s failure to

comply with § 422.378.

7. A new § 422.378 is added to read

as follows:

§ 422.378 Relationship to State law.

(a) Preemption of State law. Any

provisions of State law that relate to the

licensing of the organization and that

prohibit the organization from providing

coverage under a contract as specified in

this subpart, are superseded.

(b) Consumer protection and quality

standards. (1) A waiver of State

licensure granted under this subpart is

conditioned upon the organization’s

compliance with all State consumer

protection and quality standards that—

(i) Would apply to the organization if

it were licensed under State law;

(ii) Generally apply to other M+C

organizations and plans in the State;

and

(iii) Are consistent with the standards

established under this part.

(2) The standards specified in

paragraph (b)(1) of this section do not

include any standard preempted under

section 1856(b)(3)(B) of the Act.

(c) Incorporation into contract. In

contracting with an organization that

has a waiver of State licensure, HCFA

incorporates into the contract the

requirements specified in paragraph (b)

of this section.

(d) Enforcement. HCFA may enter

into an agreement with a State for the

State to monitor and enforce compliance

with the requirements specified in

paragraph (b) of this section by an

organization that has obtained a waiver

under this subpart.

8. A new § 422.380 is added to read

as follows:

§ 422.380 Solvency standards.

General rule. A PSO or the legal entity

of which the PSO is a component that

has been granted a waiver under

§ 422.370 must have a fiscally sound

operation that meets the requirements of

§§ 422.382 through 422.390.

9. A new § 422.382 is added to read

as follows:

§ 422.382 Minimum net worth amount.

(a) At the time an organization applies

to contract with HCFA as a PSO under

this part, the organization must have a

minimum net worth amount, as

determined under paragraph (c) of this

section, of:

(1) At least $1,500,000, except as

provided in paragraph (a)(2) of this

section.

(2) No less than $1,000,000 based on

evidence from the organization’s

financial plan (under § 422.384)

demonstrating to HCFA’s satisfaction

that the organization has available to it

an administrative infrastructure that

HCFA considers appropriate to reduce,

control or eliminate start-up

administrative costs.

(b) After the effective date of a PSO’s

M+C contract, a PSO must maintain a

minimum net worth amount equal to

the greater of—

(1) One million dollars;

(2) Two percent of annual premium

revenues as reported on the most recent

annual financial statement filed with

HCFA for up to and including the first

$150,000,000 of annual premiums and 1

percent of annual premium revenues on

premiums in excess of $150,000,000;

(3) An amount equal to the sum of

three months of uncovered health care

expenditures as reported on the most

recent financial statement filed with

HCFA; or

(4) Using the most recent annual

financial statement filed with HCFA, an

amount equal to the sum of—

(i) Eight percent of annual health care

expenditures paid on a non-capitated

basis to non-affiliated providers; and

(ii) Four percent of annual health care

expenditures paid on a capitated basis

to non-affiliated providers plus annual

health care expenditures paid on a noncapitated basis to affiliated providers.

(iii) Annual health care expenditures

that are paid on a capitated basis to

affiliated providers are not included in

the calculation of the net worth

requirement under paragraphs (a) and

(b)(4) of this section.

(c) Calculation of the minimum net

worth amount—(1) Cash requirement. (i)

At the time of application; the

organization must maintain at least

$750,000 of the minimum net worth

amount in cash or cash equivalents.

(ii) After the effective date of a PSO’s

M+C contract, a PSO must maintain the

greater of $750,000 or 40 percent of the

minimum net worth amount in cash or

cash equivalents.

(2) Intangible Assets. An organization

may include intangible assets, the value

of which is based on Generally

Accepted Accounting Principles

(GAAP), in the minimum net worth

amount calculation subject to the

following limitations—
25378 Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations

(i) At the time of application. (A) Up

to 20 percent of the minimum net worth

amount, provided at least $1,000,000 of

the minimum net worth amount is met

through cash or cash equivalents; or

(B) Up to 10 percent of the minimum

net worth amount, if less than

$1,000,000 of the minimum net worth

amount is met through cash or cash

equivalents, or if HCFA has used its

discretion under paragraph (a)(2) of this

section.

