[Federal Register Volume 73, Number 96 (Friday, May 16, 2008)]
[Proposed Rules]
[Pages 28556-28604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1244]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 422 and 423



Medicare Program; Revisions to the Medicare Advantage and Prescription 
Drug Benefit Programs; Proposed Rule

Federal Register / Vol. 73 , No. 96 / Friday, May 16, 2008 / Proposed 
Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS 4131-P]
RIN 0938-AP24


Medicare Program; Revisions to the Medicare Advantage and 
Prescription Drug Benefit Programs

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would make revisions to the Medicare 
Advantage (MA) program (Part C) and prescription drug benefit program 
(Part D). The regulation contains new regulatory provisions regarding 
special needs plans, medical savings accounts (MSA) plans, and cost-
sharing for dual eligible enrollees in the MA program, the prescription 
drug payment and novation processes in the Part D program, and the 
enrollment, appeals, and marketing processes for both programs. We are 
proposing these changes based on lessons learned since 2006, the 
initial year of the prescription drug program and the revised MA 
program.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on July 15, 2008.

ADDRESSES: In commenting, please refer to file code CMS-4131-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the filecode to find the document 
accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-4131-P, P.O. Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-4131-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses: a. 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
    Special Needs Plans--LaVern Baty, 410-786-5480.
    Contracts with MA Organizations--Chris McClintick, 410-786-4682.
    Medicare Medical Savings Account Plans--Anne Manley, 410-786-1096.
    Enrollment--Lynn Orlosky, 410-786-9064.
    Payment--Frank Szeflinski, 303-844-7119.
    Civil Money Penalties--Christine Reinhard, 410-786-2987.
    Reconsiderations--
    <bullet> John Scott, 410-786-3636.
    <bullet> Kathryn McCann Smith, 410-786-7623.
    Marketing--Elizabeth Jacob, 410-786-8658.
    Change of Ownership--Scott Nelson, 410-786-1038.
    Low-income Cost-Sharing--Christine Hinds, 410-786-4578.
    Definitions related to the Part D drug benefit. Subparts F and G--
Deondra Moseley, (410) 786-4577 or Meghan Elrington, (410) 786-8675. 
Subpart R--David Mlawsky, (410) 786-6851.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

A. Overview of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003

    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. The 
MMA established the Medicare prescription drug benefit program (Part D) 
and made revisions to the provisions in Medicare Part C, governing what 
is now called the Medicare Advantage (MA) program (formerly 
Medicare+Choice). The MMA directed that important aspects of the new 
Medicare prescription drug benefit program under Part D be similar to 
and coordinated with regulations for the MA program.
    The MMA also directed implementation of the prescription drug 
benefit and revised MA program provisions by January 1, 2006. The final 
rules for the MA and Part D prescription drug programs appeared in the 
Federal Register on January 28, 2005 (70 FR 4588 through 4741 and 70 FR 
4194 through 4585, respectively). Many of the provisions relating to 
applications, marketing, contracts, and the new bidding process, for 
the MA program, became effective on March 22, 2005, 60

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days after publication of the rule, so that the requirements for both 
programs could be implemented by January 1, 2006. All of the provisions 
regarding the new Part D prescription drug program became effective on 
March 22, 2005.
    As we have gained more experience with the MA program and the 
prescription drug benefit program, we are proposing to revise areas of 
both programs. Many of these revisions clarify existing policies or 
codify current guidance for both programs. We believe that these 
changes would help plans understand and comply with our policies for 
both programs and aid MA organizations and Part D plan sponsors in 
implementing their health care and prescription drug benefit plans.

B. Relevant Legislative History and Overview

    The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) established 
a new ``Part C'' in the Medicare statute (sections 1851 through 1859 of 
the Social Security Act (the Act)) which provided for a Medicare+Choice 
(M+C) program. Under section 1851(a)(1) of the Act, every individual 
entitled to Medicare Part A and enrolled under Medicare Part B, except 
for most individuals with end-stage renal disease (ESRD), could elect 
to receive benefits either through the original Medicare program or an 
M+C plan, if one was offered where he or she lived. The primary goal of 
the M+C program was to provide Medicare beneficiaries with a wider 
range of health plan choices.
    The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), Public Law 106-111, amended the M+C provisions of the BBA. 
Further amendments were made to the M+C program by the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554), enacted December 21, 2000.
    As noted above, the MMA was enacted on December 8, 2003. Title I of 
the MMA added a new ``Part D'' to the Medicare statute (sections 1860D-
1 through 1860D-42) creating the Medicare Prescription Drug Benefit 
Program, the most significant change to the Medicare program since its 
inception in 1965.
    Sections 201 through 241 of Title II of the MMA made significant 
changes to the M+C program which was established by the Balanced Budget 
Act of 1997 (BBA) (Pub. L. 105-33). Title II of the MMA renamed the M+C 
program the MA program and included new payment and bidding provisions, 
new regional MA plans and special needs plans, reestablished authority 
for medical savings account (MSA) plans that had been provided in the 
BBA on a temporary basis, and other changes. Title I of the MMA created 
prescription drug benefits under Medicare Part D, and a new retiree 
drug subsidy program.
    Both the MA and prescription drug benefit regulations were 
published separately, as proposed and final rules, though their 
development and publication were closely coordinated. On August 3, 
2004, we published in the Federal Register proposed rules for the MA 
program (69 FR 46866 through 46977) and the prescription drug benefit 
program (69 FR 46632 through 46863). In response to public comments on 
the proposed rules, we made several revisions to the proposed policies 
for both programs. For further discussion of these revisions, see the 
respective final rules (70 FR 4588-4741) and (70 FR 4194-4585).

II. Provisions of the Proposed Regulations

    In the sections that follow, we discuss the proposed changes to the 
regulations in parts 422 and 423 governing the MA and prescription drug 
benefit programs. Several of the proposed revisions and clarifications 
affect both programs. In our discussion, we note when a provision would 
affect both the MA and prescription drug benefit and include in section 
II C, a table comparing the proposed Part C and D program changes by 
specifying each issue and the sections of the Code of Federal 
Regulations that we propose to revise for both programs.

A. Proposed Changes to Part 422--Medicare Advantage Program

1. Special Needs Plans
    The Congress first authorized special needs plans (SNP) to 
exclusively or disproportionately serve individuals with special needs. 
The three types of special needs individuals eligible for enrollment 
identified by the Congress include (1) institutionalized individuals 
(defined in 42 CFR 422.2 as an individual residing or expecting to 
reside for 90 days or longer in a long term care facility), (2) 
individuals entitled to medical assistance under a State plan under 
title XIX, and (3) other individuals with severe or disabling chronic 
conditions that would benefit from enrollment in a SNP.
    The number of SNPs approved as of January 2008, is 787. This figure 
includes 442 dual eligible SNPs, 256 chronic care SNPs, and 89 
institutional SNPs.
a. Ensuring Special Needs Plans Serve Primarily Special Needs 
Individuals (Sec.  422.4)
    Section 231 of the MMA authorized MA organizations to offer a 
specialized MA plan that ``exclusively,'' or ``disproportionately,'' 
``serves'' one of three categories of ``special needs'' individuals: 
Individuals dually-eligible for both Medicare and Medicaid, 
institutionalized individuals, and individuals with severe or disabling 
chronic conditions that the Secretary determines would benefit from 
enrollment in a SNP.
    As noted above, the final rule implementing the MMA changes to the 
MA program, including these SNP provisions, was issued on January 28, 
2005 (70 FR 4588). In the preamble to the proposed rule we proposed to 
interpret the term ``serves'' special needs individuals to mean markets 
to, and enrolls, special needs individuals. This was intended to permit 
an MA Plan with existing non-special needs enrollees to be designated a 
SNP if it prospectively, exclusively, or disproportionately enrolled 
special needs individuals.
    We also proposed to interpret the statutory phrase, 
``disproportionately serve[s] special needs individuals'' to refer to a 
SNP that enrolls special needs individuals in a proportion greater than 
such individuals exist in the area served by the plan (69 FR 46874). We 
asked for public comments regarding whether we should specify a 
percentage, such as 50 percent or more, as the minimum enrollment for a 
plan to be considered a SNP.
    We did not receive any comments on this proposed provision. 
Therefore, in the final rule we established the disproportionate 
percentage methodology based on the test we proposed in the proposed 
rule, that is, a comparison of the proportion of the special needs 
individuals the plan enrolls relative to non-special needs enrollees 
and the proportion of special needs individuals in the plan's service 
area. If the proportion of special needs to non-special needs 
individuals being enrolled in the plan was greater than the proportion 
in the plan's service area, the plan could be considered a 
disproportionate share SNP. Our expectation was that only a limited 
number of non-special needs individuals would be likely to enroll in a 
SNP, such as spouses or children of special needs individuals who wish 
to enroll in the same MA plan as the spouse or parent. However, such 
plans may be attractive to other non-special needs individuals because 
they may

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offer additional benefits beyond what Medicare covers. Also, 
individuals who are in the early stages of one of the chronic 
conditions covered by a disproportionate percentage, chronic care SNP 
may find the benefits or the network of participating specialists 
attractive.
    Disproportionate percentage SNPs have proliferated since the 
implementation of the Part D program, due, in part, to the fact that 
both dual eligible individuals and institutionalized individuals are 
permitted to enroll in MA plans year round, and dual eligible and 
institutional SNPs are thus permitted to market year round. CMS' 
information shows that a significant number of the dual-eligible 
disproportionate percentage SNPs may have between 25 percent and 40 
percent of their enrollment composed of non-special needs individuals. 
As a result, we are concerned that disproportionate percentage SNPs are 
enrolling significant numbers of non-special needs individuals, thus 
diluting the focus on serving those individuals with special needs.
    Therefore, in order to ensure that existing and future SNPs 
maintain a primary focus on individuals with special needs, we are 
proposing to amend our regulations at Sec.  422.4(a)(1)(iv)(B) to 
require that MA organizations offering SNPs limit new enrollment of 
non-special needs members to no more than 10 percent of new enrollees, 
and that 90 percent of new enrollees must be special needs individuals 
as defined in Sec.  422.2. We believe this threshold would continue to 
allow the small number of non-SNP eligible spouses and children to 
continue to enroll in the same MA plan as their SNP eligible spouse or 
parent while ensuring that the SNP retains its focus on serving the 
special needs individuals for which it is specifically designed.
    We understand that the majority of SNPs that currently enroll both 
special needs and non-special needs individuals have current 
enrollments of non-special needs individuals that exceed 10 percent. 
Because the new limitation only applies to new enrollees, these plans 
would be able to continue to serve their existing membership. 
Organizations offering disproportionate enrollment SNPs would not be 
permitted to enroll new non-special needs individuals, however, without 
first enrolling enough special needs individuals to ensure that the 
percentage of new non-special needs enrollees remains below 10 percent. 
Furthermore, as specified in Sec.  422.4, those enrollees deemed 
continuously eligible per Sec.  422.52(d) are considered special needs 
individuals for the purpose of determining the disproportionate 
percentage.
    On an ongoing basis plans would need to monitor their enrollment to 
ensure that the 10 percent limit on new enrollments is met. This means 
that plans would need to monitor their enrollment to ensure that they 
were enrolling nine special needs individuals for every non-special 
needs individual to keep the ratio of new enrollees who were non-
special needs individuals below 10 percent of new enrollees. MA 
organizations offering disproportionate SNPs would have to have a 
mechanism to ensure that a non-special needs individual could not 
enroll until a sufficient number of special needs individuals were 
enrolled to keep new enrollment of non-special needs individuals below 
10 percent of new enrollments. For example, if a SNP receives completed 
enrollment elections from non-special needs individuals when such an 
enrollment would push the percentage of new enrollees over 10 percent, 
it could--(1) deny the enrollment due to the onset of the limit; or (2) 
place the enrollment on a waiting list to be processed after a 
sufficient number of special needs individuals have been enrolled. The 
plan would need to ensure that once enrollments are accepted for non-
special needs individuals, that this is done on a non-discriminatory 
basis. We believe that this approach will encourage SNPs to design 
benefit packages that best serve the certain special needs populations 
for which they have been created.
    We welcome comments on the appropriateness of the 10 percent 
standard for new enrollees, as well as the most effective and least 
burdensome ways for plans to monitor the proportions of new 
enrollments.
b. Ensuring Eligibility To Elect an MA Plan for Special Needs 
Individuals (Sec.  422.52)
    In order to elect a SNP, an individual must meet the eligibility 
requirements for the specific type of SNP in which the individual 
wishes to enroll. For example, to enroll in a dual eligible SNP, the 
individual must be eligible for both Medicare and Medicaid. It is the 
responsibility of the MA organization offering the SNP to verify 
eligibility during the enrollment process.
    We are concerned that some dual eligible SNPs may not be 
appropriately verifying Medicaid eligibility of applicants for 
enrollment, and therefore may be enrolling beneficiaries who are not 
eligible for both Medicare and Medicaid. Similarly, some chronic care 
SNPs may encounter difficulties having providers verify that the 
applicants have the condition(s) established as the focus of the 
chronic care SNP.
    We propose to clarify in our regulations that MA organizations must 
establish a process to verify that potential SNP enrollees meet the 
SNP's specific eligibility requirements. While this issue is addressed, 
to some degree, in our manual guidance (section 20.11 of Chapter 2 of 
the Medicare Managed Care Manual), we believe that it is important to 
ensure that plans are aware of and meet their obligations to verify an 
applicant's eligibility prior to enrolling individuals in a SNP through 
rule making.
    Therefore, we are proposing in Sec.  422.52(g) that MA 
organizations offering SNPs for dual eligible beneficiaries establish a 
process approved by CMS to obtain information from the State about the 
applicant's Medicaid status and that this verification must be obtained 
prior to enrollment. This would likely require the SNP to enter into an 
agreement with the State to obtain this information on a routine and 
timely basis. We address the issue of a relationship with the State 
Medicaid program in the case of a dual eligible SNP in more detail in 
section II, below. Those organizations offering chronic care SNPs must 
attempt to obtain verifying information directly from the beneficiary's 
provider or the organization may use the disease-specific pre-
qualification assessment questions developed by, and available from CMS 
(model language) as an alternative methodology.
    In the 2008 MA application solicitation, we required SNPs to 
identify their processes for verifying a beneficiary's chronic 
condition before enrollment. Specifically, each applicant was required 
to contact the enrollee's physician to verify eligibility for the 
specific chronic condition SNP. We subsequently received industry 
comments that SNP staff sometimes experience significant delays in 
obtaining physician verification of the beneficiary's chronic condition 
and, as a consequence, there was delay in enrolling an eligible 
beneficiary.
    In response to this information, we developed an additional option 
to facilitate chronic condition verification. In a May 31, 2007 
memorandum, we notified chronic condition SNPs that they could develop 
a pre-enrollment qualification assessment tool to expedite verification 
that beneficiaries had the chronic condition for which they were 
enrolled (see https://32.90.191.19/hpms/upload--area/NewsArchive--

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MassEmail/000001696/CHVHPMS%20v2.pdf). We simultaneously posted an 
example of an acceptable verification tool for coronary artery disease, 
congestive heart failure, and/or cerebrovascular accident (stroke) on 
HPMS (see https://32.90.191.19/hpms/upload_area/NewsArchive_MassEmail/000001696/Draft%20pre-Qual%for%20chronic%20SNP%20verification%205%2007%20(2).pdf).
    The notification memorandum instructed SNPs to draft a verification 
tool, complete an attestation form asserting compliance with CMS 
conditions listed on the form, and to submit the tool to CMS for review 
and approval prior to using the tool. Concurrently, we collaborated 
with physician experts in chronic disease management to develop a 
series of questions related to several chronic conditions listed in 
HPMS as of January 2, 2007, representing potentially severe or 
disabling primary chronic conditions. Questions similar to the above 
example were developed for chronic obstructive pulmonary disease, 
diabetes mellitus, hypertension, chronic renal failure, depression, 
schizophrenia, bipolar disorder, dementia, and chronic alcohol or drug 
dependence.
    Because chronic condition SNPs request CMS approval for their 
proposed pre-enrollment qualification assessment tools, we use the 
disease-specific questions to guide the SNP in the design of an 
appropriate tool. Having the additional option of using a pre-
enrollment qualification assessment tool gives SNPs three means of 
meeting the verification requirement--written documentation from the 
beneficiary's former physician, telephonic confirmation by the 
beneficiary's former physician, or use of the verification tool 
followed by post-enrollment confirmation by any physician.
    Similarly, organizations offering a SNP for institutionalized 
individuals must verify each enrollee's institutional status with the 
facility or appropriate State agency.
c. Model of Care (422.101(f))
    As noted above, the MMA permitted MA organizations to offer care 
targeted to beneficiaries with special health care needs through SNPs. 
The MMA specified that a special needs individual was an individual who 
was ``institutionalized'' (as defined by the Secretary), is entitled to 
medical assistance under a State plan under title XIX (Medicaid), or 
``meets such requirements as the Secretary may determine would benefit 
from enrollment'' in a SNP for individuals ``with severe or disabling 
chronic conditions.'' In order to ensure that SNPs are providing care 
targeted to such special needs beneficiaries, under our authority in 
section 1856(b)(1) of the Act to establish standards by regulation, we 
are proposing that SNPs develop a model of care specific to the special 
needs population they are serving. In order to more clearly establish 
and clarify delivery of care standards for SNPs and to codify standards 
which we have included in other CMS guidance and instructions (the 2008 
and 2009 Call Letters, ``Special Needs Plan Solicitation \1\''), we 
propose to add new paragraph (f) to Sec.  422.101. Section 422.101(f) 
would specify that SNPs must have networks with clinical expertise 
specific to the special needs population of the plan; use performance 
measures to evaluate models of care; and be able to coordinate and 
deliver care targeted to the frail/disabled, and those near the end of 
life based on appropriate protocols. We believe that these measures are 
critical to providing care to the types of special needs populations 
served by SNPs.
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    \1\ The solicitation may be found at http://www.cms.hhs.gov/SpecialNeedsPlans.
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    For example, CMS anticipates that a chronic condition SNP serving 
beneficiaries having severe or disabling diabetes mellitus would 
establish a provider network that afforded access to diabetes experts 
such as endocrinologists who consult on pharmacotherapy for the fragile 
diabetic, vitreo-retinal ophthalmologists for diabetic retinopathy 
management, nephrologists for diabetic nephropathy management, 
neurologists having diabetic neuropathy expertise, nurses having 
specialized training in diabetes education, and nutritionists with 
expertise in diabetic counseling.
    The SNP might enroll diabetic beneficiaries who develop chronic 
renal failure related to diabetic nephropathy and require dialysis. The 
SNP might choose to contract or partner with these specialized diabetes 
experts and/or dialysis facilities, but, as a special needs plan 
targeting beneficiaries with specialized diabetic needs, the SNP is 
obligated to provide services to manage the expected disease-specific 
complications of a diabetic with severe or disabling disease 
progression. We also expect that the chronic condition SNP serving 
diabetic beneficiaries would develop diabetes-specific performance 
measures to evaluate its own systems, experts, and health outcomes 
related to its diabetes management.
    The SNP's own internal quality assurance and performance 
improvement program should examine the effectiveness of its model of 
care for diabetes management. For example, if the SNPs provider network 
applied the American Diabetes Association's clinical practice guideline 
for reducing the risk of or slowing the progression of diabetic 
nephropathy by optimizing glucose control (see National Guidelines 
Clearinghouse, 2008; http://www.guideline.gov/summary/summary.aspx?doc_id=10401), an appropriate performance measure to 
evaluate management of diabetic beneficiaries would be a process 
measure to determine the percentage of diabetics having glycosylated 
hemoglobin (Hgb A<INF>1C</INF>) measured in the last 6 months or an 
outcome measure to determine how many diabetics had an A<INF>1C</INF> 
measuring less than 7 percent (see National Quality Measures 
Clearinghouse, 2008; http://www.guideline.gov/browse/xrefnqmc.aspx).
    We recognize there is a broad range of chronic disease management 
systems and evidence-based clinical practice guidelines available to 
SNPs; consequently, we have deliberately guided SNPs toward the 
conceptual framework of a model of care without being prescriptive 
about the specific staff structure, provider network, clinical 
protocols, performance improvement, and communication systems. We also 
expect that within the target population of beneficiaries having severe 
or disabling diabetes mellitus, SNPs would have a subpopulation of 
diabetics who are frail, near the end of life, or disabled by other 
morbidities (for example, neurological disorders, mental disorders, 
etc.) that would need additional specialized benefits and services that 
should be addressed in the model of care. For example, the diabetic 
beneficiary with diabetic complications who is near the end of life 
might require assisted living or institutional services for which the 
SNP would develop different goals, expanded specialty services and 
facilities in their provider network, different performance measures, 
and additional protocols.
d. Dual Eligible SNPs and Arrangements With States (Sec.  422.107)
    CMS' review of SNPs targeting beneficiaries eligible for both 
Medicare and Medicaid (dual eligible SNPs) over the past few years 
suggests to us that for such SNPs to serve this population of 
beneficiaries, a plan should have a documented relationship with the 
State Medicaid agency in the State in which its members reside. Dual 
eligible SNPs that have not established a working relationship with the 
State may