(ii) From the effective date of the

contract. (A) Up to 20 percent of the

minimum net worth amount if the

greater of $1,000,000 or 67 percent of

the minimum net worth amount is met

by cash or cash equivalents; or

(B) Up to ten percent of the minimum

net worth amount if the greater of

$1,000,000 or 67 percent of the

minimum net worth amount is not met

by cash or cash equivalents.

(3) Health Care Delivery Assets.

Subject to the other provisions of this

section, a PSO may apply 100 percent

of the GAAP depreciated value of health

care delivery assets (HCDAs) to satisfy

the minimum net worth amount.

(4) Other assets. A PSO may apply

other assets not used in the delivery of

health care provided that those assets

are valued according to statutory

accounting practices (SAP) as defined

by the State.

(5) Subordinated debts and

subordinated liabilities. Fully

subordinated debt and subordinated

liabilities are excluded from the

minimum net worth amount

calculation.

(6) Deferred acquisition costs.

Deferred acquisition costs are excluded

from the calculation of the minimum

net worth amount.

10. A new § 422.384 is added to read

as follows:

§ 422.384 Financial plan requirement.

(a) General rule. At the time of

application, an organization must

submit a financial plan acceptable to

HCFA.

(b) Content of plan. A financial plan

must include—

(1) A detailed marketing plan;

(2) Statements of revenue and expense

on an accrual basis;

(3) Statements of sources and uses of

funds;

(4) Balance sheets;

(5) Detailed justifications and

assumptions in support of the financial

plan including, where appropriate,

certification of reserves and actuarial

liabilities by a qualified health

maintenance organization actuary; and

(6) If applicable, statements of the

availability of financial resources to

meet projected losses.

(c) Period covered by the plan. A

financial plan must—

(1) Cover the first 12 months after the

estimated effective date of a PSO’s M+C

contract; or

(2) If the PSO is projecting losses,

cover 12 months beyond the end of the

period for which losses are projected.

(d) Funding for projected losses.

Except for the use of guarantees, LOC,

and other means as provided in

§ 422.384(e), (f) and (g), an organization

must have the resources for meeting

projected losses on its balance sheet in

cash or a form that is convertible to cash

in a timely manner, in accordance with

the PSO’s financial plan.

(e) Guarantees and projected losses.

Guarantees will be an acceptable

resource to fund projected losses,

provided that a PSO—

(1) Meets HCFA’s requirements for

guarantors and guarantee documents as

specified in § 422.390; and

(2) Obtains from the guarantor cash or

cash equivalents to fund the projected

losses timely, as follows—

(i) Prior to the effective date of a

PSO’s M+C contract, the amount of the

projected losses for the first two

quarters;

(ii) During the first quarter and prior

to the beginning of the second quarter

of a PSO’s M+C contract, the amount of

projected losses through the end of the

third quarter; and

(iii) During the second quarter and

prior to the beginning of the third

quarter of a PSO’s M+C contract, the

amount of projected losses through the

end of the fourth quarter.

(3) If the guarantor complies with the

requirements in paragraph (e)(2) of this

section, the PSO, in the third quarter,

may notify HCFA of its intent to reduce

the period of advance funding of

projected losses. HCFA will notify the

PSO within 60 days of receiving the

PSO’s request if the requested reduction

in the period of advance funding will

not be accepted.

(4) If the guarantee requirements in

paragraph (e)(2) of this section are not

met, HCFA may take appropriate action,

such as requiring funding of projected

losses through means other than a

guarantee. HCFA retains discretion to

require other methods or timing of

funding, considering factors such as the

financial condition of the guarantor and

the accuracy of the financial plan.

(f) Letters of credit. Letters of credit

are an acceptable resource to fund

projected losses, provided they are

irrevocable, unconditional, and

satisfactory to HCFA. They must be

capable of being promptly paid upon

presentation of a sight draft under the

letters of credt without further reference

to any other agreement, document, or

entity.

(g) Other means. If satisfactory to

HCFA, and for periods beginning one

year after the effective date of a PSO’s

M+C contract, a PSO may use the

following to fund projected losses—

(1) Lines of credit from regulated

financial institutions;

(2) Legally binding agreements for

capital contributions; or

(3) Legally binding agreements of a

similar quality and reliability as

permitted in paragraphs (g)(1) and (2) of

this section.

(h) Application of guarantees, Letters

of credit or other means of funding

projected losses. Notwithstanding any

other provision of this section, a PSO

may use guarantees, letters of credit

and, beginning one year after the

effective date of a PSO’s M+C contract,

other means of funding projected losses,

but only in a combination or sequence

that HCFA considers appropriate.

11. A new § 422.386 is added to read

as follows:

§ 422.386 Liquidity.

(a) A PSO must have sufficient cash

flow to meet its financial obligations as

they become due and payable.

(b) To determine whether the PSO

meets the requirement in paragraph (a)

of this section, HCFA will examine the

following—

(1) The PSO’s timeliness in meeting

current obligations;

(2) The extent to which the PSO’s

current ratio of assets to liabilities is

maintained at 1:1 including whether

there is a declining trend in the current

ratio over time; and

(3) The availability of outside

financial resources to the PSO.

(c) If HCFA determines that a PSO

fails to meet the requirement in

paragraph (b)(1) of this section, HCFA

will require the PSO to initiate

corrective action and pay all overdue

obligations.

(d) If HCFA determines that a PSO

fails to meet the requirement of

paragraph (b)(2) of this section, HCFA

will require the PSO to initiate

corrective action to—

(1) Change the distribution of its

assets;

(2) Reduce its liabilities; or

(3) Make alternative arrangements to

secure additional funding to restore the

PSO’s current ratio to 1:1.

(e) If HCFA determines that a PSO

fails to meet the requirement of

paragraph (b)(3) of this section, HCFA

will require the PSO to obtain funding

from alternative financial resources.

12. A new § 422.388 is added to read

as follows:
Federal Register / Vol. 63, No. 88 /Thursday, May 7, 1998 /Rules and Regulations 25379

§ 422.388 Deposits.

(a) Insolvency deposit. (1) At the time

of application, an organization must

deposit $100,000 in cash or securities

(or any combination thereof) into an

account in a manner that is acceptable

to HCFA.

(2) The deposit must be restricted to

use in the event of insolvency to help

assure continuation of services or pay

costs associated with receivership or

liquidation.

(3) At the time of the PSO’s

application for an M+C contract and,

thereafter, upon HCFA’s request, a PSO

must provide HCFA with proof of the

insolvency deposit, such proof to be in

a form that HCFA considers appropriate.

(b) Uncovered expenditures deposit.

(1) If at any time uncovered

expenditures exceed 10 percent of a

PSO’s total health care expenditures,

then the PSO must place an uncovered

expenditures deposit into an account

with any organization or trustee that is

acceptable to HCFA.

(2) The deposit must at all times have

a fair market value of an amount that is

120 percent of the PSO’s outstanding

liability for uncovered expenditures for

enrollees, including incurred, but not

reported claims.

(3) The deposit must be calculated as

of the first day of each month required

and maintained for the remainder of

each month required.

(4) If a PSO is not otherwise required

to file a quarterly report, it must file a

report within 45 days of the end of the

calendar quarter with information

sufficient to demonstrate compliance

with this section.

(5) The deposit required under this

section is restricted and in trust for

HCFA’s use to protect the interests of

the PSO’s Medicare enrollees and to pay

the costs associated with administering

the insolvency. It may be used only as

provided under this section.

(c) A PSO may use the deposits

required under paragraphs (a) and (b) of

this section to satisfy the PSO’s

minimum net worth amount required

under § 422.382(a) and (b).

(d) All income from the deposits or

trust accounts required under

paragraphs (a) and (b) of this section, are

considered assets of the PSO. Upon

HCFA’s approval, the income from the

deposits may be withdrawn.