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encounter difficulties verifying eligibility for Medicaid prior to 
enrollment in a SNP and, thus, may inappropriately enroll members who 
are not eligible for Medicaid. Also, without an arrangement with the 
State, SNPs may not have the information necessary to guide 
beneficiaries to providers that can deliver both Medicare and Medicaid 
services. Further, Medicaid often provides additional health services 
not covered by Medicare through the SNP. Medicare Advantage 
organizations (MA organization) with no State relationship may be 
advising dual eligible members that services are not covered at all 
because they are not covered under the SNP, even though the services 
are covered through Medicaid. Consequently, if the MA organization is 
not aware of the benefits available to its members through other 
sources, such as Medicaid, it cannot ensure that the model of care it 
delivers offers adequate coordination of the essential services.
    In order to ensure that beneficiaries are able to access essential 
services that are available through Medicaid in addition to those 
benefits available through the SNP, we propose to add a new Sec.  
422.107 which would require that an MA organization seeking to offer a 
SNP to serve the dual eligible population must have, at a minimum, a 
documented relationship, such as a contract, memorandum of 
understanding (MOU), data exchange agreement, or some other agreed upon 
arrangement with the State Medicaid agency for the State in which the 
dual eligible SNP is operating, in an effort to improve Medicare and 
Medicaid integration.
    We propose in Sec.  422.107(a) that all SNPs, whether entering the 
market or already established at the time these regulations become 
effective, must have in place a dual eligibility verification 
arrangement and information sharing on Medicaid providers and benefits.
    We also propose in Sec.  422.107(b) that within 3 years of the 
effective date of these regulations, all dual eligible SNPs already 
offering contracts are required to develop additional formal 
arrangements with States, and that new SNPs offering contracts after 
these regulations are effective, are required to have formal 
arrangements by their third contract year. CMS is allowing 3 years 
because we understand that it may take this long for contractual 
arrangements between the State and an MA plan to be implemented, 
particularly if Medicaid capitation and a request for proposal (RFP) 
are involved. We believe that by providing States and MA organizations 
with the maximum amount of flexibility for having a documented 
relationship, it will encourage States to actively participate in the 
development of integrated Medicare and Medicaid products with MA 
organizations. We believe 3 years is a reasonable and sufficient amount 
of time for MA organizations to develop documented arrangements with 
their respective States. We understand that some States are not yet 
ready to engage and participate in providing health care through MA 
organizations for their Medicaid-eligible populations and, are, 
therefore, providing a 3-year window for development and 
implementation.
    Examples of additional formal arrangements range from documentation 
of a cooperative arrangement with the State to coordinate benefits to a 
contractual arrangement between the State Medicaid agency and the MA 
organization offering the SNP, under an RFP process, or under a 
Medicaid capitation arrangement.
e. Special Needs Plans and Other MA Plans With Dual Eligibles: 
Responsibility for Cost-Sharing (Sec.  422.504(g)(1))
    CMS' review of MA plans serving dual eligible beneficiaries over 
the past few years has identified that a number of providers are 
charging the beneficiaries Medicare Parts A and B cost sharing that is 
the responsibility of the State. Additionally, many dual eligible 
enrollees are unclear about the Medicare and Medicaid rules and 
benefits. Some new enrollees have experienced interruptions in 
treatment, resulting in a negative impact on their health. These 
experiences suggest that additional requirements are needed to ensure 
that both providers and beneficiaries understand Medicare and Medicaid 
rules and that beneficiaries do not pay cost-sharing for which they are 
not responsible.
    In order to protect beneficiaries and ensure that providers do not 
bill for cost-sharing that is not the beneficiary's responsibility, we 
have amended Sec.  422.504(g)(1)(i) and (g)(1)(ii) to require that all 
MA organizations, including SNPs, with enrollees who are eligible for 
both Medicare and Medicaid specify in their contracts with providers 
that enrollees will not be held liable for Medicare Parts A and B cost 
sharing when the State is liable for the cost-sharing. We are 
proposing, therefore, that contracts with providers state that the 
provider will do this by either accepting the MA plan payment in full 
(Sec.  422.504(g)(1)(iii)(A)) or by billing the appropriate State 
source (for example, Medicaid) (Sec.  422.504(g)(1)(iii)(B)). 
Additionally, we are proposing that all MA organizations with enrollees 
eligible for both Medicare and Medicaid must inform providers of the 
Medicare and Medicaid benefits and rules for enrollees eligible for 
Medicare and Medicaid (Sec.  422.504(g)(1)(iii)).
    Medicare Advantage organizations have flexibility in establishing 
arrangements with States. The arrangements could include discussing and 
identifying both the Medicare and Medicaid benefits and rules. A list 
of the services, as well as the rules applicable to enrollees eligible 
for Medicare and Medicaid could be disseminated to providers and 
updated as necessary. A contact person or liaison could be identified 
for each MA plan who could assist with questions and with the 
maintenance of current information.
2. MA MSA Transparency (Sec.  422.103(e))
    As noted above, the MMA restored authority for ``Medical Savings 
Account'' (MSA) plans that had been provided for in the BBA on a 
temporary basis, but which expired without any such plan ever being 
offered. MSA plans are MA plans under which a portion of the total MA 
capitation rate is paid to the MA organization for a high-deductible 
policy that covers Medicare covered services after the high deductible 
is met. The remainder of the amount is placed into a savings account to 
be used to cover health care costs until the deductible is met. Any 
amounts not used in a given year accumulate for use in a future year.
    As noted, under the original BBA authority, no MA organization 
chose to offer an MSA plan. We believe that this might be attributable 
in part to differences between the rules for MSA plans and the more 
popular health savings account (HSA) arrangements available for non-
Medicare beneficiaries. In order to encourage the offering of MSA 
plans, and to test whether changing some rules would be beneficial, we 
initiated an ``MSA demonstration'' under which some MSA rules were 
waived. As part of this demonstration, we required that participating 
MA organizations provide MSA plan enrollees with cost and quality 
information that they could use to make informed choices as to where 
they would get health care.
    Consistent with the best practices of HSAs and other high-
deductible health plans, we propose in new Sec.  422.103(e) to require 
that all MSA plans provide enrollees with information on the cost and 
quality of services as specified by CMS and provide information to CMS

[[Page 28561]]

on how they would provide this information to enrollees.\2\
---------------------------------------------------------------------------

    \2\ HSAs are health insurance plans with a high deductible and a 
savings account for the under 65 population and are administered by 
the U.S. Department of the Treasury. Medicare MSAs are a type of 
medical savings account, also with a high deductible and a savings 
account, designed for the Medicare population and are administered 
by the U.S. Department of Health and Human Services, Centers for 
Medicare & Medicaid Services. HSAs and MSAs are governed by 
different statutes, and while these health insurance products are 
similar in many ways, there are also important differences between 
them. For further information on HSAs, go to http://www.ustreas.gov/offices/public-affairs/hsa/.
---------------------------------------------------------------------------

    The purpose of reporting cost/quality information to consumers, a 
practice known as ``transparency,'' is to permit plan enrollees to 
compare costs for specific services and to compare providers on cost 
and quality, with the high deductible acting as an added incentive to 
shop around. This proposal would implement a basic tenet of high-
deductible health plans, the availability of useful cost and quality 
information to support consumer shopping.
    We recognize that the Congress exempted MSA plans from the quality 
improvement program requirements in section 1852(e)(1) of the Act, and 
thus from the data collection and reporting requirements in section 
1852(e)(3) of the Act. We would not, under this requirement, be 
mandating the same level of data collection required under those 
provisions, or the reporting of quality data to CMS. Rather, we are 
presuming that MA organizations in the business of offering an MSA 
product are committed to facilitating the intended benefits of this 
model--that consumers make informed choices as to their health care 
purchases during the deductible period and beyond. We would expect that 
such organizations already have mechanisms in place, in connection with 
their commercial lines of business, for providing their beneficiaries 
with cost or quality information. Indeed, in the case of Medicare 
participating providers, such information is available from CMS through 
our own transparency initiatives.
    Our view that quality and cost information would be available, or 
reasonably accessible, to organizations in the business of offering an 
MSA plan is supported by the fact that the MA organizations 
participating in the MSA demonstration have agreed to provide the 
information to their enrollees. We invite public comments on this 
issue. We are proposing to revise the regulations to require that MA 
organizations offering MSA plans provide their enrollees with quality 
and cost information, to the extent available, concerning services in 
the plan's service area, and to report to CMS on its approach to 
providing this information. Below are examples of what a plan could be 
expected to address:
    <bullet> How the organization will provide cost and quality 
information to enrollees, including screenshots for any Web-based tools 
used to meet this requirement.
    <bullet> If they will use a Web-based product to meet this 
requirement, how they will provide this information to enrollees that 
do not have access to the Internet.
    <bullet> How their organization will obtain information regarding 
cost and quality in the requested service area and whether this 
information will be personalized to the member.

B. Proposed Changes to Part 423--Medicare Prescription Drug Benefit 
Program

1. Passive Election for Full Benefit Dual Eligible Individuals Who Are 
Qualifying Covered Retirees (Sec.  423.34)
    Section 1860D-1(b)(1)(C) of the Act, and implementing regulations 
at 42 CFR 423.34(d), require that CMS automatically enroll a full-
benefit dual eligible (FBDE) individual who has (1) failed to enroll in 
a prescription drug plan (PDP) or MA-PD into a PDP at or below the 
premium subsidy amount, and, per the last sentence in section 1860D-
1(b)(1)(C) of the Act, (2) has not declined Part D enrollment, into a 
PDP with a premium at or below the full premium subsidy amount. 
Further, the statute requires that if there is more than one such plan 
the ``Secretary shall enroll such an individual on a random basis among 
all such plans in the PDP region.'' Our general policy in implementing 
these provisions is to notify individuals in advance about their 
pending auto-enrollment, and to include in that notice information 
about other plans available to the individual and about how to decline 
Part D coverage, and thus opt out of the default enrollment process.
    For the overwhelming majority of FBDE individuals, default 
enrollment into a PDP is a favorable outcome that ensures that they 
receive prescription drug coverage without costs for premiums and 
deductibles, and with only nominal costs for cost sharing. In many 
cases, the Part D enrollment is also beneficial for FBDE individuals 
with retiree coverage, since the Part D drug coverage may well be 
available at a lower cost than the coverage offered through the 
employer plan. However, for a significant number of FBDE individuals 
with drug coverage through an employer group plan--especially those 
with full health care coverage--automatic enrollment into a PDP can 
have serious and sometimes irreversible negative consequences, either 
for the beneficiary and/or for family members. For example, under the 
terms of a particular employer group plan, an individual may lose 
employer group retiree medical coverage upon enrollment in a Part D 
plan, or worse, an individual's automatic enrollment in a PDP can 
result not only in the individual's disenrollment from the employer 
plan, but the disenrollment of a spouse or other family member. 
Although we were aware of this possibility at the outset of the 
program, we had no information about the extent to which FBDE 
individuals might already have retiree group coverage, and we believed 
that to the extent there were individuals in this situation, the number 
would be extremely small. Thus, we did not make any special rules for 
this population.
    Since January 2006, however, we have received a relatively small, 
but steady, series of complaints about this issue. We have attempted to 
work with employers to resolve individual situations as they arose, but 
have not had complete success. A recent survey of large employers found 
that 36 percent of the firms indicated retirees would lose all retiree 
medical coverage upon enrollment in a Part D plan, and another 32 
percent specified the retirees would lose their employer group drug 
coverage only. More importantly, 82 percent of employers indicated that 
if a retiree is enrolled in a Medicare Part D plan, the spouse of that 
individual would not be allowed to keep employer sponsored coverage. 
Finally, 57 percent of the firms surveyed indicated that they would not 
allow retirees to rejoin the company's coverage in the future, should 
they decide that they would prefer the employer coverage to the Part D 
coverage in which they were automatically enrolled based on their FBDE 
status. (See December 13, 2006, Kaiser/Hewitt Survey Report of Large 
Employers at http://www.kff.org/medicare/med121306nr.cfm).
    To address those concerns, we propose to revise Sec.  423.34(d)(1), 
and add new Sec.  423.34(d)(3), to establish a process under which FBDE 
individuals who we know to be enrolled in a qualifying employer group 
plan would be deemed to decline Part D coverage if, following a notice 
of their options, they do not indicate that they wish to receive it. As 
a result, these individuals would not be part of the group that is 
subject to default auto-enrollment. In order to ensure that only 
individuals with creditable employer coverage would be

[[Page 28562]]

included in this process, we would limit the applicability of this 
process to individuals enrolled in a plan for which CMS is paying an 
employer subsidy. Under our proposal, the individuals would be notified 
in advance by CMS of their prospective auto-enrollment, and of the need 
to carefully consider the possible repercussions of such an enrollment, 
including the impact that enrollment into Medicare Part D would have on 
their retiree coverage for themselves and other family members. We 
would recommend contacting the sponsor or administrator of the retiree 
group plan to discuss the effect of enrollment in Medicare Part D on 
the retiree coverage.
    Individuals would further be informed that by taking no action, 
they will be deemed to have elected to decline enrollment into a Part D 
plan. We would further inform them that they could enroll in a Part D 
plan at any time in the future if they wish to do so, and that the 
enrollment could be made retroactive. Thus, absent a confirmation of 
the individual's desire to be auto-enrolled into a Part D plan, he or 
she would retain the employer group coverage.
    In considering whether to adopt this approach, we recognized that 
to the extent that declining Part D could possibly have any negative 
consequences for FBDE individuals who are not auto-enrolled, CMS has 
the discretionary authority to make retroactive enrollment changes that 
can address such problems. In contrast, CMS has no authority to insist 
that a retiree plan sponsor allow individuals back into its plan should 
the retirees or their family members be adversely affected by auto 
enrollment. Given that 56 percent of employers surveyed have 
specifically stated that they would not allow re-enrollment into their 
retiree plans after an individual began Part D coverage, we believe 
that our proposed change in policy would clearly be in the best 
interests of the FBDE population with retiree coverage.
2. Part D Late Enrollment Penalty (Sec.  423.46)
    Section 1860D-22(b) of the Act established a Part D late enrollment 
penalty (LEP) for beneficiaries who have a continuous period of 63 days 
or longer following the end of an individual's Part D initial 
enrollment period without creditable prescription drug coverage. This 
requirement is codified in Sec.  423.46. Although Sec.  423.46 
describes which individuals would be subject to a penalty, it does not 
specify the role of the Part D plan in the LEP determination process. 
We have subsequently outlined plan responsibilities in our existing 
guidance (Chapter 4 of the Medicare Prescription Drug Benefit Manual) 
and now propose to clarify the general responsibilities of Part D plans 
in our regulations.
    First, we would clarify under Sec.  423.46(b) that Part D plans 
must obtain information on prior creditable coverage from all enrolled 
or enrolling beneficiaries. Under this process, plans first query CMS 
systems for previous plan enrollment information, which is a standard 
part of the beneficiary enrollment process. When no previous enrollment 
information exists, however, the process for obtaining creditable 
coverage information must also include plan interaction with the 
beneficiary. This is due in large part to the limited information 
available in CMS' systems about forms of creditable coverage other than 
Part D coverage or coverage through an employer group under the retiree 
drug subsidy (RDS). Therefore, it is critical that plans obtain 
historical creditable coverage information from the beneficiary in 
order to determine the number of uncovered months, if any, and retain 
any information collected concerning that determination (as specified 
under proposed Sec.  423.46(d)).
    The related requirement that we are proposing under Sec.  423.46(b) 
is that plans must then report creditable coverage information in a 
manner specified by CMS. Specifically, that would entail reporting the 
number of uncovered months to CMS, which will then calculate the 
penalty and report the penalty back to the plan. The plan then notifies 
the beneficiary of the determination of the LEP amount and of their 
ability to request a reconsideration of this determination.
    Thus, we would also establish under Sec.  423.46(c) that, 
consistent with section 1860(D)-22(b)(6)(C) of the Act, individuals who 
are determined to have a late enrollment penalty, have the opportunity 
to ask for a reconsideration of this determination. (Note that existing 
Sec.  423.56(g) briefly references the ability to ``apply to CMS'' when 
an individual believes that he or she was not adequately informed that 
his or her prescription drug coverage was not creditable, and we would 
cross-reference that section here.) We believe that the statute clearly 
intends that individuals have an opportunity to provide CMS, or an 
independent review entity acting under CMS' authority, with additional 
information related to prior prescription drug coverage in support of a 
request for reconsideration of a late enrollment penalty determination. 
While the statute expressly provides for this opportunity only with 
respect to an argument that proper notice was not given concerning 
whether existing coverage was creditable, we believe that the same 
rationale could apply to other arguments that the penalty should not 
apply (for example, an argument that the individual is eligible for a 
waiver of the penalty under a demonstration project).
    Finally, we would specify that a beneficiary would not have the 
right to further review of the reconsideration decision of CMS, or the 
independent review entity acting under CMS' authority. CMS would, 
however, have the discretion to reopen, review, and revise such a 
decision.
3. Medicare Prescription Drug Benefit Program Definitions
    These proposed clarifications to our policies associated with the 
Medicare Prescription Drug Benefit (also known as Medicare Part D) 
include refining our definitions related to what may be included in the 
drug costs Part D sponsors use as the basis for calculating beneficiary 
cost sharing, reporting drug costs to CMS for the purposes of 
reinsurance reconciliation and risk sharing, as well as submitting bids 
to CMS. We also propose a new definition for administrative costs in 
order to further clarify costs that must not be included in Part D drug 
costs. We also propose to create corollary definitions for drug cost 
reporting for purposes of the Retiree Drug Subsidy (RDS). We propose 
that the effective date of these changes be the effective date of a 
final rule with the exception of specific changes to the Part D 
definition of ``negotiated prices'', ``gross covered prescription drug 
costs'', and ``allowable risk corridor costs'' related to the use of 
pass-through versus lock-in prices, which we propose to be effective 
for coverage year 2010. We propose that the effective date of the RDS 
definitions be the effective date of a final rule, that is, for all 
plan years beginning after the effective date of a final rule.
a. Subpart C--Benefits and Beneficiary Protections (Definitions)
i. Incurred Costs
    CMS is proposing to amend the definition of ``incurred costs'' to 
reflect our current policy that certain nominal co-payments assessed by 
manufacturer Patient Assistance Programs (PAPs) can be applied toward 
an enrollee's TrOOP balance or total drug spend (the accumulated total 
prices for covered Part D drugs paid by the plan or by or on behalf of 
the beneficiary). CMS allows PAPs to provide assistance for covered 
Part D drugs to Part D enrollees

[[Page 28563]]

outside the Part D benefit. This means that payments made by PAPs do 
not count toward enrollees' TrOOP or total drug spend balances. 
However, if a PAP requires their enrollees--including those enrolled in 
a Part D plan--to pay a nominal copayment when they fill a prescription 
for a covered Part D drug for which the PAP provides assistance, such 
amounts would count toward TrOOP if the plan is notified of the 
copayment. As explained in Appendix C of Chapter 14 (Coordination of 
Benefits) of the Prescription Drug Benefit Manual, these nominal PAP 
copayment amounts, when paid by or on behalf of a Part D enrollee, are 
applicable to the enrollee's TrOOP and total drug spend balances, 
provided the enrollee submits appropriate documentation to their Part D 
plan. We are proposing to revise the definition of incurred costs to 
clearly indicate that these nominal PAP copayments are included in 
incurred costs. This revision to the definition of ``incurred costs'' 
in Sec.  423.100 is consistent with the proposed changes to the 
definition of ``gross covered prescription drug costs'', which has also 
been revised to ensure that these nominal PAP copayments are included 
in gross covered prescription drug costs and allowable reinsurance 
costs.
ii. Negotiated Prices
    In the January 2005 final rule, CMS defined a number of terms 
related to drug prices and costs in order to identify the costs that 
should be used to calculate beneficiary cost sharing, to advance the 
beneficiary through the benefit, and to calculate final plan payments 
for reinsurance subsidies and risk sharing during payment 
reconciliation. For instance, under Sec.  423.104(d)(2)(i), beneficiary 
cost sharing under the initial coverage limit is equal to 25 percent of 
``actual cost.'' (70 FR 4535) ``Actual cost'' is defined in Sec.  
423.100 as ``the negotiated price for a covered Part D drug when the 
drug is purchased at a network pharmacy, and the usual and customary 
price when a beneficiary purchases the drug at an out-of-network 
pharmacy consistent with Sec.  423.124(a).'' (70 FR 4533) And in Sec.  
423.100, the term ``negotiated prices'' is defined as ``prices for 
covered Part D drugs that (1) are available to beneficiaries at the 
point of sale at network pharmacies; (2) are reduced by those 
discounts, direct or indirect subsidies, rebates, other price 
concessions, and direct or indirect remunerations that the Part D 
sponsor has elected to pass through to Part D enrollees at the point of 
sale; and (3) includes any dispensing fees. (70 FR 4534)
    Since that time, we have received questions over what we meant in 
this last definition when we refer to prices for covered Part D drugs 
that are available to beneficiaries at the point of sale. These 
questions are particularly important because beneficiary cost sharing 
is a function of the negotiated price, either directly as in 
coinsurance percentages of negotiated price, or indirectly, as 
copayments are ultimately tied to actuarial equivalence requirements 
based on negotiated prices. That is, for instance, the higher the 
negotiated prices, the higher the fixed copayments must be to result in 
actuarial equivalence to 25 percent in the aggregate in the initial 
coverage phase.
    The ``total drug spend'' (the accumulated total prices for covered 
Part D drugs paid at the point of sale by the plan or by or on behalf 
of the beneficiary) also is a function of the negotiated price. Because 
the total drug spend is used to determine when the beneficiary advances 
through the deductible and the initial coverage phases of the Part D 
benefit, higher negotiated drug prices would cause the beneficiary to 
more quickly advance through those various phases. Accordingly, because 
higher negotiated prices would advance the beneficiary through the 
initial coverage phase more quickly, fewer prescriptions on average 
would be subsidized by the plan through the initial coverage period. 
Also, a beneficiary enrolled in basic prescription drug coverage (as 
defined in Sec.  423.100) would reach the coverage gap more quickly, 
with the costs of covered Part D drugs purchased during the coverage 
gap phase financed entirely by the beneficiary. In addition, since 
beneficiaries must have access to the same negotiated prices during the 
coverage gap, the higher the negotiated prices, the higher the amounts 
paid by beneficiaries for drugs in the coverage gap may be. Similarly, 
higher negotiated prices would mean higher cost-sharing for 
beneficiaries who reach the catastrophic threshold. Because cost-
sharing for the catastrophic phase of the benefit generally is based on 
5 percent of the negotiated price, the higher the negotiated price, the 
higher the cost-sharing at the catastrophic level.
    For all these same reasons, higher negotiated prices would mean 
higher low-income cost sharing subsidies paid by the government. Under 
the low-income cost sharing subsidy, low-income subsidy eligible 
individuals pay reduced or no cost sharing for covered Part D drugs. 
The government subsidizes the cost sharing for these beneficiaries by 
reimbursing Part D sponsors for the difference between the cost sharing 
paid by other Part D beneficiaries and the cost sharing paid by low-
income subsidy (LIS) eligible individuals. Higher negotiated prices 
would result in higher cost sharing paid by other Part D beneficiaries 
and therefore, higher low-income cost sharing subsidies paid by the 
government to plan sponsors.
    Because higher negotiated prices (and therefore, higher total drug 
spend) will advance beneficiaries through the phases of the Part D 
benefit more quickly, a greater number of beneficiaries will reach the 
catastrophic phase of the benefit more quickly. In addition, higher 
negotiated prices generally will result in higher covered Part D drug 
costs during the catastrophic phase. As a result, the reinsurance 
subsidies paid by the government to Part D sponsors to reimburse 80 
percent of the covered Part D drug costs in the catastrophic phase of 
the benefit will be higher.
    We believe that, in a competitive market, negotiated prices would 
be minimized when such prices are fully transparent to plan sponsors 
and beneficiaries. Consequently we strove to base our guidance on the 
principle of limiting drug costs to the price paid at the pharmacy 
(meaning any pharmacy, including mail-order pharmacies). In the 
preamble to the final rule we explained that drug costs include: 
Ingredient cost, dispensing fee, and sales tax (70 FR 4307). These 
three terms refer to specific fields on the automated prescription drug 
claim transaction that unambiguously indicate the amounts paid to the 
pharmacy by the payer of the claim. Therefore, by using these terms, 
CMS intended to refer to the price paid at the pharmacy and not the 
price paid by the sponsor to the PBM. Furthermore, the preamble states 
that ``we assume that ingredient cost and dispensing fee reflect point 
of sale price concessions in accordance with purchase contracts between 
plans (or their agents, such as PBMs) and pharmacies * * *'' (70 FR 
4307), and that ingredient cost and dispensing fee reflect the drug 
price paid to the pharmacy and should reflect any point-of-sale price 
concessions from the pharmacy whether they are provided directly to the 
Part D sponsor or indirectly through a contracted PBM. Thus, we 
intended to define the term ``negotiated prices'' consistent with 
``pass-through'' prices, an industry term for the prices negotiated 
with and paid to the pharmacy (either directly by the sponsor or 
indirectly through an

[[Page 28564]]

intermediary contracting organization, such as a PBM on the sponsor's 
behalf). With ``pass-through'' prices, the price paid to the pharmacy 
is the price passed on to the beneficiary (and, in the case of LIS 
eligible individuals, to the government) at the point of sale.
    However, after publication of the final rule and issuance of 
clarifying subregulatory guidance in Spring 2006, CMS received comments 
that the notice and comment rulemaking had not made this point clearly, 
and that the regulation could be read to allow an alternative 
interpretation of the price paid at the point of sale. Specifically, 
these comments asserted that the ``lock-in'' pricing approach, a 
contract method by which a plan sponsor agrees to pay a PBM a set rate 
for a particular drug which may vary from the price that the PBM 
negotiates with each pharmacy, also met the definition of negotiated 
prices issued in the regulation.
    Under such pricing arrangements, the PBM consistently bills one 
``lock-in'' price negotiated with the sponsor for a drug (often based 
on AWP), but may pay a variety of different prices to network 
pharmacies based on varying contractual terms. On any given drug 
purchase, the PBM may pay the pharmacy a higher or lower price than it 
will bill the plan sponsor. However, we assume that the prices billed 
to the plan sponsor are generally higher than the prices paid to 
pharmacies, resulting in an overall net profit to the PBM that is 
marketed as a ``risk premium'' earned for shielding the sponsor from 
price variability. We welcome comments on this assumption. Commenters 
argued that these stable prices negotiated between the sponsor and the 
PBM also met the definition of ``negotiated prices'' in the final rule. 
(We note that when the negotiated price under the plan is the lock-in 
price, if the pharmacy price is lower than the lock-in price, the 
pharmacy will still have to collect the higher lock-in price from the 
beneficiary during the deductible or coverage gap and transfer the 
excess amount to the PBM in some manner.) On the basis of that 
alternative interpretation, some Part D sponsor applicants who held 
network contracts through PBMs based on the lock-in pricing methodology 
had based their 2006 and 2007 bids on such prices and could not 
renegotiate such contracts easily.
    Consequently, on July 20, 2006, we issued guidance to Part D 
sponsors stating that, in order to minimize disruption to plan 
operations, for 2006 and 2007, sponsors could, at their option, base 
beneficiary cost-sharing not on the price ultimately charged by the 
pharmacy for the drug, but on the ``lock-in'' price, the price the 
sponsor paid a pharmacy benefit manager (PBM) or other intermediary for 
the drug. We also stated our intent to issue a proposed rule that would 
require a single approach for calculating beneficiary cost sharing, 
based upon the price ultimately received by the pharmacy.
    Therefore, we are now proposing to amend our definition of 
negotiated prices. We previously proposed to amend this definition in 
the notice of proposed rule making, Policy and Technical Changes to the 
Medicare Prescription Drug Benefit (72 FR 29403-29423). However, we 
chose not to finalize this proposed definition in the final rule (73 FR 
20486-20509) in order to further examine the impact of this proposal 
and provide the public with an additional opportunity to comment on 
this proposed definition. We have noted below, some of the impact 
concerns for which we would like to receive additional comments. We 
will consider the comments received on this definition from the 
previous proposed rule, as well as comments received on this proposed 
rule when determining whether to finalize this policy.
    In order to resolve the confusion caused by the Prescription Drug 
Benefit final rule, we are now proposing to amend the definition of 
``negotiated prices'' (to be effective for Part D contract year 2010) 
to require that Part D sponsors base beneficiary cost sharing on the 
price ultimately received by the pharmacy or other dispensing provider. 
Specifically, we are proposing to revise Sec.  423.100 so that the 
first part of the definition of ``negotiated prices'' would state that 
negotiated prices are prices that the Part D sponsor (or other 
intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount the network dispensing pharmacy or other network dispensing 
provider will receive, in total, for a particular drug. The term 
``intermediary contracting organization'' refers to organizations such 
as pharmacy benefit managers (PBMs) that contract with plan sponsors to 
provide one or more of a variety of administrative functions on the 
sponsor's behalf, such as negotiating pharmacy contracts, negotiating 
rebates and other price concessions from manufacturers, and/or 
providing drug utilization management or benefit adjudication services. 
The term ``intermediary contracting organization'' encompasses any 
entity that contracts with a plan sponsor to pay pharmacies and other 
dispensers for Part D drugs provided to enrollees in the Part D 
sponsor's plan, regardless of whether the intermediary contracting 
organization negotiates pharmacy contracts on behalf of the plan 
sponsor or on its own behalf. Similarly, the term ``intermediary 
contracting organization'' encompasses any entity that negotiates 
rebates or other price concessions with manufacturers for Part D drugs 
provided to enrollees in the Part D sponsor's plan, regardless of 
whether the intermediary contracting organization negotiates the rebate 
agreements explicitly on behalf of the plan sponsor or on its own 
behalf. Our proposed definition excludes any differential between the 
price paid to the pharmacy and the price paid to the PBM or other 
intermediary contracting organization, and instead treats that 
differential (or ``risk premium'') as an administrative cost paid to 
the PBM or intermediary contracting organization rather than a drug 
cost under Part D. We elaborate on our reasons for in effect proposing 
to require the reporting of ``pass-through'' versus ``lock-in'' prices 
for Part D drug costs further below, as well as solicit specific 
comments from multiple stakeholders to ensure we are aware of all of 
the ramifications of this proposed policy.
    We would also revise the definition of ``negotiated prices'' (to be 
effective upon the effective date of a final rule) to include prices 
for covered Part D drugs negotiated between the Part D sponsor (or its 
intermediary contracting organization) and other network dispensing 
providers. Part D sponsors can contract with providers other than a 
pharmacy to dispense covered Part D drugs, including them in their 
network. Therefore, we are amending the definition of negotiated prices 
to reflect the prices for covered Part D drugs that Part D sponsors (or 
their intermediary contracting organizations) negotiate with all their 
network dispensing providers.
    There are a number of reasons for our decided preference for drug 
costs at the point of sale to be based on the amount actually paid to 
the pharmacy or other dispensing provider (hereafter referred to as 
pass-through prices) as opposed to the amount paid to the PBM 
(hereafter referred to as lock-in prices). In addition to our original 
intentions discussed above, we believe that continuing to allow lock-in 
prices to be used for Part D drug cost calculations and reporting could 
have several undesirable results:
    1. Continued and probably increased cost shifting from the 
government to beneficiaries in the form of higher beneficiary out-of-
pocket costs.
    2. Interference with market competition among Part D sponsors.
    3. Beneficiary confusion over actual drug prices.

[[Page 28565]]

    4. Difficulties for pharmacies in explaining drug prices to 
customers and managing cash transfers to Part D sponsors or their 
intermediary contracting organizations contracting.
    5. Continued and possibly increased risk of government risk-sharing 
on amounts that reflect administrative costs, contrary to Congressional 
intent to exclude risk-sharing on administrative expenses.
    First, relative to pass-through prices, lock-in prices result in a 
cost shift from costs that would otherwise be fully paid by the 
government in the administrative cost portion of the basic Part D bid 
to costs that are paid in full or in part by the beneficiary. When the 
differential between the price paid to the pharmacy and the price paid 
to the PBM (sometimes referred to as ``PBM spread'' or ``risk 
premium'') is treated as a drug cost, this amount is part of the cost 
basis on which beneficiary cost sharing is calculated. This is true 
whether the beneficiary is paying the total cost of the drug in the 
deductible or coverage gap in a basic plan, or whether cost sharing is 
structured as coinsurance or fixed copayments. Again, cost sharing for 
the basic portion of a Part D plan is based on the negotiated prices 
either directly, as a coinsurance percentage of the price of the drug, 
or indirectly, as a fixed copayment derived to result in actuarial 
equivalence in the aggregate to 25 percent of drug prices in the 
initial coverage phase or to approximately 5 percent in the 
catastrophic phase. Thus, when the PBM spread is added to the 
pharmacy's price in computing cost sharing, a beneficiary who utilizes 
drugs will generally pay more in cost sharing both during covered 
benefit intervals and during deductible and coverage gap periods for 
their drugs when the negotiated price is based on lock-in prices rather 
than pass-through prices, resulting in higher out-of-pocket beneficiary 
costs.
    On the other hand, when the PBM spread is included in the 
administrative costs component of a Part D sponsor's bid, as opposed to 
being treated as a drug cost, the plan sponsor's bid would be increased 
by these amounts. Consequently, all other things being equal, the 
sponsor's bid must be higher with pass-through prices than with lock-in 
prices. While a higher bid increases premiums for the beneficiary and 
direct subsidy costs for the government, because of the formulas for 
calculating premiums and federal subsidies, the beneficiary only pays 
about 25 percent of this increase and the government pays the other 
approximately 75 percent.
    Under the pass-through approach, therefore, for the vast majority 
of beneficiaries who utilize Part D drugs, total out-of-pocket costs, 
including both monthly Part D premiums and cost-sharing, are lower 
because (1) cost sharing per script is lower, (2) the lower drug costs 
advance the beneficiary through the benefit more slowly--allowing in 
general more scripts to be subsidized in the initial coverage phase, 
and (3) increased premium costs are principally borne by the 
government. On net, beneficiaries who utilize their drug benefits pay 
less under our proposed approach with negotiated prices based on pass-
through prices because out-of-pocket costs are 100% borne by the 
beneficiary, but the beneficiary only pays about 25% of the premium.
    We believe that the beneficiary is almost always better off paying 
the lowest possible point-of-sale price. Under the lock-in pricing 
approach, the lock-in prices that some plan sponsors pay to their PBMs 
are uniform for each drug across multiple network pharmacies. However, 
the pass-through prices paid to the pharmacy may differ across network 
pharmacies. Some plan sponsors may perceive value in the use of lock-in 
prices to define negotiated prices, so that beneficiaries may pay a 
uniform price across different network pharmacies. However, we believe 
that beneficiaries receive no value from paying more for drugs in 
return for always paying a uniform stable price. Therefore, we believe 
that beneficiaries who utilize their Part D benefits are almost always 
better off paying pass-through prices under our proposed approach.
    We would acknowledge that lower premiums at the expense of higher 
out-of-pocket costs would advantage some Part D beneficiaries who are 
non- or very low utilizers of the benefit. However, from a public 
policy perspective, lowering premiums at the expense of higher cost 
sharing for those individuals who most need the benefit dilutes the 
insurance principle. The drug purchases of those beneficiaries who 
utilize their Part D benefits are subsidized in part by those who do 
not need the benefit. Shifting costs from premiums to cost sharing 
would reduce the sharing of risk and drug costs across beneficiaries by 
shifting a greater percentage of the drug costs to those beneficiaries 
who use more prescription drugs and, therefore, pay more cost sharing. 
Those beneficiaries who use fewer prescription drugs are more likely to 
enroll in those plans with lower premiums and higher cost sharing (for 
example, plans that utilize lock-in prices). Less healthy beneficiaries 
who use more prescription drugs are more likely to enroll in those 
plans with higher premiums and lower cost sharing (for example, plans 
that use pass-through prices). This would distort the risk pool for 
those plans using pass-through prices and drive their costs up as those 
enrollees who use fewer prescription drugs disenroll from these plans 
as the premiums increase to reflect the increased percentage of high 
utilizers in the plan. It is important to create and maintain the most 
robust risk pool possible under the Medicare Part D to maintain program 
stability.
    In addition, as noted in the preamble to the final rule: ``[a]s 
required under section 1860D-11(e)(2)(D)(i) of the Act and in Sec.  
423.272(b)(2), the structure of the benefit design (including cost 
sharing provisions and formulary design) must not be discriminatory; 
that is, it must not discourage enrollment by any Part D enrollee on 
the basis of health status * * *''. (70 FR 4297) We could argue that a 
business model and resulting benefit structure that by design shifts 
costs from the premium (where they would be paid by all) to cost 
sharing (where they are paid only by benefit utilizers) is per se 
discriminatory. That is, knowledgeable beneficiaries who seek to 
minimize their costs, who must utilize numerous prescription drugs due 
to their health status, and who use a tool such as the Medicare 
Prescription Drug Plan Finder, will determine that their costs are 
never minimized in a plan that bases their costs on lock-in prices--
despite the lower premiums--and they will elect not to join that plan. 
Only non- or low utilizers of drug benefits might find that this plan 
design minimizes their costs. We believe that Congress instructed CMS 
to review Part D benefits in order to prohibit just this sort of 
systematically discriminatory benefit design.
    All other things being equal then, requiring that those amounts 
paid by sponsors to PBMs (or other intermediary contracting 
organizations) that exceed the amounts paid by PBMs (or other 
intermediary contracting organizations) to pharmacies be treated as 
administrative costs will increase the basic Part D bid for any plan 
sponsor that previously based its bid on lock-in prices, shifting the 
majority of the cost to the direct subsidy paid by the government. This 
increase in direct subsidy costs will be offset somewhat by other 
payment impacts on the government. Specifically, reinsurance payments 
will be lower because (1) reinsurance payments are based on drug costs 
which generally are lower using

[[Page 28566]]

pass-through prices, and (2) fewer beneficiaries will reach 
catastrophic coverage due to being advanced through the earlier phases 
of the benefit more slowly. Similarly, the government's payments for 
low-income subsidy cost sharing are lower, as these subsidies are based 
on the negotiated price, which as previously explained is generally 
lower when based on pass-through prices. Thus, overall, a change from 
lock-in to pass-through prices will result in a cost shift from the 
beneficiaries who need the benefit most to the government--a result 
that, as we have argued above, is more consistent with the insurance 
principle.
    The second potential undesirable impact of lock-in prices being 
used for drug cost calculations and reporting under the Part D program 
is interference with market competition. Because the cost shift from 
the government to the beneficiary lowers the bid, it also causes the 
plan's bid to become relatively more competitive. In fact, utilizing 
lock-in prices would seem to provide a competitive advantage to plans 
relative to other comparable plans that use pass-through prices, since 
premium levels are tied to the relationship between the plan's bid and 
the national average bid amount. The lower the plan's bid, the lower 
the difference between the plan's bid and the national average bid 
amount, and therefore, the lower the plan's premium. Unlike sponsors 
who do not use PBMs or other intermediary contracting organizations 
and, therefore, must base their bids on pass-through prices, those 
using PBMs or other intermediary contracting organizations currently 
have the option of using either pass-through or lock-in prices as the 
basis for their bids. This greater flexibility may give the latter a 
competitive advantage over the former. For example, to the extent a 
sponsor believes a lower premium rather than lower cost-sharing makes 
its plan more marketable, a sponsor contracting with a PBM may decide 
to use lock-in prices in its bid in order to obtain a lower premium. In 
addition, a sponsor may use lock-in prices in its bid to increase the 
likelihood that its plan qualifies for auto-enrollment and facilitated 
enrollment of LIS eligible individuals. To qualify for auto-enrollment 
and facilitated enrollment, a plan's premium must be at or below the 
low-income premium subsidy amount. A sponsor that is trying to gain or 
retain enrollment of LIS eligible individuals may use lock-in prices to 
help ensure that its plan premium is below the low-income premium 
subsidy amount. Thus, CMS believes that allowing both pricing 
approaches creates an unlevel playing field among plan sponsors. We 
specifically solicit comments on the economic and public policy impacts 
of this differential and whether it does in fact create an undesirable 
unlevel playing field, as between Part D sponsors contracting with PBMs 
or other intermediary contracting organizations and those who do not. 
We also solicit comments on each of the potential undesirable results 
discussed above.
    In the discussion above we assumed that all other things were 
equal, and that the shift from one pricing methodology to the other 
only resulted in a shift in costs between the government and the 
beneficiary. That is, that overall program costs remained the same 
under either policy. However, arguments can be made that costs, both 
administrative as well as drug costs, would not remain the same under 
our proposed single approach.
    On the one hand, some proponents of the lock-in approach have 
expressed concerns that our proposal would increase drug costs over 
time by discouraging the risk premium inherent in the lock-in method. 
They assert that the resultant pressure for downward pricing from the 
Part D sponsor would create a disincentive for PBMs to enter into this 
type of payment arrangement with plan sponsors. They are concerned that 
the demise of the lock-in model would result in the PBMs' role being 
reduced to one of mere claims processing agents with less incentive to 
negotiate the lowest possible network pharmacy discounts. In contrast, 
they contend that the risk premium incentives inherent in the lock-in 
approach result in significantly lower drug costs for Part D sponsors 
than other contractual models, and that the loss of this model could 
potentially increase drug costs, bids, premiums, and Part D program 
costs.
    On the other hand, however, in response to the contention that the 
risk premium payment results in lower drug prices in the long run, we 
could argue that in a competitive market any potential increase in 
administrative fees (from transferring the spread to administrative 
costs) would be negotiated away in whole or in part with more perfect 
information in a fully transparent environment. For instance, our 
proposed changes do not prohibit Part D sponsors from contracting with 
PBMs for drug utilization management services and paying administrative 
incentive fees for reducing costs through such services. In a 
transparent environment, plans would be negotiating on lowest possible 
drug prices, as well as minimizing administrative costs, and these 
would be more clearly comparable among PBMs (or other intermediaries). 
It is not clear to us why PBMs would compete any less vigorously for 
the same level of profits included in administrative fees, or for the 
lowest possible network pharmacy negotiated prices in order to earn 
those fees. Therefore, we are more persuaded by the counterargument 
that the PBM spread is in fact an additional profit earned due to 
asymmetry in market information that might well be reduced with more 
transparency in pricing. Under these assumptions, leaving the 
additional costs in administrative costs would reduce bids, premiums, 
and total Part D program costs over time.
    Moreover, nothing in our proposed rule prohibits the payment of a 
risk premium to the PBM by the plan sponsor. Our proposed changes to 
the definition of negotiated prices do not interfere with the 
negotiations between Part D sponsors, pharmacy benefit managers, and 
pharmacies for covered Part D drugs. Rather, we propose that Part D 
sponsors would be required to use the price ultimately received by the 
pharmacy (or other dispensing provider) as the basis for calculating 
beneficiary cost sharing, total drug spend, and cost reporting to CMS. 
We do not require a Part D sponsor to use a particular pricing approach 
in its contracting agreements with PBMs. Part D sponsors may continue 
to use either the pass-through or lock-in pricing approach when 
contracting with a PBM--provided that beneficiary cost sharing, total 
drug spend, and the drug costs reported to us are based on the price 
ultimately received by the pharmacy. To the extent that Part D sponsors 
believe that the lock-in pricing contracting approach reduces their 
total costs, we expect that they will continue to use it when 
contracting with a PBM. We solicit comments on whether Part D sponsors 
and PBMs would use the lock-in pricing contracting approach in certain 
cases if the proposed policy were finalized.
    We solicit comments from plan sponsors, other industry contracting 
experts, benefit consultants, and market analysts on the impact of our 
proposed change on aggregate pricing exhibited between plans and PBMs, 
as well as on the prevalence of and trends in lock-in pricing 
arrangements between plan sponsors and PBMs. In particular, we are 
soliciting comments on whether lock-in pricing truly offers benefits to 
sponsors equal to the value of the risk premium, or whether the 
existence of the risk premium is in effect a higher