(e) On prior written approval from

HCFA, a PSO that has made a deposit

under paragraphs (a) or (b) of this

section, may withdraw that deposit or

any part thereof if—

(1) A substitute deposit of cash or

securities of equal amount and value is

made;

(2) The fair market value exceeds the

amount of the required deposit; or

(3) The required deposit under

paragraphs (a) or (b) of this section is

reduced or eliminated.

13. A new § 422.390 is added to read

as follows:

§ 422.390 Guarantees.

(a) General policy. A PSO, or the legal

entity of which the PSO is a component,

may apply to HCFA to use the financial

resources of a guarantor for the purpose

of meeting the requirements in

§ 422.384. HCFA has the discretion to

approve or deny approval of the use of

a guarantor.

(b) Request to use a guarantor. To

apply to use the financial resources of

a guarantor, a PSO must submit to

HCFA—

(1) Documentation that the guarantor

meets the requirements for a guarantor

under paragraph (c) of this section; and

(2) The guarantor’s independently

audited financial statements for the

current year-to-date and for the two

most recent fiscal years. The financial

statements must include the guarantor’s

balance sheets, profit and loss

statements, and cash flow statements.

(c) Requirements for guarantor. To

serve as a guarantor, an organization

must meet the following requirements:

(1) Be a legal entity authorized to

conduct business within a State of the

United States.

(2) Not be under Federal or State

bankruptcy or rehabilitation

proceedings.

(3) Have a net worth (not including

other guarantees, intangibles and

restricted reserves) equal to three times

the amount of the PSO guarantee.

(4) If the guarantor is regulated by a

State insurance commissioner, or other

State official with authority for riskbearing entities, it must meet the net

worth requirement in § 422.390(c)(3)

with all guarantees and all investments

in and loans to organizations covered by

guarantees excluded from its assets.

(5) If the guarantor is not regulated by

a State insurance commissioner, or

other similar State official it must meet

the net worth requirement in

§ 422.390(c)(3) with all guarantees and

all investments in and loans to

organizations covered by a guarantee

and to related parties (subsidiaries and

affiliates) excluded from its assets.

(d) Guarantee document. If the

guarantee request is approved, a PSO

must submit to HCFA a written

guarantee document signed by an

appropriate authority of the guarantor.

The guarantee document must—

(1) State the financial obligation

covered by the guarantee;

(2) Agree to—

(i) Unconditionally fulfill the

financial obligation covered by the

guarantee; and

(ii) Not subordinate the guarantee to

any other claim on the resources of the

guarantor;

(3) Declare that the guarantor must act

on a timely basis, in any case not more

than 5 business days, to satisfy the

financial obligation covered by the

guarantee; and

(4) Meet other conditions as HCFA

may establish from time to time.

(e) Reporting requirement. A PSO

must submit to HCFA the current

internal financial statements and annual

audited financial statements of the

guarantor according to the schedule,

manner, and form that HCFA requests.

(f) Modification, substitution, and

termination of a guarantee. A PSO

cannot modify, substitute or terminate a

guarantee unless the PSO—

(1) Requests HCFA’s approval at least

90 days before the proposed effective

date of the modification, substitution, or

termination;

(2) Demonstrates to HCFA’s

satisfaction that the modification,

substitution, or termination will not

result in insolvency of the PSO; and

(3) Demonstrates how the PSO will

meet the requirements of this section.

(g) Nullification. If at any time the

guarantor or the guarantee ceases to

meet the requirements of this section,

HCFA will notify the PSO that it ceases

to recognize the guarantee document. In

the event of this nullification, a PSO

must—

(1) Meet the applicable requirements

of this section within 15 business days;

and

(2) If required by HCFA, meet a

portion of the applicable requirements

in less than the time period granted in

paragraph (g)(1) of this section.

(Catalog of Federal Domestic Assistance

Program No. 93.773, Medicare—Hospital

Insurance; and Program No. 93.774,

Medicare—Supplementary Medical

Insurance Program)

Dated: April 20, 1998.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing

Administration.

Dated: April 28, 1998.

Donna E. Shalala,

Secretary.

[FR Doc. 98–12058 Filed 5–4–98; 11:09 am]

BILLING CODE 4120–01–P