[[Page 28567]]

price exacted from sponsors without the leverage to negotiate lower 
costs or due to asymmetry in market information as between PBMs and 
sponsors. We also solicit comments on whether stakeholders consider the 
proposed definition of ``negotiated prices'' to represent strictly a 
change in reporting requirements for Part D plan sponsors. We solicit 
comments on how contractual relationships and requirements may change 
between and among Part D plan sponsors and their first-tier, 
downstream, and related entities.
    Our third concern with lock-in pricing involves the confusion that 
may be caused for beneficiaries whenever they see the difference 
between the price paid to the pharmacy and the price charged to the 
plan sponsor. While we understand that the intent is for the 
beneficiary to see the same information on drug prices on the 
pharmacy's receipt, on the Medicare Prescription Drug Plan Finder, and 
on the plan's Explanation of Benefits (EOB), this does not always 
happen. Under lock-in pricing, the EOB which the beneficiary receives 
from the plan may currently reflect the price the plan sponsor pays its 
PBM (the lock-in price) instead of the price negotiated with the 
pharmacy. We understand that pharmacies generally do not customize 
receipts for payers, and those that print total amounts paid on their 
receipts will not always be able to alter those amounts to correspond 
to the prices the plan sponsor pays its PBM. Even for cases in which 
the pharmacy does not print out total amounts received on its receipt, 
the same issues may occur in the deductible or coverage gap when the 
patient pay amount may equal the lock-in price, which could be higher 
than the price paid to the pharmacy. Whenever the pharmacy receipt does 
display the pharmacy's price, the beneficiary may see the discrepancy 
in price between the receipt and the plan's EOB. Even when receipts 
display the plan's price, the beneficiary may see discrepancies between 
the price they pay and pharmacy advertised specials or prices offered 
to a friend and believe the price they paid was wrong. Beneficiaries 
may perceive these discrepancies in drug prices as fraud and place 
complaints or inquiries. Reviewing and addressing these types of 
inquiries serves to increase administrative costs for pharmacies, plan 
sponsors, and the government. Moreover, if pharmacies were to err and 
charge pass-through prices during the coverage gap instead of the lock-
in prices, actual beneficiary true out-of-pocket (TrOOP) expenses might 
diverge from the amounts reported on the plan's EOB, possibly leading 
to an overstatement of TrOOP costs in plan (PBM) claims payment 
systems. We solicit comments, particularly from beneficiary advocates, 
on the extent to which they are hearing of beneficiary concerns around 
such discrepancies.
    The fourth potential undesirable impact concerns difficulties that 
may be caused for pharmacies in explaining apparent price discrepancies 
to customers, as well as the additional administrative burden of 
managing the resulting cash transfers between the beneficiary and the 
PBM. If a beneficiary notices an apparent price discrepancy as 
described above, the beneficiary is likely to ask the pharmacy for an 
explanation. We believe the pharmacy must then expend scarce staff 
resources on explaining the discrepancy and managing the beneficiary's 
reaction. Moreover, whenever the additional amount that exceeds the 
price negotiated between the PBM and pharmacy has been collected from 
the beneficiary, the pharmacy must have in place and manage accounting 
processes to transfer the additional amounts to the PBM and support 
ongoing reconciliations. We solicit comments from both chain and 
independent pharmacies on the extent to which these or any other 
impacts from lock-in prices have been incurred.
    We are not aware of any advantages to pharmacies from lock-in 
prices. We have heard the argument that the proposed changes would have 
a disproportionately negative impact on small independent pharmacies. 
Under the lock-in pricing approach, Part D sponsors negotiate a single 
rate with their contracted PBMs and, therefore, are generally not aware 
of the different rates paid by the PBMs to each pharmacy. This argument 
suggests that under the revised definition of negotiated prices, Part D 
sponsors would be made aware of the different rates paid to each 
pharmacy, and, in particular, Part D sponsors would become aware of 
higher-cost pharmacy providers, which are generally small independent 
pharmacies that are unable to offer the more aggressive drug prices 
provided by retail chain pharmacies. This argument presupposes that in 
their efforts to reduce drug costs, Part D sponsors would then remove 
these higher-cost pharmacies from their pharmacy networks, leading to a 
significant impact on the financial viability of these pharmacies.
    We are not persuaded by this argument at this time. First, as 
discussed above, we believe that under the revised definition of 
negotiated prices Part D sponsors may still use either the pass-through 
or lock-in pricing approach in their contracts with PBMs if sponsors 
continue to place value on being shielded from price variations. 
Moreover, even under transparent pricing arrangements, we expect that 
Part D sponsors would continue to contract with small independent 
pharmacies in order to satisfy our pharmacy access standards as 
outlined in Sec.  423.120. In order to meet these rigorous pharmacy 
access standards, Part D sponsors would have to continue to contract 
with many if not most of these independent pharmacies and include them 
in their pharmacy networks. Moreover, we expect that Part D sponsors 
likely will determine that the proportion of their utilization that 
comes through independent pharmacies with the leverage to negotiate 
significantly higher reimbursements is generally not sufficiently large 
to significantly affect aggregate drug costs. Therefore, we are unable 
to conclude at this time that these proposed changes would have any 
adverse effects on pharmacies, including small independent pharmacies, 
and we solicit comments from all pharmacies on this question.
    The final potential undesirable impact we attribute to lock-in 
prices is the continued, and possibly increased, risk of government 
risk-sharing on costs that may be better treated as administrative 
expenses. The payment of risk-sharing on those portions of ``drug 
costs'' under the lock-in methodology that are retained by the PBM or 
other intermediary appears contrary to Congressional intent. For both 
reinsurance and risk-sharing payments CMS is required to exclude 
``administrative costs'' from the calculations. In accordance with 
Sec.  1860D-15(b)(2) of the statute, and as codified at Sec.  423.308, 
``allowable reinsurance costs'' are defined as a subset of ``gross 
covered prescription drug costs.'' ``Gross covered prescription drug 
costs'' are defined as `` * * * the costs incurred under the plan, not 
including administrative costs, but including costs directly related to 
the dispensing of covered Part D drugs * * *'' (Sec.  1860D-15(b)(3)). 
Similarly, definitions of ``allowable risk corridor costs'', at Sec.  
1860D-15(e)(1)(B) of the statute and Sec.  423.308 of the regulations, 
exclude administrative costs. We believe that any ``risk premium'' paid 
to the PBM to smooth actual drug expenses should be considered an 
administrative contracting cost, or like a drug utilization management 
program cost to

[[Page 28568]]

the plan. Thus, in order to exclude those amounts from being included 
in the reinsurance and risk-sharing calculations, we believe CMS should 
treat these costs as administrative costs and not as drug costs.
    While there is no question that reinsurance costs to the government 
increase with lock-in prices (since per claim drug costs are higher and 
a greater number of beneficiaries will reach catastrophic coverage), it 
is possible that there would be no significant difference between the 
lock-in and pass-through prices with respect to government risk sharing 
under certain constraints. Very simply stated, risk sharing involves 
comparing the sum of drug costs anticipated in the plan sponsor's bid 
and paid prospectively through government and beneficiary monthly 
premiums (the ``target amount'') to the drug costs actually incurred, 
with the government then paying or recouping a portion of the 
difference. As long as the drug costs reflected in the bid are 
calculated in precisely the same way as the drug costs submitted to CMS 
as allowable costs, the target amount and the allowable costs will rise 
together. However, if a plan were to submit bids based on one level of 
PBM spread, but then submit costs to CMS reflecting a higher level of 
spread, then the difference between prospective costs and incurred 
costs would be increased. In the long run we believe lack of 
transparency could allow plans to game risk sharing and include extra 
administrative costs in the allowable drug cost reporting. If this 
would happen, and the plans used lower drug costs in the bid but 
included additional administrative costs in the allowable costs 
submitted in reconciliation, then the government risk sharing costs 
would increase. We solicit comments on the issues identified above 
concerning government risk sharing on costs that may more appropriately 
be considered administrative expenses.
b. Subpart G--Payments to Part D Plan Sponsors for Qualified 
Prescription Drug Coverage (Definitions and Terminology, Sec.  423.308)
i. Actually Paid (Sec.  423.308)
    In the April 2006 Call Letter, CMS stated that Part D sponsors must 
report 100 percent of the rebates and price concessions they receive, 
including the portion of manufacturer rebates retained by PBMs. In 
other words, in defining price concessions that must be netted from 
drug costs, CMS does not make a distinction between a price concession 
that is passed fully through to the plan sponsor by the PBM (or any 
other intermediary contracting organization) and a price concession 
that is partially passed on and partially retained by the PBM (or any 
other intermediary contracting organization). When a PBM retains rebate 
amounts associated with drugs being purchased for enrollees in a Part D 
plan with which the PBM contracts, this revenue permits the PBM to 
charge the Part D sponsor a lower amount in administrative fees and 
still make the same income on the transaction. When a rebate of x 
amount is paid to the PBM, the Part D sponsor benefits from that rebate 
whether it is passed on to the sponsor in its entirety, or it is 
available as revenue to the PBM.
    Thus, regardless of whether the PBM passes through 100% of rebates 
and the Part D sponsor in turn writes a check for 100% of 
administrative fees owed the PBM, or whether the PBM retains a portion 
of rebates and the Part D sponsor benefits from the fact that this 
revenue permits the PBM to charge a lower administrative fee for the 
transaction--the result is the same. The total amount of rebates 
received by the PBM for the Part D drugs dispensed under the Part D 
sponsor's contract must be reported as a price concession through DIR 
reporting to CMS. If we did not adopt this approach, a PBM and a Part D 
sponsor would be able to manipulate the amount reported in amounts 
actually paid simply by recasting administrative fees, which must be 
excluded, as rebates retained by the PBM that would not have to be 
reported as rebates to the PDP sponsor that benefits from the PBM's 
receipt of this revenue.
    Therefore, we are proposing to include language in the definition 
of ``actually paid'' that codifies and clarifies our previous guidance, 
and provides that direct or indirect remuneration includes discounts, 
chargebacks or rebates, cash discounts, free goods contingent on a 
purchase agreement, up-front payments, coupons, goods in kind, free or 
reduced-price services, grants, or other price concessions or similar 
benefits from manufacturers, pharmacies or similar entities obtained by 
an intermediary contracting organization with which the Part D sponsor 
has contracted for administrative services, regardless of whether the 
intermediary contracting organization retains all or a portion of the 
direct and indirect remuneration or passes the entire direct and 
indirect remuneration to the Part D sponsor. Similarly, we are 
clarifying that this definition of actually paid applies regardless of 
the terms of the contract between the plan sponsor and any intermediary 
contracting organization. We solicit comment on this proposed 
clarification.
    We believe that the above analysis has equal applicability in the 
Retiree Drug Subsidy (RDS) context, when a qualified retiree 
prescription drug plan contracts with a PBM, and the PBM retains rebate 
amounts associated with drugs obtained for a qualifying covered 
retiree. Again, the qualified retiree prescription drug plan benefits 
from the fact that revenue attributable to drugs purchased for its 
retirees is available to the PBM, because the PBM would not need to 
charge the sponsor of the qualified retiree prescription drug plan as 
much in administrative fees to make the same revenue on the 
transaction. As in the case of a Part D sponsor, if rebate amounts 
retained by a PBM were not deducted from the qualified retiree 
prescription drug plan's costs, the plan and the PBM could ensure 
higher RDS payments simply by recasting administrative costs as 
retained rebates. Therefore, as discussed below, we are proposing to 
make similar amendments to the definitions in Subpart R that apply to 
the RDS program.
ii. Administrative Costs (Sec.  423.308)
    The statute requires CMS to exclude administrative costs from the 
calculation of gross covered prescription drug costs and allowable risk 
corridor costs. However, administrative costs are not defined in either 
the statute or the January 28, 2005 final rule. Therefore, to explain 
this term and clarify which costs are included in administrative costs, 
we are proposing to add a definition for the term ``administrative 
costs''. We previously proposed to add this definition in the notice of 
proposed rule making, Policy and Technical Changes to the Medicare 
Prescription Drug Benefit (72 FR 29403 through 29423). However, we 
chose not to finalize this proposed definition in order to further 
examine the impact of this proposal and provide the public with an 
additional opportunity to comment on this proposed definition. We will 
consider the comments received on this definition from the previous 
proposed rule, as well as comments received on this proposed rule when 
finalizing this rule.
    In this definition, we propose to define ``administrative costs'' 
as the Part D sponsor's costs other than those incurred to purchase or 
reimburse the purchase of Part D drugs under the Part D plan. Included 
in the definition of administrative costs are any costs incurred by 
Part D plans on drug claims that differ from the price charged by a 
dispensing entity for covered Part D drugs. As discussed above in the 
section

[[Page 28569]]

on Negotiated Prices, any net profit (or ``risk premium'') retained by 
a PBM that is added to the prices paid to pharmacies and billed to a 
Part D sponsor would be considered an administrative cost and not a 
drug cost. As discussed above, we believe this is because such amounts 
are more appropriately considered costs the plan chooses to incur to 
mitigate its market risk around the costs of drugs, rather than the 
cost of the drugs itself, and should be viewed as analogous to the cost 
of drug utilization management programs and similar services purchased 
from PBMs to manage drug costs. In order to create a level playing 
field around the treatment of all such related costs, we propose to 
clearly categorize this ``net profit'', ``risk premium'', or ``PBM 
spread'' as an administrative cost to the Part D plan sponsor.
    The proposed policy would also refine our interpretation of the 
statutory and regulatory definitions of ``allowable reinsurance costs'' 
and ``allowable risk corridor costs,'' which in both cases exclude any 
administrative costs of the sponsor. By statute, ``allowable 
reinsurance costs'' are a subset of ``gross covered prescription drug 
costs,'' and Congress specifically defined these gross costs as ``not 
including administrative costs.'' (See sections 1860D-15(b)(2) and 
1860D-15(b)(3) of the Act.) Similarly, Congress defined ``allowable 
risk corridor costs'' as ``not including administrative costs.'' (See 
section 1860D-15(e)(1)(B) of the Act.) In the January 28, 2005 final 
rule, we adopted these definitions. (70 FR 4547.) As noted above, we 
interpret administrative costs to include any net profit (or loss) 
incurred by an intermediary contracting organization (for example, a 
pharmacy benefit manager (PBM)) as a result of lock-in pricing. 
Therefore, this net profit or loss must not be included in the 
reinsurance and risk corridor payments made by the government, as these 
payments exclude administrative fees. Thus, the Ingredient Cost, 
Dispensing Fee, Sales Tax, Gross Drug Cost below the Out of Pocket 
Threshold, and Gross Drug Cost above the Out of Pocket Threshold fields 
on Prescription Drug Event (PDE) records submitted to CMS would need to 
reflect the final amount ultimately received by the pharmacy at the 
point of sale.
    We are aware of concerns that the proposed definition of 
administrative costs would indirectly prohibit the purchase of drugs 
from certain entities such as PBMs. In addition, it has been argued 
that any costs incurred to buy drugs should be considered drug costs 
regardless of the party from whom the drug is purchased. However, the 
proposed definition for administrative costs would not directly or 
indirectly require Part D sponsors to purchase drugs from dispensing 
providers only. Part D sponsors would continue to have the option to 
contract or purchase drugs from other entities such as PBMs. However, 
to the extent that the amounts paid to a PBM for administrative 
services provided to a Part D sponsor are included in the cost of the 
drug under the lock-in pricing approach, Part D sponsors would be 
required to report this spread amount as an administrative cost. These 
administrative costs would be excluded from the Part D sponsor's 
allowable reinsurance and allowable risk corridor costs as required by 
statute.
    The proposed definition of administrative cost does not include 
administrative fees or other remuneration that a PBM receives on behalf 
of a plan from pharmaceutical manufacturers or biotechnology companies. 
CMS considers these amounts price concessions which directly or 
indirectly reduce the Part D sponsor's costs under its Part D plan. 
Therefore, Part D sponsors would continue to report these 
administrative fees as DIR to ensure that they are excluded from 
allowable reinsurance costs and allowable risk corridor costs.
    Again, this same analysis applies in the RDS context to amounts a 
PBM retains in connection with price concessions that reduce the 
qualified retiree prescription drug plan's drug costs.
iii. Gross Covered Prescription Drug Costs and Allowable Risk Corridor 
Costs (Sec.  423.308)
    Part D sponsors are required to report drug costs to CMS for the 
purposes of reconciliation and risk sharing. We are required by statute 
to calculate reinsurance payments using ``allowable reinsurance 
costs,'' a subset of ``gross covered prescription drug costs,'' which 
Congress specifically defined as ``not including administrative 
costs.'' (See sections 1860D-15(b)(2) and 1860D-15(b)(3)of the Act). 
Risk sharing payments are calculated using ``allowable risk corridor 
costs,'' which are also defined as ``not including administrative 
costs.'' (See section 1860D-15(e)(1)(B) of the Act.)
    There have been several questions regarding the appropriate drug 
costs to report, particularly when a Part D sponsor has contracted with 
a PBM. The January 28, 2005 final rule defines ``gross covered 
prescription drug costs'' as ``those actually paid costs incurred under 
a Part D plan, excluding administrative costs * * * [equal to:] (1) All 
reimbursement paid by a Part D sponsor to a pharmacy (or other 
intermediary) * * * plus (2) All amounts paid under the Part D plan by 
or on behalf of an enrollee (such as the deductible, coinsurance, cost 
sharing, or amounts between the initial coverage limit and the out-of-
pocket threshold) in order to obtain drugs covered under the Part D 
plan.'' (70 FR 4547)
    The January 28, 2005 final rule definition of ``gross covered 
prescription drug costs'' specifically recognizes that reimbursement 
may be paid by a Part D sponsor ``to a pharmacy (or other 
intermediary).'' (70 FR 4547) Many interpreted the term 
``intermediary'' to mean PBM (rather than an agent of the pharmacy or 
other dispensing provider). Using this definition, many plan sponsors 
reported as gross covered prescription drug costs the prices they 
negotiated with their PBMs, rather than the prices that were agreed 
upon as the amount to be received by the pharmacies.
    We propose rectifying these conflicting definitions to require the 
plan sponsor to include the net profit or loss retained or incurred by 
a PBM as part of lock-in pricing to be part of the administrative costs 
of the plan sponsor. This would require the amount ultimately received 
by the pharmacy (minus any other point-of-sale price concessions) to be 
used in calculating cost sharing for plan years 2010 and beyond. We 
previously proposed to amend this definition in the notice of proposed 
rule making, Policy and Technical Changes to the Medicare Prescription 
Drug Benefit (72 FR 29403-29423). However, we chose not to finalize 
this proposed definition in the final rule (73 FR 20486-20509) in order 
to further examine the impact of this proposal and provide the public 
with an additional opportunity to comment on this proposed definition. 
We will consider the comments received on this definition from the 
previous proposed rule, as well as comments received on this proposed 
rule when determining whether to finalize this policy. Specifically, we 
are proposing to amend the definition of ``gross covered prescription 
drug costs'' to eliminate the parenthetical ``or other intermediary'' 
to require that all plan sponsors report the amount ultimately received 
by the pharmacy or other dispensing provider. We propose that the 
amount ultimately received by the pharmacy or other dispensing provider 
(whether directly or indirectly) for the particular drug will be the 
basis for accumulating gross covered drug costs and reporting drug 
costs on the Prescription Drug Event (PDE) records.

[[Page 28570]]

    Similarly, we propose clarifying our definition of ``allowable risk 
corridor costs'' so that it is clear that these costs are only based 
upon the amounts received directly by the pharmacy or other dispensing 
provider. This is because we would consider any net profit (or loss) 
earned by a PBM or other entity negotiating contracts with pharmacies 
to constitute an administrative cost, and therefore, to be exempt from 
the definition of allowable risk corridor costs, as well as gross 
covered prescription drug costs. Thus, for example, if a Part D sponsor 
pays a PBM a certain amount for a particular drug, and then the PBM 
negotiates a different price with the pharmacy, any differential 
retained or lost by the PBM would be considered an administrative cost, 
and could not be reported as part of drug costs. As discussed above in 
the section on Negotiated Prices, the net profit or loss (or ``risk 
premium'') retained by a PBM that is added to the prices paid to 
pharmacies and billed to a Part D sponsor under the lock-in pricing 
approach would be considered an administrative cost. As argued above, 
such amounts are more appropriately considered costs that the plan 
chooses to incur to mitigate its market risk around the costs of drugs, 
rather than the cost of the drugs itself, and should be viewed as 
analogous to the cost of drug utilization management programs and 
similar services purchased from PBMs to manage drug costs. In order to 
create a level playing field around the treatment of all such related 
costs, we propose to clearly categorize this ``profit'', ``risk 
premium'', or ``PBM spread'' as an administrative cost to the Part D 
plan sponsor and to explicitly disallow it from gross covered 
prescription drug costs, allowable reinsurance costs (a subset of gross 
covered prescription drug costs), and allowable risk corridor costs.
    We, therefore, propose revising the definitions of ``gross covered 
prescription drug costs'' and ``allowable risk corridor costs'' to 
establish that the amount received by the dispensing pharmacy or other 
dispensing provider (whether directly or through an intermediary 
contracting organization) is the basis for drug cost that must be 
reported to CMS, and not the amount paid by the Part D sponsor to the 
PBM. Accordingly, we are revising Sec.  423.308 to incorporate these 
changes.
    We are aware of concerns that these proposed changes to the 
definitions of gross covered drug costs and allowable risk corridor 
costs may require Part D sponsors to depend heavily on information 
traditionally held exclusively by PBMs. For the sponsor's convenience, 
or for other reasons, such as to protect the privacy of beneficiary 
personal health information data, a Part D sponsor's contractor may 
submit drug cost data on the Part D sponsor's behalf to CMS directly 
rather than through the Part D sponsor. Therefore, some have argued, 
the Part D sponsor cannot attest to the validity of drug cost data it 
does not see. However, because we contract with Part D sponsors for the 
provision of the Medicare prescription drug benefit, Part D sponsors, 
and not their subcontractors, are ultimately responsible for the 
quality of data submitted to us. Part D sponsors that choose to 
contract with a PBM or any other third party administrator, therefore, 
must take reasonable steps to ensure that the data submitted to us on 
their behalf is accurate and timely. For example, the sponsor may 
engage an independent auditor to audit the data prior to its submission 
to us.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' and ``allowable risk corridor costs'' to 
ensure that when entities other than pharmacies dispense Part D drugs 
and receive payment for Part D drugs, these expenditures also are 
reflected in gross covered prescription drug costs and allowable 
reinsurance costs, as well as allowable risk corridor costs. For 
instance, reimbursement for a vaccine that must be administered in a 
physician's office and reimbursement made to a third party payer in 
accordance with our coordination of benefits (COB) requirements are 
both legitimate drug costs that have been incurred through the payments 
indicated. In addition, in accordance with Sec.  423.464, the Part D 
sponsor must coordinate benefits with other Part D plans as the result 
of any reconciliation process developed by CMS under Sec.  423.464, 
such as when another Part D plan mistakenly paid for a prescription 
drug on the beneficiary's behalf based on an erroneous belief that the 
beneficiary was actually enrolled in its plan. In these cases, when the 
enrollment error is corrected, the beneficiary's true plan generally 
will reconcile payments with the original payer. The drug costs paid by 
Part D plans (as well as by the beneficiary) under these reconciliation 
processes reflect drug costs incurred by the plan's enrollees that a 
payer other than the correct Part D plan of record paid as primary. As 
drug costs paid for Part D covered drugs under Part D plans, these 
costs are included in the calculations of reinsurance costs and risk 
corridor costs. Therefore, we have amended the definition of ``gross 
covered prescription drug costs'' and ``allowable risk corridor costs'' 
in Sec.  423.308 to include all these drug costs.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' to ensure that when a beneficiary is 
responsible for 100 percent of the cost for a covered Part D drug (as 
in any applicable deductible or coverage gap of a basic plan), and the 
beneficiary obtains that covered Part D drug at a network pharmacy for 
a price below the plan's negotiated price, the beneficiary's out-of-
pocket costs that are considered ``incurred costs'' for covered Part D 
drugs count toward both TrOOP and total drug spending. This is 
consistent with guidance released via Q&A 7944 (issued May 9, 2006 
http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi.) For example, when an enrollee is in an 
applicable coverage gap or deductible phase of the Part D benefit, the 
enrollee may be able to obtain a better cash price for a covered Part D 
drug at a network pharmacy than the plan offers via its negotiated 
price. The enrollee may take advantage of a special cash price or 
discount being offered to all pharmacy customers for the covered Part D 
drug or, alternatively, use a discount card. In such cases, the 
enrollee purchases a covered Part D drug without using the membership 
card for his or her Part D plan. If that purchase price is lower than 
the Part D plan's negotiated price, it will count toward TrOOP and 
total drug spend balances, provided the Part D plan finds out about the 
purchase. When the enrollee chooses not to use his/her membership card 
at a network pharmacy, that enrollee must take responsibility for 
submitting the appropriate documentation to the enrollee's Part D plan, 
consistent with plan-established processes and instructions for 
submitting that information, in order to have that amount aggregated to 
the beneficiary's TrOOP and total drug spend balances. We are aware of 
concerns that it is overly burdensome to require beneficiaries to 
submit claims for these reduced price purchases. However, we cannot 
require in-network pharmacies to submit these claims to Part D sponsors 
electronically, because at this time the HIPAA standard for claims 
submission does not accommodate the electronic transmission of this 
claim information by network pharmacies. To the extent that a future 
revision of the HIPAA standard does accommodate such transactions, we 
would support minimizing the submission of paper claims by 
beneficiaries.

[[Page 28571]]

    The applicability of beneficiary out-of-pocket expenditures made 
outside the Part D benefit to TrOOP and total drug spend also extends 
to any nominal copayments assessed by manufacturer patient assistance 
programs (PAPs) that provide assistance with covered Part D drug costs 
to Part D enrollees outside the Part D benefit. Consistent with 
guidance provided via Q&A 7942 (http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi), providing 
assistance with covered Part D drug costs to Part D enrollees outside 
the Part D benefit does not preclude a PAP sponsor from requiring its 
enrollees (including those enrolled in a Part D plan) from paying a 
nominal copayment when they fill a prescription for a covered Part D 
drug for which they provide assistance. We note that any copayments 
assessed by PAPs operating outside the Part D benefit should be 
nominal, since only nominal beneficiary cost-sharing is consistent with 
the concept of operating outside Part D. Moreover, given that 
copayments are typically assessed for purposes of minimizing drug over-
utilization, the assessment of anything but nominal cost-sharing by 
PAPs is seemingly inconsistent with the mission of a charitable 
organization structured to provide assistance with prescription drug 
costs to low-income patients.
    Although PAP payments made for covered Part D drugs outside the 
Part D benefit do not count toward enrollees' TrOOP or total drug spend 
balances, nominal PAP copayment amounts paid by affected Part D 
enrollees can be applied to their TrOOP and total drug spend balances, 
provided the enrollees submit the appropriate documentation to their 
plan consistent with plan-established processes and instructions for 
submitting the information. We are proposing to revise the definition 
of ``gross covered prescription drug costs'', as well as the definition 
of ``incurred costs'' in Sec.  423.100, to include these drug costs and 
to reflect this sub-regulatory guidance.
    We also note that Sec.  423.308 includes a definition of the term 
``target'' amount. Due to a technical formatting error, this definition 
appears to be the second paragraph of the definition of gross covered 
prescription drug costs. To clarify that the definition of ``target 
amount'' is not part or a component of the definition of gross covered 
prescription drug costs, but is a separate definition of a different 
term, we are proposing to revise the current discussion of ``target 
amount'' and are providing an amendatory instruction to add the 
definition in Sec.  423.308. We are proposing technical edits to this 
definition to ensure that the structure of the definition is similar to 
that of other definitions in this section. We are proposing no 
substantive changes to the definition.
c. Subpart R: Payments to Sponsors of Retiree Prescription Drug 
Programs (Definitions, Sec.  423.882)
    Section 423.882 codifies existing guidance. Given the similarities 
between the statutory definitions of ``gross covered prescription drug 
costs'' under section 1860D-15(b)(3) of the Act and ``gross covered 
retiree plan-related prescription drug costs'' under section 1860D-
22(a)(3)(C)(ii) of the Act, we have consistently stated our intent to 
determine gross covered retiree plan-related prescription drug costs in 
a manner corresponding to our determination of gross covered 
prescription drug costs. Additionally, given the similarities between 
the statutory definitions of ``allowable reinsurance costs'' under 
section 1860D-15(b)(2) of the Act and ``allowable retiree costs'' under 
section 1860D-22(a)(3)(C)(i) of the Act, we determine allowable retiree 
costs in a manner parallel to how we determine allowable reinsurance 
costs. For example, for terminology not specifically defined under 
Sec.  423.882, we generally utilize the relevant Part D definitions to 
the extent that they are consistent with the statutory provisions under 
section 1860D-22 of the Act. In addition, our RDS guidance related to 
the calculation of gross covered retiree plan-related prescription drug 
costs (or ``gross retiree costs'') and allowable retiree costs 
generally corresponds with the Part D guidance on the calculation of 
gross covered prescription drug costs and allowable reinsurance costs.
    In order to ensure continued consistency between the RDS program 
and Part D, and because, as noted above, we believe the same policy 
arguments in favor of the Part D definitions apply to similar 
arrangements under the RDS program, we believe that the regulatory 
definitions under Sec.  423.882 applicable to the RDS program should 
mirror the corresponding Part D definitions under Sec.  423.100 and 
Sec.  423.308. Accordingly, we propose to make the following additions 
and revisions to Sec.  423.882 to be consistent with the corresponding 
existing and proposed definitions under Sec.  423.100 and Sec.  
423.308. The proposed definitions under Sec.  423.882 include 
codification of existing CMS guidance.
    <bullet> Actually Paid: We propose to add this definition to mirror 
the proposed revised definition under Sec.  423.308, with the exception 
of technical changes and clarifications to reflect its application to 
the RDS program. Specifically, we propose to define actually paid to 
mean that the costs must be actually incurred by the qualified retiree 
prescription drug plan (and/or the qualifying covered retiree) and must 
be net of any direct or indirect remuneration from any source 
(including manufacturers, pharmacies, qualifying covered retirees, or 
any other person) that would serve to decrease the costs incurred under 
the qualified retiree prescription drug plan. Similarly, we are also 
proposing to include language in this definition that provides that 
direct or indirect remuneration includes discounts, chargebacks or 
rebates, cash discounts, free goods contingent on a purchase agreement, 
up-front payments, coupons, goods in kind, free or reduced-price 
services, grants, or other price concessions or similar benefits from 
manufacturers, pharmacies or similar entities obtained by an 
intermediary contracting organization with which the sponsor of the 
qualified retiree prescription drug plan has contracted for 
administrative services, regardless of whether the intermediary 
contracting organization retains all or a portion of the direct and 
indirect remuneration or passes the entire direct and indirect 
remuneration to the sponsor of the qualified retiree prescription drug 
plan. Similarly, we are clarifying that this definition of actually 
paid applies regardless of the terms of the contract between the 
sponsor of the qualified retiree prescription drug plan and any 
intermediary contracting organization.
    <bullet> Administrative costs: We propose to add this definition to 
mirror the proposed revised definition under Sec.  423.308 with the 
exception of minimal changes to reflect the RDS terminology. 
Specifically, we propose to define administrative costs to mean costs 
incurred by a qualified retiree prescription drug plan that are not 
drug costs incurred to purchase or reimburse the purchase of Part D 
drugs and that differ from the amount paid by or on behalf of the plan 
to a pharmacy or other entity that is the final dispenser of the drug. 
Similarly, we are proposing to include language in this definition that 
any profit or loss retained by the intermediary contracting 
organization (through discounts, rebates, or other direct or indirect 
price concessions) when negotiating prices with dispensing entities is 
considered an administrative cost.
    <bullet> Allowable Retiree Costs: We propose to make changes to the 
existing definition to mirror the relevant portions of the existing 
definition of ``allowable reinsurance costs'' under

[[Page 28572]]

Sec.  423.308. Specifically, we propose to revise the definition of 
allowable retiree costs under Sec.  423.882 by clarifying that 
allowable retiree costs are the subset of gross covered retiree plan-
related prescription drug costs actually paid by the qualified retiree 
prescription drug plan or by or on behalf of a qualifying covered 
retiree.
    <bullet> Gross covered retiree plan-related prescription drug 
costs: We propose to revise the existing definition of ``gross covered 
retiree plan-related prescription drug costs'' (or ``gross retiree 
costs'') to mirror the proposed definition of ``gross covered 
prescription drug costs'' under Sec.  423.308, with the exception of 
minimal changes to reflect the RDS terminology. Specifically, we 
propose to revise our definition of gross retiree costs to clarify that 
these costs equate to the sum of the negotiated prices (as defined in 
the proposed definition) actually paid by the qualified retiree 
prescription drug plan (and/or qualifying covered retirees) and 
received by the dispensing pharmacy (or other dispensing entity), or 
received by other entities pursuant to the plan's coordination of 
benefits (COB) activities. As with our existing definition of gross 
retiree costs, our proposed definition would exclude administrative 
costs from gross retiree costs.
    <bullet> Negotiated Prices: We propose to add this definition to 
mirror the proposed definition of negotiated prices under Sec.  423.100 
with the exception of minimal changes to reflect RDS terminology. 
Specifically, we propose to define negotiated prices for Part D drugs 
as the prices that the qualified retiree prescription drug plan (or 
other intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount such network entity will receive, in total, for a particular 
drug, net of discounts, direct or indirect subsidies, rebates, other 
price concessions, and direct or indirect remuneration that the 
qualified retiree prescription drug plan has elected to pass through to 
qualifying covered retirees at the point of sale. Similarly, we are 
proposing that negotiated prices include any dispensing fees.
    Under these proposed definitions, payments made to RDS plan 
sponsors of qualified retiree prescription drug plans (or ``RDS 
sponsors'') would be based upon ``pass-through'' prices and not ``lock-
in'' prices that the RDS plan sponsor pays to a PBM or other 
intermediary contracting organization. We elaborate on our reasons for 
requiring ``pass-through'' versus ``lock-in'' prices for RDS plan drug 
costs further below, as well as solicit specific comments from 
stakeholders to ensure we are aware of all of the ramifications of this 
proposed policy.
    The ``pass through'' vs. ``lock in'' approach is being proposed for 
RDS plan sponsors for many of the same policy considerations that, as 
discussed in section II.B.4 of this proposed rule, underlie our 
proposed modifications to the Part D definitions of ``negotiated 
prices,'' ``administrative costs,'' ``allowable risk corridor costs,'' 
and ``gross prescription drug costs'' under Sec.  423.100 and Sec.  
423.308. Specifically, the RDS payment is calculated based on allowable 
retiree costs, which in turn is a subset of gross retiree costs. (See 
sections 1860D-22(a)(3)(A),(C)(i), and (C)(ii) of the Act.) The statute 
requires CMS to exclude administrative costs from the calculation of 
gross covered retiree plan-related prescription drug costs and 
subsidizing these costs would therefore be contrary to Congressional 
intent. (See section 1860D-22(a)(3)(C)(ii) of the Act.) As explained in 
section II.B.3.a.ii of this proposed rule, discussing the proposed Part 
D definition of Negotiated Prices, we believe any net profit (or ``risk 
premium'') retained by a PBM that is added to the prices paid to 
pharmacies and billed to a Part D sponsor should be considered an 
administrative cost and not a drug cost. This same principle equally 
applies to the RDS program. Because we believe any net profit or risk 
premium retained by a PBM or similar intermediary contracting 
organization should be considered administrative costs and not drugs 
costs, we believe including these costs in gross retiree costs and 
allowable retiree costs would be contrary to Congressional intent that 
the RDS payment not subsidize an RDS sponsor's administrative costs. To 
ensure that these amounts are excluded from gross and allowable retiree 
costs, we, therefore, propose to define administrative costs as 
including any profit or loss retained by an intermediary contracting 
organization contracting with an RDS sponsor that differs from the 
amount paid to a pharmacy or other entity that is the final dispenser 
for drugs dispensed to qualifying covered retirees. We solicit comments 
on all proposed definitions discussed above.
    We note that our proposed definition of administrative costs would 
not directly or indirectly require RDS plan sponsors to purchase drugs 
from dispensing providers only, and RDS plan sponsors would continue to 
have the option to contract or purchase drugs from other entities such 
as PBMs. However, to the extent that the amounts paid to a PBM or 
similar intermediary contracting organization for administrative 
services provided to a RDS plan sponsor are included in the cost of the 
drug under the lock-in pricing approach, RDS plan sponsors would be 
required to treat this spread amount as an administrative cost and 
these administrative costs would be excluded from the RDS plan 
sponsor's allowable retiree costs.
    Our proposal would not require an RDS plan sponsor to use a 
particular pricing approach in its contracting agreements with PBMs. 
RDS plan sponsors may continue to use either the pass-through or lock-
in pricing approach when contracting with a PBM--provided that drug 
costs reported to us are based on the price ultimately received by the 
pharmacy.
    There may be concerns that these proposed changes may require RDS 
plan sponsors to depend heavily on information traditionally held 
exclusively by PBMs. To protect the privacy of beneficiary personal 
health information data, an RDS sponsor's PBM or other intermediary 
contracting organization may submit drug cost data on the RDS sponsor's 
behalf to CMS directly rather than through the RDS sponsor. However, 
RDS plan sponsors, and not the intermediary contracting organizations, 
are ultimately responsible for the data submitted to us, and those that 
choose to contract with a PBM or other third party to submit data to 
CMS, therefore, must take reasonable steps to ensure that the data 
submitted to us on their behalf is accurate and timely.
4. Limiting Copayments to a Part D Plan's Negotiated Price (Sec.  
423.104)
    Section 1860D-2(d)(1) of the Act requires Part D sponsors to offer 
their enrollees access to negotiated prices used for payment for 
covered Part D drugs. In previous operational guidance, Part D sponsors 
were advised that it was optional when administering a Part D plan's 
benefit to apply either a copayment (if the sponsor elected to charge a 
flat copayment in lieu of coinsurance) or the actual negotiated price 
of the drug when that amount was lower than the copayment as outlined 
in the plan benefit package. Although we expected that very few Part D 
sponsors would choose to impose a cost sharing charge higher than the 
negotiated price of the drug, we allowed the option consistent with 
commercial practices. In practice, CMS found that the majority of Part 
D sponsors administer the benefit in such a way that the lesser of a 
cost sharing charge or the negotiated price of

[[Page 28573]]

the drug is applied to the beneficiary at the point of sale.
    Based on our experience in implementing the benefit, we believe 
that a policy where the plan sponsor charges the beneficiary the lesser 
of the cost sharing amount or the negotiated prices is more consistent 
with the intent of section 1860D-2(d) of the Act. Accordingly, we 
propose to revise our policy so that, for example, a beneficiary who is 
subject to a $5 copayment during the coverage gap cannot be required to 
pay more than the negotiated price of the covered Part D drug, if the 
negotiated price is less than $5. Specifically, we propose to revise 
the requirements related to qualified prescription drug coverage at 
Sec.  423.104(g) to make clear that Part D sponsors must provide 
enrollees with access to, or make available at the point-of-sale, its 
negotiated prices of covered Part D drugs when the covered Part D 
drugs' cost-share is more than the Part D sponsor's negotiated price. 
In other words, if the negotiated price for a covered Part D drug under 
a Part D sponsor's benefit package is less than the applicable cost-
sharing before the application of any deductible, before any initial 
coverage limit, before the annual out-of-pocket threshold, and after 
the annual out-of-pocket threshold.
5. Timeline for Providing Written Explanation of Plan Benefits (Sec.  
423.128)
    In accordance with the requirements of section 1860D-4(a)(4) of the 
Act, Sec.  423.128(e) of our final rule implementing the provisions of 
the Part D program (which appeared in the Federal Register on January 
28, 2005, and the provisions of which became effective March 22, 2005), 
requires Part D sponsors to furnish to enrollees who receive covered 
Part D drugs an explanation of benefits (EOB) when prescription drug 
benefits are provided. As articulated in the preamble to our January 
2005 final rule, our intent was to ensure that an EOB was provided to 
Part D enrollees at least monthly if they used their prescription drug 
benefits in a given month. Section 423.128(e)(6) specifically requires 
that an EOB be provided ``during any month when prescription drug 
benefits are provided * * *.''. This was an inadvertent error given 
that, operationally, it is not feasible for Part D sponsors to mail 
their members an EOB during the same month in which they used their 
prescription drug benefits.
    Sponsors must build into their EOB mailing cycles sufficient time 
to not only process each member's EOB, but also to produce and mail an 
EOB to each member with activity in a given month. Since the 
implementation of the Part D program in January 2006, it has become 
clear that a more reasonable timeframe for the provision of an EOB is 
warranted given the operational impossibility of providing an EOB for a 
month in which a member used his or her benefits during that same 
month. We therefore propose a revision to Sec.  423.128(e)(6) to 
require sponsors to provide an EOB no later than the end of the month 
following the month in which an enrollee uses his or her Part D 
benefits. We believe that our proposed revision to Sec.  423.128(e)(6) 
strikes a reasonable balance between Part D sponsor production 
constraints and the timely provision of claims information to Part D 
enrollees.
6. Low-Income Subsidy Provisions
a. Low-Income Cost-Sharing and Payment Adjustments for Qualified 
Prescription Drug Coverage (Sec.  423.329)
    CMS currently makes prospective payments to Part D plan sponsors of 
the low-income cost sharing subsidy (LICS) based solely on estimates 
provided as part of the annual bidding process. When LICS estimates are 
too high, excessive prospective payments are made that (under our 
current process) are not recovered until the year end reconciliation. 
In its report ``Medicare Part D Sponsors: Estimated Reconciliation 
Amounts for 2006,'' released October 2007, the HHS Office of the 
Inspector General recommended that CMS explore other payment 
methodologies to recoup excessive LICS payments earlier.
    Section 1860D-14(c)(1)(C) of the Act, when providing for 
administration of the subsidy program, gives the Secretary flexibility 
in determining a process for payment of the LICS subsidies as long as 
plan sponsors are reimbursed ``periodically and on a timely basis.''
    The Part D program regulations at 42 CFR 423.329(d)(2) state that 
payments of the LICS subsidy under this section are based on a method 
that CMS determines. However, in paragraph (d)(2)(i) we also stated 
that LICS interim payments are to be made based on the low-income cost-
sharing assumptions submitted with plan bids under Sec.  
423.265(d)(2)(iv) and negotiated and approved under Sec.  423.272.
    The language of Sec.  423.329(d)(2)(i) regarding interim payments 
of the LICS subsidies has proven overly restrictive and has had the 
unintended effect of requiring CMS to make payments to Part D plan 
sponsors that are subsequently determined to have been significantly 
different from their actual costs, and which will not be recovered 
until payment reconciliation is completed. In contrast, the regulation 
governing interim payment of Part D reinsurance affords greater 
flexibility to CMS to determine the most appropriate interim payment 
methodology. The regulation at Sec.  423.329(c)(2)(i) states that, 
``CMS establishes a payment method by which payments of [reinsurance] 
are made on a monthly basis during the year, based on either estimated 
or incurred allowable reinsurance costs.'' Therefore, we propose to add 
to the end of Sec.  423.329(d)(2)(i) the following qualifying 
statement: ``or by an alternative method that CMS determines.'' This 
proposed revision would afford CMS additional flexibility to make mid-
year LICS payment adjustments or other modifications to the LICS 
interim payment methodology, as appropriate.
b. Lesser of Policy for Low-Income Subsidy Individuals (Sec.  423.782)
    Section 1860D-14 of the Act establishes the low-income subsidy 
program available to Part D sponsors to provide low-income individuals 
assistance with their Part D plan cost-sharing amounts and premiums. 
The amount of a Part D sponsor's low-income cost-sharing subsidy is 
based upon the difference between the amount the non-subsidized 
beneficiary pays for his/her Part D covered drug under the plan's 
benefit package and the maximum cost-sharing amounts established in 
statute at section 1860D-14(a) of the Act. For calendar year 2008, full 
subsidy eligible individuals (as defined in the current regulation at 
42 CFR 423.773(b)) are not subject to any deductible and cannot be 
charged cost sharing above the maximum cost sharing amounts of $1.05/
$2.25 for generics and preferred multi-source brand name drugs; and 
$3.10/$5.60 for other brand name drugs in 2008. Other low-income 
subsidy eligible individuals, as defined at 42 CFR 423.780(d), cannot 
be charged more than $56 towards a Part D sponsor's deductible, and 
cannot be charged more per prescription than an amount equal to 15 
percent coinsurance.
    When we originally drafted the regulations, we assumed that the 
Part D sponsor benefit packages would routinely result in higher cost 
sharing amounts for non-subsidized beneficiaries than the maximum low-
income subsidy deductible and cost sharing amounts. However, when Part 
D sponsors offer benefit packages that already provide beneficiaries 
with a deductible and cost sharing less than the low-income deductible 
and cost sharing maximum amounts established

[[Page 28574]]

in statute (such as for zero dollar generics), this turns out not to 
always be the case. There are also instances when the Part D sponsor's 
negotiated prices used for payment for covered Part D drugs are less 
than the low-income cost sharing amounts. In these cases, our 
operational guidance (Prescription Drug Event or PDE training guide 
http://www.medicaretraining.net/federalemployees/ParticipantGuide.pdf) 
has instructed that Part D sponsors charge low-income beneficiaries the 
lesser of (1) its plan benefit package's prescribed cost-sharing, (2) 
the sponsor's negotiated rate for the drug, or (3) the LIS cost sharing 
amount established in statute. If the Part D sponsor's plan deductible 
was either less than the maximum low-income subsidy deductible amount 
or zero, the beneficiary should not be charged more than the plan's 
actual deductible.
    The basis of our PDE guidance is found both in regulation and in 
statute. Section 1860D-14(a) of the Act provides that a beneficiary is 
eligible for a ``reduction in the annual deductible'' and ``reduction 
in cost-sharing [above or below] the out-of-pocket threshold.'' We 
believe the statute does not require that the low-income subsidy 
beneficiary be charged the statutorily-defined cost-sharing amounts if 
the approved cost sharing for a specific drug under a plan is less than 
that amount. Nor does the statute require that the low-income subsidy 
beneficiary be subject to a defined deductible when a Part D sponsor's 
plan benefit structure does not include a deductible. Thus, our 
previously issued guidance is consistent with the statutory parameters 
outlining the reductions in beneficiary out-of-pocket cost sharing 
amounts. The statute at 1860D-2(d)(1) of the Act also requires Part D 
sponsors to offer their enrollees access to negotiated prices used for 
payment for covered Part D drugs. We believe a Part D sponsor that 
imposes the statutory low-income cost sharing amounts on low-income 
subsidy beneficiaries when the PDP sponsor's negotiated prices are less 
than the low-income cost sharing amounts, violates 1860D-2(d) of the 
Act with regard to an enrollee's access to negotiated drug prices.
    Furthermore, our current regulations at 42 CFR 423.104(b) sets 
forth the requirement that Part D sponsors must offer the same drug 
plan to all Part D eligible beneficiaries residing in their plan 
service area. We commonly refer to this section of the regulation as 
the uniform benefit rule. This section prohibits Part D sponsors from 
varying plan benefits to beneficiaries in a service region and further 
supports the policy that low-income subsidy beneficiaries not be 
charged more than what they, or other non-LIS beneficiaries would be 
charged under the Part D sponsor's plan benefit package. For an 
extensive discussion of the statutory basis for 42 CFR 423.104(b), see 
70 FR 4245 of the preamble to the final Medicare Prescription Drug 
Benefit Rule published January 28, 2005.
    To ensure low-income subsidy eligible beneficiaries are not harmed 
when the statutory low-income subsidy cost-sharing amounts are in 
excess of cost-sharing imposed under their plan's benefit package, we 
propose to codify our existing guidance in regulation. We propose 
adding a new paragraph (c) to Sec.  423.782 which would clarify that 
the cost-sharing subsidy under Sec.  423.782(a) and (b) is not 
available when an individual's out-of-pocket costs, under his or her 
Part D sponsor's plan benefit package, are less than the amounts 
described in Sec.  423.782(a) and (b).
c. Using Best Available Evidence to Determine Low-Income Subsidy 
Eligibility Status (Sec. Sec.  423.772, 423.800)
    Section 1860D-14(a)(3)(B)(v) of the Act requires the Secretary to 
treat Part D eligible individuals who are full-benefit dual eligible 
individuals (as defined under 1935(c)(6)) or recipients of supplemental 
security income under title XVI as full low-income subsidy eligible 
individuals. Section 1860D-14(c)(1) of the Act further requires that 
the Secretary provide for a process under which (1) the Secretary 
notifies the PDP sponsor that an individual is eligible for a low 
income subsidy, and (2) the PDP sponsor is required to reduce the 
premiums and cost sharing for such individuals to the amount a low-
income subsidy eligible individual is required to pay.
    The primary process CMS has employed to implement these 
requirements is for CMS to identify low-income subsidy-eligible 
individuals based upon information from the States on Medicaid 
eligibility and Social Security on SSI eligibility and the eligibility 
of LIS applicants. Because we do not always have timely or up-to-date 
information from these sources, however, we developed a process under 
which sponsors accept and use reliable documentation, known as ``best 
available evidence,'' to establish a beneficiary's low-income subsidy 
eligibility status and communicate this information to the Secretary.
    This ``best available evidence'' policy derives from the fact that, 
while section 1860D-14(c)(1)(A) of the Act provides for CMS to inform 
sponsors of low-income subsidy eligibility, the sponsor's obligation 
under section 1860D-14(c)(1)(B) of the Act to reduce premiums and cost-
sharing for all such individuals is not contingent upon CMS doing so. 
While CMS attempts to identify all subsidy eligible individuals to the 
full extent possible, experience has shown that this does not 
necessarily result in every such individual being successfully 
identified. CMS believes, therefore, that the Sponsors have an 
obligation to take reasonable steps to respond to documentation that 
identifies such individuals when they have not been identified by CMS, 
in order to fulfill their statutory obligation to reduce premiums and 
cost-sharing for such individuals.
    Given the importance of this policy, we propose to codify it in 
Sec.  423.800(b) and (d). Specifically, we propose to include in 
regulations text guidance (Part D Guidance--Low-Income Subsidy (LIS) 
Status Corrections Based on Best Available Evidence, dated June 27, 
2007, available at: http://www.cms.hhs.gov/PrescriptionDrugCovContra/Downloads/Final%20Sponsor%20Guidance%20on%20BAE%20062707.zip) we have 
issued to Part D sponsors concerning our best available evidence (BAE) 
policy.
    These revisions to Sec.  423.800 reflect our current policy that 
Part D sponsors must accept and use BAE in those instances when this 
evidence, submitted by the beneficiary or another person on the 
beneficiary's behalf, substantiates that the beneficiary's information 
in CMS systems is not accurate. To ensure the appropriateness of 
corrections based on BAE, CMS policy requires sponsors to maintain for 
10 years the original documentation used to substantiate requests for 
manual updating of the CMS system to accommodate subsequent periodic 
government audits. In addition, we plan to establish a feedback 
mechanism to the States to confirm the LIS corrections based on BAE and 
identify and address any problems in State to CMS reporting.
    As noted above, this policy is necessary because the monthly files 
from the States and Social Security CMS uses to establish an 
individual's low-income subsidy eligibility pursuant to section 1860D-
14(c)(1)(A) of the Act do not always accurately reflect an individual's 
true eligibility status. In certain cases, for example, the State has 
not yet reported the individual as Medicaid eligible, or has not 
reported him/her as institutionalized. As a result, CMS systems do not 
reflect a beneficiary's correct low-income subsidy (LIS) status at that 
point in

[[Page 28575]]

time. As a result, accurate subsidy information on these individuals 
has not been communicated to the Part D plan.
    In these circumstances, beneficiaries, advocates or pharmacies have 
brought such errors to the Part D sponsor's attention. CMS believes 
that the Part D sponsor is in the best position to address such errors 
and appropriately apply the subsidy as it is required by statute to do 
under section 1860D-14(c)(1)(B) of the Act. This led to CMS's 
development of the best available evidence (BAE) policy that we are 
proposing to incorporate in this proposed rule.
    Specifically, we are proposing to amend the regulations to require 
that Part D sponsors use BAE to substantiate a beneficiary's 
eligibility for a reduction in premiums and or cost-sharing in the case 
of individuals who indicate they are eligible for the low-income 
subsidy. These include full-benefit dual eligible individuals, partial 
dual eligible individuals (that is, those who are enrolled in a 
Medicare Savings Program as a Qualified Medicare Beneficiary, Specified 
Low-Income Medicare Beneficiary or Qualifying Individual), people who 
receive Supplemental Security Income (SSI) benefits but not Medicaid, 
and people who apply for and are determined eligible for a subsidy. 
Under the BAE policy we propose to incorporate in this proposed rule, 
sponsors are required to accept and use BAE to correct the 
beneficiary's low-income subsidy data in the sponsor's system and, as 
applicable, document requests for CMS to correct the beneficiary's low-
income subsidy data in our system when the change has not occurred as a 
result of the routine reporting.
    CMS continues to work to improve low-income subsidy data reporting. 
Such improvements would include, for example, permitting more frequent 
State submission of data files to CMS, more frequent CMS processing of 
data files and improved communication of the information to Part D 
sponsors.
    Nevertheless, we anticipate that the BAE policy will remain in 
place for the indefinite future. As a result, we are proposing to 
modify Sec.  423.800 by adding a fourth paragraph, consistent with our 
current policy, that would require Part D sponsors to use the CMS-
developed BAE process to establish the appropriate cost-sharing for 
low-income beneficiaries whose information in CMS systems is not 
correct. By adding this provision to the regulation, we are ensuring 
that our best available evidence policy and its requirements are clear 
to all parties and, in so doing, that the administration of the low-
income subsidy program takes advantage of all data currently available 
to the Part D sponsors to ensure low-income beneficiaries are not 
burdened by unnecessary cost sharing at the point of sale. We also 
believe we will be in a stronger position from a compliance 
perspective, as it will strengthen our ability to take action against 
plans that fail to implement our best available evidence process.
    We expect that CMS guidance implementing the BAE policy will be 
updated as necessary to reflect appropriate process modifications as 
they become warranted, based on changes in technology and the types of 
documents that could in the future prove to reliably verify a 
beneficiary's status as an individual eligible for a full low-income 
subsidy.
    We propose to define best available evidence at Sec.  423.772 as 
documentation or information that is directly tied to authoritative 
sources, confirms that an individual meets the requirements for the 
low-income subsidy, and is used to support a change in an individual's 
low-income subsidy status. We are not proposing to specify in the 
regulation the specific documents that would meet these criteria, as 
there may be documents that meet these criteria in the future that do 
not currently exist.
    Currently, however, evidence sufficient to make a change to a 
beneficiary's low-income status includes any one of the following:
    <bullet> A copy of the member's Medicaid card which includes the 
member's name and an eligibility date during the discrepant period or 
no later than July of the preceding year.
    <bullet> A report of contact including the date a verification call 
was made to the State Medicaid Agency and the name, title and telephone 
number of the state staff person who verified the Medicaid status 
during the discrepant period;
    <bullet> A copy of a state document that confirms active Medicaid 
status during the discrepant period;
    <bullet> A print out from the State electronic enrollment file 
showing Medicaid status during the discrepant period;
    <bullet> A screen print from the State's Medicaid systems showing 
Medicaid status during the discrepant period; or
    <bullet> Other documentation provided by the State showing Medicaid 
status during the discrepant period.
    In addition, evidence to establish that a beneficiary is 
institutionalized and qualifies for zero cost-sharing includes any one 
of the following:
    <bullet> A remittance from the facility showing Medicaid payment 
for a full calendar month for that individual during the discrepant 
period;
    <bullet> A copy of a state document that confirms Medicaid payment 
to the facility for a full calendar month on behalf of the individual; 
or
    <bullet> A screen print from the State's Medicaid systems showing 
that individual's institutional status based on at least a full 
calendar month stay for Medicaid payment purposes during the discrepant 
period.
    Again, the proposed changes described in this portion of the 
proposed rule would not change current BAE policy. Rather they would 
codify existing operational processes and reflect our historic policy 
that Part D sponsors use BAE when this evidence substantiates that the 
beneficiary's information in CMS systems is not accurate. We invite 
comment on methods by which we can improve this policy in the future.
7. Certification of Allowable Costs (Sec.  423.505)
    We propose, by revising Sec.  423.505(k)(5), to clarify that the 
certification of allowable costs for risk corridor and reinsurance 
information includes direct and indirect remuneration that serves to 
decrease the costs incurred by a Part D sponsor for a Part D drug. The 
submission of accurate and complete data regarding direct and indirect 
remuneration that reduces a Part D sponsor's costs for Part D drugs 
under the Medicare prescription drug benefit is necessary to ensure 
accurate reinsurance and risk corridor payments.
8. Change of Ownership Provisions (Sec.  423.551)
    We propose to amend the change of ownership provisions in 42 CFR 
423.551, by adding paragraph (g) to clarify that PDP sponsors may not 
sell or transfer individual beneficiaries or groups of beneficiaries 
enrolled in any of their plan benefit packages (PBPs). This new 
provision is simply a clarification of an existing restriction on PDP 
sponsors' ability to sell portions of their Part D lines of business.
    This proposed restriction on the sale of beneficiaries is based on 
two CMS determinations. First, in the preamble to the current Part D 
rule that published in the Federal Register January 28, 2005 (70 FR 
4341), CMS stated that we would recognize the sale of PDP lines of 
business as asset transfers that constitute a change ownership which 
CMS may recognize through the execution of an agreement to novate the 
selling sponsor's PDP sponsor contract to a second qualified sponsor. 
Using a

[[Page 28576]]

common understanding of the phrase ``line of business'' as referring to 
a company's set of products or services, CMS maintains that a ``PDP 
line of business'' includes a PBP as well as the beneficiaries enrolled 
in that PBP. Therefore, there can be no sale of a line of business 
consisting solely of a set of beneficiaries without the accompanying 
transfer to the succeeding sponsor of the obligation to continue to 
provide the PBP services the beneficiaries have already elected.
    Second, the sale of individual beneficiaries would allow PDP 
sponsors effectively to make enrollment elections on behalf of 
beneficiaries when the Part D statute grants that authority exclusively 
to beneficiaries (see section 1860D-1(a)(1)(A) of the Act) and, in the 
case of full-benefit dual eligible beneficiaries, CMS (see section 
1860D-1(b)(1)(C) of the Act). The change of ownership provisions of 
subpart L may not be read as a grant of enrollment election authority 
to PDP sponsors.
    We propose to add Sec.  423.551(g) to provide necessary 
clarification on this change of ownership issue. During the first 2 
years of the Part D program, several PDP sponsors have requested CMS 
approval of transactions involving the sale of beneficiaries. This 
clarification will minimize the number of sponsors that mistakenly 
begin negotiations on such sale agreements.

C. Proposed Changes to the MA and Prescription Drug Benefit Programs

    In order to assist readers in understanding how the proposed 
provisions we discuss in this section would apply to both programs, we 
are including Table 1, which highlights the provisions affecting both 
programs and the pertinent Part 422 and Part 423 CFR sections.

                       Table 1.--Provisions Affecting Both the Part C and Part D Programs
----------------------------------------------------------------------------------------------------------------
                                                            Part 422  CFR                          Part 423  CFR
             Provision                Part 422  Subpart        section       Part 423  Subpart        section
----------------------------------------------------------------------------------------------------------------
Passive enrollment procedures.....  Subpart B............          422.60  Subpart B............          423.32
Involuntary disenrollment and non-  Subpart B............          422.74  Subpart B............          423.44
 payment of premium.
Disclosure of plan information....  Subpart C............         422.111  Subpart C............         423.128
Retroactive premium collection and  Subpart F............         422.262  Subpart F............         423.293
 beneficiary repayment options.
Prohibiting improper billing of     Subpart F............         422.262  Subpart F............         423.293
 monthly premiums.
Non-renewal notification timelines  Subpart K............         422.506  Subpart K............         423.507
Reconsiderations..................  Subpart M............        422.578,  Subpart M............        423.560,
                                                                  422.582                               423.580,
                                                                                                         423.582
Civil money penalties.............  Subpart O............         422.760  Subpart O............         423.760
Marketing: Definitions............  Subpart V (all               422.2260  Subpart V (all               423.2260
                                     marketing sections).                   marketing sections.
Marketing: Review and distribution  .....................        422.2262  .....................        423.2262
 of marketing materials.
Marketing: Guidelines for CMS       .....................        422.2264  .....................        423.2264
 review.
Marketing: Deemed approval........  .....................        422.2266  .....................        423.2266
Marketing: Standards for MA/Part D  .....................        422.2268  .....................        423.2268
 marketing.
Marketing: Licensing of marketing   .....................        422.2272  .....................        423.2272
 representatives and confirmation
 of marketing resources.
Marketing: Broker and agent         .....................        422.2274  .....................        423.2274
 commissions.
Marketing: Employer and group       .....................        422.2276  .....................        423.2276
 retiree marketing (MA provision
 only).
----------------------------------------------------------------------------------------------------------------

1. Authorization of Automatic or Passive Enrollment Procedures 
(Sec. Sec.  422.60 and 423.32)
    Section 1851(c)(1) of the Act directs the Secretary to establish a 
process through which an individual makes an ``election'' to receive 
Medicare coverage through an MA plan or original Medicare, or to change 
from one MA plan to another, including the form and manner in which 
such elections are made. Section 1860D-1(b)(1)(A) of the Act similarly 
directs the Secretary to establish a process for enrolling in or 
disenrolling from a PDP, or changing enrollment from one PDP to 
another. This authority is implemented for MA plans in Sec. Sec.  
422.60, 422.62, 422.66, and 422.74, and for Medicare prescription drug 
plans in Sec. Sec.  423.32 and 423.36, as well as in CMS manuals.
    In rare instances, CMS is faced with situations in which 
organizations become insolvent, or are determined to have such serious 
compliance issues that immediate plan terminations may become 
necessary. Normally, an organization that elects to non-renew its 
contract for the following year is required to notify CMS in July of 
the contract year, several months before the non-renewal takes effect. 
All beneficiaries enrolled in that plan are required to be notified in 
early October, providing individuals at least 3 months to evaluate 
other plan options, and make a plan election for the subsequent year. 
Consistent with existing regulations and guidance, such elections would 
normally entail ``active'' measures, such as signing an enrollment 
form, submitting an on-line enrollment request or calling a plan to 
enroll.
    However, when CMS identifies a situation that requires an immediate 
plan termination, or other situations in which CMS determines plan 
members might be harmed by remaining in their current plan, CMS 
believes that it is in the best interests of beneficiaries to protect 
those that may not have adequate time to elect a plan due to emergency 
terminations as well as those unable to, or who otherwise do not, focus 
on their plan options. In these circumstances, our primary goal is to 
ensure that minimal harm comes to the beneficiary who fails to act on 
his or her election options. To achieve this goal, we have determined 
that it is sometimes appropriate to use ``passive'' enrollment 
procedures under which an individual is notified that he or she can 
make an enrollment ``election'' by taking no action. Under these 
procedures, we strive, when possible, to select plans for individuals 
that will maintain a level of coverage equal to or better than their 
current coverage, without incurring

[[Page 28577]]

additional costs. We also generally assume that individuals who are 
currently enrolled in a particular type of coverage, such as 
prescription drug coverage, would want to maintain this type of 
coverage. Similarly, we assume that LIS-eligible individuals would 
prefer a plan where their premiums and deductibles were fully 
subsidized.
    In addition to termination situations, we have provided for 
``passive'' enrollment in cases in which a failure to elect the 
enrollment in question would harm the beneficiary. For example, we have 
employed passive enrollment in the case of employer group members who 
would lose employer benefits if they were not passively enrolled. We 
also have provided for passive enrollment in which the particular plan 
in which the beneficiary is enrolled was being terminated by CMS due to 
compliance and insolvency issues, as well as instances when a 
beneficiary was enrolled in a terminating plan but a similar plan was 
offered by the same organization with which the beneficiary had already 
chosen to enroll.
    We are proposing to incorporate our current passive enrollment 
policies in the regulations in a new Sec.  422.60(g) and Sec.  
423.32(g). These new provisions would set forth in the regulations that 
CMS may authorize plans to carry out ``passive'' enrollment procedures 
in situations involving immediate plan terminations or potential 
beneficiary harm from remaining enrolled in the beneficiary's current 
plan. Under these enrollment procedures, individuals will be notified 
that they will be deemed to have elected the MA or PDP plan selected 
for them by CMS if they take no action to cancel such enrollment. In 
conjunction with these provisions, we would set forth several key 
beneficiary protections that would be required any time such an 
enrollment would occur. Such protections would include requiring that 
the organization that is receiving the enrollment notify all 
prospective enrollees of the passive enrollment prior to the effective 
date of the passive enrollment or as soon as possible after the 
enrollment effective date if prior notification is not possible under 
the circumstances. The notices to the enrollees would be approved by 
CMS and would explain their right to choose another plan, and describe 
the costs and benefits of the new plan and how to access care under the 
plan, as well and any other conditions of enrollment established by 
CMS.
    We would also specify that affected individuals would be entitled 
to a special enrollment period after their new enrollment took effect, 
as permitted under Sec. Sec.  422.62(b)(4) and 423.38(c)(8)(ii).
2. Involuntary Disenrollment for Nonpayment of Premium (Sec. Sec.  
422.74 and 423.44)
    The MMA provides individuals with the option to choose to have 
their premiums for either MA or PDP membership withheld from their 
Social Security benefit, as described in 42 CFR 422.262(f) and 423.293, 
respectively. Section 1851(g)(3)(A) of the Act provides Medicare 
Advantage organizations the option to disenroll members who fail to pay 
basic and supplemental monthly premiums, as set forth at 42 CFR 
422.74(d)(1). Section 1860D-1(b)(1)(B)(v) of the Act makes this 
provision applicable to PDP sponsors. See 42 CFR 423.44(d)(1).
    Although MA organizations and PDP sponsors may disenroll 
individuals for failing to pay premiums in a timely manner, we believe 
that such disenrollments should be an option only in cases where 
individuals pay their required premiums directly to the plan, as 
opposed to individuals who have chosen to have their premiums 
automatically withheld from their Social Security benefits. In cases 
where MA organizations or PDP sponsors are not receiving premiums on a 
timely basis from members who have chosen the premium withhold option, 
the member is clearly not at fault if the premium for some reason is 
not being deducted or paid to the plan properly. Thus, we do not 
believe that the organization or sponsor should have the option to 
disenroll a member in that situation. Similarly, individuals who have 
elected the premium withhold option also should not be subject to 
disenrollment during the time needed to initially establish premium 
withhold status on an individual account.
    Therefore, we are revising the MA and Part D regulations in Sec.  
422.74(d)(1) and Sec.  423.44(d)(1) by adding the cross reference to 
paragraph (d)(1)(iv) to prohibit plans from disenrolling individuals 
for failure to pay premiums if they have either requested the premium 
withhold option or if they are already in premium withhold status. 
Plans may initiate disenrollments for failure to pay premium only after 
an individual in ``direct bill'' status has been notified of the 
premium owed and, in the case of MA plans, provided the grace period 
required under Sec.  422.74(d)(1)(i)(B), as currently outlined in the 
MA and Part D regulations discussed above.
3. Disclosure of Plan Information (Sec. Sec.  422.111 and 423.128)
    As provided in section 1852(c)(1) of the Act, MA organizations and 
prescription drug benefit plan (PDP) sponsors must disclose detailed 
information about the plans they offer to their enrollees. This 
detailed information is specified in section 1852(c)(1) of the Act and 
Sec. Sec.  422.111(b) and 423.128(b) of the Part C and Part D program 
regulations, respectively. Sections 422.111(a)(3) and 423.128(a)(3), as 
well as our Marketing Guidelines require that this information be 
disclosed at the time of enrollment and at least annually thereafter. 
In addition, the Marketing Guidelines specify that current enrollees 
must receive the annual notice of change (ANOC) by October 31 and the 
evidence of coverage (EOC) annually.
    We propose clarifying in Sec. Sec.  422.111(a)(3) and 423.128(a)(3) 
that plans must disclose the information specified in Sec. Sec.  
422.111(b) and 423.128(b) of the MA and Part D program regulations, 
respectively, both at the time of enrollment and at least annually 
thereafter, 15 days before the annual coordinated election period. 
Making this clarification is essential to ensuring that current 
enrollees receive comprehensive information necessary for making an 
informed decision regarding their health care options prior to the 
annual coordinated election period.
4. Retroactive Premium Collections and Beneficiary Repayment Options 
(Sec. Sec.  422.262 and 423.293)
    Routine changes in a beneficiary's plan status (for example, plan 
switching) or systems issues can result in a need for retroactive 
premium collections. Many beneficiaries can be financially harmed when 
required to pay the full amount of a retroactively-due premium in 
addition to their current month's premium in a single lump sum. Section 
1860D-13(c)(1) of the Act states that ``the provisions of Sec.  1854(d) 
shall apply to PDP sponsors and premiums (and any late enrollment 
penalty) under this part in the same manner as they apply to MA 
organizations and beneficiary premiums under Part C.'' Section 
1854(d)(1) and (2) of the Act direct MA organizations to permit the 
payment of MA ``monthly basic, prescription drug, and supplemental 
beneficiary premiums on a monthly basis'' and ``in accordance with 
regulations, an MA organization shall permit each enrollee, at the 
enrollee's option, to make payment of premiums (if any) under this part 
to the

[[Page 28578]]

organization through'' withholding, electronic funds transfer, or 
``such other means as the Secretary may specify.''
    We believe it would be consistent with these provisions to provide 
beneficiaries with the option of prorating past due premiums over a 
period of monthly payments when the reason for the premium arrearage is 
other than a member's willful refusal to remit the premium. 
Specifically, we believe that beneficiaries should be able to spread 
out their obligation over at least the same period for which the 
premiums were due. That is, if 7 months of premiums are due, the member 
should have at least 7 months to repay. Accordingly, we propose to 
amend the MA regulations at Sec.  422.262 by adding new paragraph (h) 
and the Part D regulations at Sec.  423.293 by revising paragraph (a) 
to expressly provide for this option.
5. Prohibiting Improper Billing of Monthly Premiums (Sec. Sec.  422.262 
and 423.293)
    Under some circumstances operational failures cause CMS payment 
delays with respect to premiums collected by Social Security 
withholding. When this has happened, some PDP sponsors and MA 
organizations have erroneously opted to directly bill members for 
premiums that the members have requested be withheld from their Social 
Security payments. Sections 1860D-13(a) (for Part D) and 1854(b) (for 
Part C) of the Act establish specific formulas (based on annual 
bidding) for calculation of monthly premiums. Members who have 
submitted a request that premiums be withheld under section 1860D-13(c) 
of the Act for Part D or section 1854(d) of the Act for Part C have the 
right to have their premiums taken only out of their Social Security 
payments. Therefore, it is impermissible to bill a member for such 
premiums. Accordingly, we are proposing to revise the MA regulations by 
adding new paragraph (g) to Sec.  422.262 and the Part D regulations by 
adding new paragraph (e) to Sec.  423.293, to explicitly prohibit such 
improper billing. Note that under circumstances when CMS cannot 
effectuate the premium withhold option for beneficiaries, we will set 
beneficiaries back to direct bill. In those cases, plans will be able 
to directly bill beneficiaries for premium amounts owed.
6. Non-Renewal Notification Timelines (Sec. Sec.  422.506 and 423.507)
    Non-renewals of MA or prescription drug plan contracts require the 
MA organization, the Part D sponsor, or CMS to notify both the 
enrollees of the organization or sponsor and the general public of the 
non-renewal. Existing regulations require notification 90 days prior to 
the effective date of the non-renewal for notification to enrollees and 
90 days prior to the end of the calendar year to the general public. 
The effective date of contract non-renewals in the MA and prescription 
drug plan programs is January 1st of each calendar year.
    Currently, CMS regulations concerning contract non-renewals require 
that CMS notify an MA organization or a prescription drug plan sponsor 
(PDP sponsor) of a non-renewal by August 1 of the current contract 
calendar year. In cases where CMS announces its intention to non-renew 
an MA organization or a PDP sponsor, the MA organization or PDP sponsor 
has certain contract appeal rights. Note that in instances where an MA 
organization or PDP sponsor announces its intent to non-renew its 
contract with CMS, there is no similar contract appeals process 
available. Should an MA organization or PDP sponsor decide to pursue an 
appeal of CMS' decision to non-renew the organization or sponsor's 
contract, we believe it is appropriate that the appeals process be 
concluded in time for there to be a final decision on the non-renewal, 
and for there to be sufficient time for the enrollees and the general 
public to be notified of a contract non-renewal prior to January 1 of 
the following year. Presently, the 90 day notice requirement requires 
contract non-renewal appeals process to be completed in only 60 days 
(from August 1st which is the date of notification of non-renewal, 
until October 1st,in order for the notice period to have run prior to 
January 1st). Our experience is that the contract non-renewal appeals 
process is likely to extend beyond 60 days. For this reason, we propose 
revising Sec.  422.506(a)(2)(ii), (a)(2)(iii), (b)(2)(ii), and 
(b)(2)(iii) of the MA regulations and Sec.  423.507(a)(2)(ii), 
(a)(2)(iii), (b)(2)(ii) and (b)(2)(iii) of the Part D regulations, to 
change the beneficiary and public notice requirement from at least 90 
days to at least 60 days, thus allowing more time for the contract non-
renewal process to conclude, while still allowing for a sufficient 
beneficiary notice period, prior to January 1st. This change will help 
ensure that all termination decisions are final, prior to the start of 
marketing and enrollment activities.
    CMS also believes that a 60 day notification requirement better 
aligns itself with other important CMS notification and election 
requirements. For example, CMS currently requires that all MA 
organizations and PDP sponsors provide annual notice of change (ANOC) 
documents to enrollees of Medicare private health plans by October 31st 
of each year. As mentioned previously, the annual election period runs 
from November 15th to December 31st of each year. By changing the 
enrollee notification timeframe from 90 to 60 days, beneficiaries will 
receive notice of a pending contract non-renewal during the same time 
period when beneficiaries are making important Medicare coverage 
decisions for the upcoming calendar year. A 60 day notification period 
is a sufficient amount of time for enrollees to review other plan 
options and to make an election for enrollment into a plan for the 
following calendar year.
7. Reconsiderations (Sec. Sec.  422.578, 422.582, 423.560, 423.580)
    We are proposing changes to the reconsideration process for both 
the MA and prescription drug benefit programs. The overall changes to 
the first level appeal process will be the same for both programs. 
However, we discuss the proposed revisions for each program separately 
because the proposed revisions would vary slightly due to program 
differences.
a. Medicare Advantage Program (Sec. Sec.  422.578 and 422.582)
    Under section 1852(g)(3)(A)(ii) of the Act and Sec. Sec.  422.578 
and 422.584 of the regulations, a physician, without regard as to 
whether the physician is treating the enrollee, is permitted to request 
an expedited plan reconsideration on behalf of an enrollee without 
having to be appointed by the enrollee as his or her representative. 
However, in order to request a standard pre-service plan 
reconsideration under Sec. Sec.  422.578 and 422.582, a physician must 
have been appointed as the enrollee's representative, or be authorized 
by State law or other applicable law to act on behalf of the enrollee. 
We are proposing to revise Sec.  422.578 and 422.582 to permit an 
enrollee's treating physician to request a standard plan 
reconsideration of a pre-service request on an enrollee's behalf 
without having been appointed by the enrollee as his or her 
representative.
    Section 1852(g)(2) of the Act states that an MA organization 
``shall provide for reconsideration of a determination described in 
paragraph (1)(B) upon request by the enrollee involved.'' Although the 
statute does not expressly give any individual other than the enrollee 
the right to request a standard plan reconsideration, we have long 
permitted an enrollee to appoint a representative (for example, an 
attorney or family member) to file a request on

[[Page 28579]]

behalf of an enrollee. In addition, when an individual is authorized 
under State law or other applicable law to act on the beneficiary's 
behalf, such an individual is also permitted to request a plan 
reconsideration on the enrollee's behalf.
    With respect to a physician's request for a standard plan 
reconsideration, the current regulations draw a distinction between a 
physician who is requesting an organization determination on behalf of 
an enrollee regarding coverage of services that have not been provided, 
and a request involving services that the physician has furnished. In 
the latter case, under Sec.  422.574(b), if the physician has furnished 
a service to an enrollee and formally waives any right to payment from 
the enrollee for that service, he or she becomes a ``party'' to the 
organization determination, and may, under Sec.  422.578, request a 
standard plan reconsideration (1st level appeal) without being 
appointed by the enrollee as a representative. This is a third instance 
in which someone other than the enrollee can request a standard plan 
reconsideration.
    After a number of years experience with the Part C program, we 
believe it is appropriate to revise the regulations to add a fourth 
circumstance under which an individual other than an enrollee can 
request a standard plan reconsideration on the enrollee's behalf. 
Specifically, we propose to allow the enrollee's physician, who the 
enrollee has already selected to provide treatment, to request standard 
plan reconsiderations on his or her patient's behalf without having 
been appointed as the enrollee's representative. We believe that an 
enrollee's treating physician already has been selected by the enrollee 
and occupies a position of trust. We also believe that as a treating 
physician, he or she is in a good position to know whether a request 
for plan reconsideration is warranted, and in the enrollee's interests. 
We have found that in some cases, requiring that the physician take the 
step of being appointed by the enrollee is a burden that does not serve 
the enrollee's interests.
    We are proposing that the physician must be able to demonstrate 
that he or she is treating the enrollee in question in order to request 
a plan reconsideration on the enrollee's behalf, and would be required 
to notify the enrollee that he or she is taking this action.
    We are not proposing to allow physicians who are not acting as an 
enrollee's representative to request appeals on behalf of enrollees 
beyond the plan level, as we believe that the enrollee should be 
directly involved in a decision to disclose his or her private health 
information to appeals adjudicators beyond the plan level of appeal 
because those adjudicators do not have the same relationship with the 
enrollee that the plan has.
b. Prescription Drug Benefit Program
i. Definitions (Sec.  423.560)
    We propose to revise the regulation text of Sec.  423.560 by adding 
a new definition for ``other prescriber.'' This term encompasses health 
care professionals, other than physicians, with the requisite authority 
under State law or other applicable law to write prescriptions for 
Medicare beneficiaries. In conjunction with this proposed new 
definition, we propose to add ``or other prescriber'' after 
``prescribing physician'' or ``physician'' throughout subpart M of part 
423 in order to authorize these other prescribers to perform the same 
functions that prescribing physicians are allowed to perform with 
respect to the coverage determination and appeals processes as set out 
in subpart M of part 423.
    Sections 1860D-4(g) and (h) of the Act establish the role of the 
``prescribing physician'' in the coverage determination and appeals 
processes. Specifically, under section 1860D-4(g) of the Act, an 
enrollee may request an exception to a tiered cost-sharing structure 
such that a non-preferred drug could be treated as a preferred drug if 
the prescribing physician ``determines that the preferred drug for 
treatment of the same condition either would not be as effective for 
the individual or would have adverse effects for the individual, or 
both.'' Section 1860D-4(h) of the Act provides that an enrollee may 
appeal a determination not to provide coverage for a Part D covered 
drug that is not on the plan's formulary ``only if the prescribing 
physician determines that all covered Part D drugs on any tier of the 
formulary for treatment of the same condition would not be as effective 
for the individual as the nonformulary drug, would have adverse effects 
for the individual, or both.'' However, sections 1860D-4(g) and (h) of 
the Act are silent on the role of other health care professionals who 
have prescribing authority under State law or other applicable law.
    As the statute reflects, the Congress recognized the important role 
a prescribing physician plays in the coverage determination and appeals 
processes. In particular, a prescribing physician is especially well 
qualified to assist Part D enrollees with certain aspects of the 
coverage determination and appeals processes. Because sections 1860D-
4(g) and (h) of the Act are silent on the role of other health 
professionals who have prescribing authority under State law or other 
applicable law, an enrollee who has his or her prescription written by 
a non-physician prescriber arguably does not currently have the same 
protections and assistance in the coverage determination and appeals 
processes as an enrollee whose prescription is written by a physician. 
Based on program experience gained since the inception of the Part D 
program, and recognizing that there are other categories of health care 
providers who are authorized under State law or other applicable law to 
prescribe drugs for Part D enrollees, we are proposing to allow non-
physician prescribers to perform the same functions as physicians for 
purposes of subpart M of part 423.
    This proposed change would ensure that enrollees who have 
prescriptions written by non-physician prescribers are afforded all of 
the same protections and assistance in the coverage and appeals 
processes that are currently available to enrollees whose prescriptions 
are written by a physician. For example, under Sec.  423.566(c), an 
enrollee's prescribing physician is permitted to request an expedited 
or a standard coverage determination on the enrollee's behalf without 
being his or her representative. Under this proposal, a nurse 
practitioner or other health care professional who is authorized under 
State law or other applicable law to write prescriptions would be able 
to request an expedited or standard coverage determination on behalf of 
the enrollee. We believe this proposal would ensure that all Part D 
enrollees have the same protections and access to assistance in the 
coverage determination and appeals processes, notwithstanding the type 
of health care professional who writes their prescription.
ii. Right to a Redetermination (Sec.  423.580)
    We propose to revise the regulation text of Sec.  423.580 to 
provide prescribing physicians and other prescribers with the ability 
to request standard redeterminations on behalf of enrollees, and 
require them to notify enrollees that they are taking this action.
    Section 1860D-4(g) of the Act requires Part D plan sponsors to 
``meet the requirements of paragraphs (1) through (3) of section 
1852(g) with respect to covered benefits under the prescription drug 
plan it offers under this part in the same manner as such requirements 
apply to an MA organization with respect to benefits it offers under an 
MA plan under Part C.''

[[Page 28580]]

Sections 1852(g)(1) through (g)(3) discuss the requirements for 
standard and expedited organization determinations and plan 
reconsiderations by MA organizations.
    Under current Sec. Sec.  423.580-423.584, an enrollee's prescribing 
physician is permitted to file an expedited redetermination on the 
enrollee's behalf without being his or her representative, but cannot 
request a standard redetermination without being the enrollee's 
representative. In accordance with section 1860D-4(g) of the Act, this 
limitation was carried over from Sec. Sec.  422.578 and 422.582 of the 
Medicare Advantage regulations. However, as discussed above, in this 
proposed rule, we are proposing to revise Sec. Sec.  422.578 and 
422.582 of the regulations to allow non-representative physicians to 
request standard plan reconsiderations of pre-service requests on 
behalf of enrollees in MA appeals. In conjunction with that proposed 
change, and consistent with the requirement under section 1860D-4(g) of 
the Act that plan redeterminations under Part D be provided in the same 
manner as plan reconsiderations under Part C, we propose to revise 
Sec. Sec.  423.580 and 423.582 to be consistent with our proposed 
changes to Sec. Sec.  422.578 and 422.582. However, under Part D, we 
are not carrying over the limitation from proposed Sec.  422.578 that 
would prevent a prescribing physician from requesting a standard plan-
level appeal for payment. Unlike under Part C, prescribing physicians 
do not have a financial interest in the payment of Part D claims. Thus, 
we believe prescribing physicians may make requests for payment on 
behalf of enrollees under Part D. In addition, consistent with our 
proposal to afford non-physician prescribers the same authority to 
assist beneficiaries in the coverage determination process as 
prescribing physicians, we also propose to allow other prescribers to 
request plan redeterminations on behalf of enrollees.
8. Civil Money Penalties (Sec. Sec.  422.760 and 423.760)
    CMS may impose civil money penalties (CMPs) on MA organizations and 
Part D sponsors for certain regulatory offenses, as described in 
subpart O of both 42 CFR 422 and 42 CFR 423. Section 1857(g)(3)(A) and 
section 1860D-12(b)(3)(E) of the Act provides CMS with the ability to 
impose CMPs of up to $25,000 per determination (determinations are 
those which could otherwise support contract termination, pursuant to 
Sec. Sec.  422.509 or 423.510) when the deficiency on which the 
determination is based adversely affects or has the substantial 
likelihood of adversely affecting an individual covered under the 
organization's contract. The current regulations essentially echo the 
Act's wording with respect to the amount of the penalty that CMS may 
impose. However, the statute and the existing regulations shed little 
light on how to determine whether a series of incidents or events, or a 
single event that individually impacts multiple enrollees, constitutes 
a single determination or multiple determinations which could justify 
the calculation of a larger total penalty.
    It is possible that one incident could negatively affect multiple 
enrollees, which would provide a justification for the CMP amount to 
potentially be greater than a CMP based on an event that only affects a 
few beneficiaries. For example, the failure of an organization or 
sponsor to timely issue annual notice of change (ANOC) documents would 
be a one-time incident that has the potential to have adverse 
consequences for a large number of enrollees. CMS believes it is 
appropriate for the specific factors to be considered in calculating a 
total CMP, such as the number of enrollees affected or potentially 
affected, whether the ANOCs were significantly delayed (resulting in a 
substantial decrease in the amount of time an enrollee had to determine 
whether or not to stay in their plan), or an additional factor was 
involved that further adversely affected the enrollees.
    Similarly, one or a small group of marketing agents perpetrating 
similar misrepresentations over a period of time could constitute a 
series of incidents or events that CMS believes should be considered in 
calculating a total CMP. If one agent or several agents are 
misrepresenting plan benefits, the agent(s) may be repeating the same 
misrepresentation on multiple occasions and to multiple enrollees. Each 
time an agent misrepresents the plan's benefits and the enrollee is 
adversely affected or potentially adversely affected by such inaccurate 
statements, a determination justifying a CMP could be made based on 
each enrollee affected by the agent's actions.
    Given that the Act requires that the deficiency on which the 
determination is based must have adversely affected or have the 
substantial likelihood of adversely affecting an individual covered 
under the organization's contract, CMS believes that a CMP may be 
calculated based on each enrollee covered under the organization's 
contract adversely affected or potentially adversely affected by the 
organization's conduct. The statute clearly specifies that CMPs may be 
levied at amounts up to but not exceeding $25,000 per determination. We 
propose to clarify our regulations relating to CMPs in both 42 CFR 
422.760 and 42 CFR 423.760 by adding paragraph (b)(2) of the respective 
sections to state that CMS may impose a penalty of not more than 
$25,000 for each enrollee covered under the organization's contract 
that is adversely affected or substantially likely to be adversely 
affected by the organization's deficiency (or deficiencies). When 
determining the amount of a penalty per determination, up to the 
$25,000 maximum, we will continue to take into account factors such as 
the severity of the infraction, the evidence supporting the infraction, 
the amount of harm caused to the Medicare beneficiary, and the 
organization's past conduct. These factors combined will assist us in 
determining the amount per affected beneficiary that the organization 
should be penalized.
    CMS believes this clarification is necessary for both MA 
organizations and Part D sponsors to fully appreciate the consequences 
of noncompliance with applicable program requirements. An MA 
organization or Part D sponsor's conduct that adversely affects a 
significant number of Medicare beneficiaries may have a significant 
financial impact on the organization. Our proposed change is aimed at 
protecting enrollees by clarifying that penalties can be substantial 
for noncompliance.
    Adding the option of assessing CMPs at the level of each enrollee 
covered under the organization's contract--to CMS' existing authority, 
which enables the Agency to continue to levy CMPs at the ``per 
contract'' level--provides necessary flexibility for CMS to better 
match CMP amounts to the specific nature of the determination that 
warrants a CMP. However, we acknowledge that there may be alternative 
or additional approaches to the ``per beneficiary'' and ``per 
contract'' schema described here that would likewise meet the Agency's 
goals of providing meaningful penalties that deter violations of 
Medicare program requirements and protect Medicare beneficiaries. For 
example, tying CMP amounts to the number of days that violations 
existed may likewise be an effective approach for assessing meaningful 
CMPs. We therefore seek comments on our proposed clarification as well 
as whether any other approaches would more effectively deter MA 
organizations and Part D sponsors from engaging in conduct which is in 
violation of CMS requirements. We also seek comment as to the 
appropriate

[[Page 28581]]

monetary range for CMPs imposed on MA organizations and Part D sponsors 
and as to whether some upper limit should exist on the total amount of 
a penalty imposed on an organization when a deficiency has adversely 
impacted a large number of enrollees covered by an MA organization or 
Part D sponsor.
9. Medicare Advantage and Prescription Drug Program Marketing 
Requirements (Proposed New Subparts V)
a. General
    Section 1851 of the Act sets forth provisions relating to 
beneficiaries making choices as to how they want to receive their 
Medicare benefits. Specifically, it addresses the provision of 
information to beneficiaries on their Medicare health care options, the 
marketing of such health care options, and the timing and method for 
making a choice among health care options, and enrollment in, 
disenrollment from, or a change in, the health care option of the 
beneficiary's choice.
    Sections 1851(h)(1) through (5) of the Act govern the marketing of 
MA plans to Medicare beneficiaries by MA organizations. Section 
1851(h)(1) of the Act requires that marketing material be submitted to 
CMS for approval before it is used, and provides for deemed approval 
after 45 days (or 10 days in certain cases) if CMS does not disapprove 
the material. Section 1851(h)(2) provides for CMS to establish 
``standards'' for the review of marketing material, and requires that 
material be disapproved if it ``is materially inaccurate or misleading 
or otherwise makes a material misrepresentation.''
    Section 1851(h)(3) of the Act provides that material approved for 
use in one geographic area is deemed approved in other areas except 
with respect to material specific to the area involved, and section 
1851(h)(5) of the Act provides that if model language approved by CMS 
is used, it can be used only 10 days after submitting it to CMS for 
approval. Finally, section 1851(h)(4) of the Act requires that MA 
organizations conform to ``fair marketing standards,'' including those 
established by CMS by regulation, and requires that such standards 
prohibit an MA organization from providing for cash or rebates as an 
inducement to enroll, or otherwise, and may include a prohibition on an 
MA organization or its agent filling out an enrollment form for 
individuals. With respect to marketing by PDP sponsors, section 1860D-
1(B)(1)(vi) of the Act requires CMS to use rules ``similar to (and 
coordinated with)'' the foregoing marketing rules set forth in section 
1851(h). Regulations at Sec. Sec.  422.80 and 423.50 and detailed 
operational guidance found in ``The Medicare Marketing Guidelines for 
Medicare Advantage plans, Medicare Advantage prescription drug plans, 
prescription drug plans, and 1876 cost plans,'' second revision dated 
July 25, 2006 (hereinafter referred to as ``Marketing Guidelines''), 
are the current standards by which MA organizations and Part D sponsors 
must meet in their marketing to eligible individuals regarding their 
plan choices. In developing these standards, CMS recognized that 
establishing fair marketing standards encompasses more than CMS 
approval of marketing materials. It also includes the development of 
standards related to the dissemination of information through a wide 
variety of media forms (for example, advertisements and Web sites) and 
MA organization or Part D sponsor (or their agents') conduct when 
attempting to persuade a beneficiary to enroll in a particular plan. 
Both the regulations and the Medicare Marketing Guidelines prohibit 
organizations from conducting marketing activities that would result in 
generating misleading information to Medicare beneficiaries.
    In order to implement standards consistent with ``fair marketing'' 
practices in accordance with sections 1851(h) and 1860D-1(b)(1)(B)(vi) 
of the Act, and to ensure beneficiaries receive the necessary 
information to make informed choices during the annual election period, 
we propose to amend and expand our marketing regulations for both the 
MA and the Part D programs. Moreover, due to the proposed addition of 
new marketing provisions and the need to clarify current marketing 
regulations, we propose to remove Sec. Sec.  422.80 and 423.50 of 
subpart B, which currently specify the requirements related to the 
approval of marketing materials and instead include this core of our 
marketing requirements in a new subpart V of 42 CFR 422 and 423 
specific to the marketing regulations for each program.
b. Marketing Materials and Marketing Requirements
i. Definitions Concerning Marketing Materials (Sec. Sec.  422.2260, 
423.2260)
    We are making an organizational change for this section consistent 
with our proposal to create a new subpart V of 42 CFR 422 and 423 
specific to marketing. We are moving the definition of marketing 
materials to Sec. Sec.  422.2260 and 423.2260 of the Part C and D 
program regulations, respectively.
ii. Review and Distribution of Marketing Materials: File and Use 
(Sec. Sec.  422.2262, 423.2262)
    In addition to moving our requirements concerning the approval of 
marketing materials and election forms to Sec. Sec.  422.2262 and 
423.2262 of the Part C and D program regulations, respectively, we are 
proposing to modify the ``file and use'' review process.
    While the statute requires the submission of marketing materials to 
CMS for a 45-day period of CMS review, based on years of program 
experience CMS recognized that some MA organizations consistently met 
all marketing standards, and that their marketing materials warranted 
less scrutiny. CMS accordingly established a file and use policy that 
was designed to streamline the marketing materials approval process for 
these MA plans. Under this file and use policy, Medicare health plans 
that demonstrated to the satisfaction of CMS that they continually met 
a particular high standard of performance were able to publish and 
distribute certain marketing materials within 5 days of submission to 
CMS under section 1851(h)(1), without waiting for a response from CMS.
    In effect, these materials were deemed approved by CMS after 5 days 
based on CMS's prior review of earlier materials. The criteria in order 
to be eligible for the original file and use policy were that a 
contracting entity had to have submitted at least eighteen months of 
marketing materials for CMS review, and at least ninety percent of the 
materials submitted within the past six months had to meet applicable 
marketing standards.
    In the regulations implementing the MMA, CMS adopted a separate 
file and use policy that was based on the nature of the marketing 
materials in question, rather than the track record of the MA 
organization or PDP sponsor. Under this policy, an MA organization or 
PDP sponsor certifies that it is using either model language already 
reviewed and approved by CMS, or types of marketing materials that CMS 
has identified as not containing substantive content. As with the 
original policy that focused on the organization, the materials covered 
by this new file and use certification policy could be used 5 days 
after submission, without any explicit approval from CMS. In the case 
of MA organizations, this certification is made at the time of 
submission, while PDP sponsors are permitted to so certify in their 
contracts.
    In order to level the playing field among contractors, eliminate 
redundancies, and focus resources on

[[Page 28582]]

materials that have content that warrants CMS scrutiny, we are 
proposing to eliminate file and use status based on an organization's 
track record, and apply a uniform policy of applying the file and use 
policy to marketing materials that either use model language without 
substantive modification, or materials that are identified by CMS as 
not containing substantive content warranting CMS review. The same 
approach to certifying that these types of materials are being used 
would apply for both Part C and Part D contractors. We would include 
the proposed file and use provision in Sec.  422.2262(b) and Sec.  
423.2262 (b) of the MA and Part D programs, respectively.
iii. Guidelines for CMS (Sec. Sec.  422.2264, 423.2264)
    We are making an organizational change for this section consistent 
with our proposal to create a new subpart V of 42 CFR 422 and 423 
specific to marketing regulations. We are moving Sec. Sec.  422.80(c) 
and 423.50(d), which describe specific guidelines for CMS review of 
marketing materials and election forms, to Sec. Sec.  422.2264 and 
423.2264, respectively.
iv. Deemed Approval (Sec. Sec.  422.2266, 423.2266)
    Consistent with our proposal to create a new subpart V of 42 CFR 
422 and 423 specific to marketing regulations, we are making an 
organizational change for this section. We are removing Sec. Sec.  
422.80(d) and 423.50(e) and creating Sec. Sec.  422.2266 and 423.2266, 
respectively. The provision concerns CMS' deemed approval of the 
distribution of marketing materials.
v. Standards for MA and PDP Marketing (Sec. Sec.  422.2268, 423.2268)
    We are making an organizational change for this section consistent 
with our proposal to create a new subpart V of 42 CFR 422 and 423 
specific to marketing regulations. We are removing Sec. Sec.  422.80(e) 
and 423.50(f) and creating Sec. Sec.  422.2268 and 423.2268, 
respectively.
vi. Licensing of Marketing Representatives and Confirmation of 
Marketing Resources (Sec. Sec.  422.2272, 423.2272)
    In response to questions from the Part D industry regarding state 
licensure of marketing representatives, CMS adopted in its Marketing 
Guidelines the requirement that MA organizations and Part D sponsors 
that conduct marketing through independent agents use state-licensed, 
certified, or registered individuals to do so, if a state licenses such 
agents. The use of only state-licensed marketing representatives helps 
ensure that the marketing representatives meet minimum standards of 
integrity and professionalism in order to market to Medicare-eligible 
beneficiaries. This Medicare requirement permits Medicare to benefit 
from State efforts to deny licensure to under-educated, unscrupulous or 
otherwise substandard individuals, and helps ensure that Medicare 
beneficiaries are not the victims of substandard or inappropriate 
marketing activities.
    Based on the experience we have gained since the start of the Part 
D program, and continued experience with the Medicare Advantage 
program, we propose to codify in the regulation our existing 
requirement that MA organizations and Part D sponsors utilize only 
State-licensed marketing representatives to do marketing where they use 
independent agents in the States that license such agents.
    We further propose to add a regulatory requirement to Sec. Sec.  
422.2272 and 423.2272 that MA organizations and PDP sponsors that 
market through independent agents not only be required to use licensed 
agents, but would be required to report to States that they are using 
such agents, in a manner consistent with State appointment laws. State 
appointment laws require MA and PDP sponsors to appoint marketing 
representatives before the agent can market a plan's product. 
Appointment laws may require an insurance plan to maintain a registry 
of marketers who sell their plans, including maintaining a list of 
license numbers, dates the individual began selling policies for the 
insurance company, and stopped selling plans for the insurance company. 
While we previously required only that licensed agents be used, and did 
not require that the appointment of such agents be reported to the 
State agency that regulates agents, we believe this latter requirement 
would enable States to monitor the agents' activities in connection 
with their Medicare marketing for the purpose of monitoring the agent's 
fitness to engage in marketing in the State. We believe Medicare 
beneficiaries would benefit from this State monitoring.
    More specifically, we recognize that, under the preemption 
provisions in section 1856(b)(3) of the Act (incorporated for PDPs 
under section 1860D-12(g)), States do not have the authority to 
regulate the marketing of Medicare Part C and D plans. However, as 
noted, any abuses by an agent in marketing such plans would have direct 
relevance to the State's oversight of the agent generally, and 
implications for the agent's marketing of products over which the state 
has jurisdiction, and Medicare beneficiaries would benefit from having 
the agents who engage in Medicare marketing subject to this state 
oversight. Because State laws requiring compliance with an appointment 
law with respect to Medicare Part C and Part D marketing are pre-
empted, however, we do not believe that any fees that would be charged 
in connection with a State appointment law would apply. Rather, we 
would limit the requirement to complying with only those aspects of 
State appointment laws that provide for giving the state information 
about which agents are marketing the Part C and D plans.
    In the context of the requirement that MA organizations and Part D 
sponsors utilize only State-licensed marketing representatives, and 
report the appointment of such agents to States consistent with the 
procedures under State appointment laws, it is important to discuss the 
activities that would not trigger the need for using State-licensed 
marketing representatives. As standard practice, MA organizations and 
Part D sponsors employ customer service representatives who answer 
questions and accept enrollments on behalf of enrollees who have 
decided to enroll in a particular plan offered by the organization. We 
recognize that plan customer service representatives play an important 
role in disseminating information by answering factual questions posed 
by beneficiaries, and that such an activity is distinguishable from the 
act of steering to a plan (``marketing,'' as defined in the Medicare 
Marketing Guidelines).
    Additionally, taking demographic information from someone who has 
decided to enroll in the plan, in order to complete an application, is 
not steering in that the beneficiary has already made a choice to 
enroll in a plan. Accordingly, we believe providing factual 
information, fulfilling a request for materials, and taking demographic 
information in order to complete an enrollment application at the 
initiative of the enrollee by a customer service representative, are 
legitimate customer service activities that would not trigger the need 
for using State-licensed marketing representatives.
    In addition, we also propose to clarify in Sec. Sec.  422.2268 and 
423.2268 several standards for MA and PDP organization marketing. In 
Sec. Sec.  422.2268(d) and 423.2268(d) we clarify that the prohibition 
on door-to-door solicitation includes other unsolicited instances of 
direct contact, such as outbound calling without the beneficiary 
initiating contact. We believe this clarification

[[Page 28583]]

would help prevent inappropriate conduct on the part of agents in 
aggressively pursuing the marketing of Part C and D plans to 
beneficiaries (for example, approaching beneficiaries directly in 
parking lots) outside of approved common areas that may be used for 
marketing displays and presentations. We would also clarify in 
Sec. Sec.  422.2268(l) and 423.2268(l) that plans may not engage in 
sales activities, including the distribution or collection of plan 
applications, at educational events. These events may be sponsored by 
plan(s) or by outside entities, and are events that are promoted to be 
educational in nature and have multiple vendors, such as health 
information fairs, conference expositions, state-or community-sponsored 
events, etc. In Sec. Sec.  422.2268(k) and 423.2268(k) we clarify that 
sales activities are only permitted in common areas of health care 
settings (for example, hospital cafeterias or conference rooms), and 
would be prohibited in areas where patients primarily intend to receive 
health care services (for example, waiting rooms and pharmacy counter 
areas). The term ``health care setting'' refers to all settings where 
providers operate, including but not limited to pharmacies, physicians 
offices, hospitals, and long-term care facilities.
    We further propose several regulatory requirements in Sec. Sec.  
422.2268 and 423.2268, providing additional protections to ensure 
beneficiaries are not the victims of inappropriate marketing 
techniques. These include a new requirement in Sec. Sec.  422.2268(b) 
and 423.2268(b) under which organizations would be required to limit 
the types of promotional items offered to potential enrollees (examples 
of acceptable items include pens, pill boxes and jar openers) and the 
value of such items to a nominal amount, established by CMS in 
operational guidance, and may not provide meals, regardless of value. 
(Refreshments are allowed, such as coffee, soft drinks, and snacks.) In 
Sec. Sec.  422.2268(f) and 423.2268(f), we also propose to prohibit the 
cross-selling, in any MA or Part D sales activity or presentation, of 
non-health care-related products to a prospective enrollee. Marketing 
to current plan members of health care and non-health care-related 
products would also remain subject to HIPAA rules. In Sec. Sec.  
422.2268(g) and 423.2268(g), we are proposing to limit any appointment 
with a beneficiary involving marketing of health care-related products 
(for example, whether Medicare supplement, Medicare Advantage, stand-
alone PDP will be discussed) to the scope agreed upon by the 
beneficiary. In advance of any marketing appointment, the beneficiary 
must have the opportunity to agree to the range of choices that will be 
discussed, and that agreement must be documented by the plan. Under 
proposed Sec. Sec.  422.2268(h) and 423.2268(h), additional lines of 
plan business not identified prior to the in-home appointment would 
require a separate appointment that could not be re-scheduled until 48 
hours after the initial appointment. An additional beneficiary 
protection, proposed in Sec. Sec.  422.2268(n) and 423.2268(n), would 
limit the use of names and/or logos of co-branded network providers on 
plan membership and marketing materials. This proposed requirement will 
reduce the tendency of members to mistakenly believe they must use the 
co-branded network provider in order to obtain plan benefits.
vii. Broker and Agent Requirements (Sec. Sec.  422.2274, 423.2274)
    Section 1851(h)(2) of the Act requires us to establish marketing 
standards for Medicare Advantage (MA) plans and under section 1860D-
1(b)(1)(B)(vi) of the Act, Medicare prescription drug benefit plans 
(PDP), to ensure that beneficiaries are not misled or provided 
inaccurate information. Since the passage of the MMA, CMS has not 
specified standards in the regulation pertaining to the way brokers or 
agents (herein after referred to as ``agents'') who are used to market 
MA plans and PDPs are compensated. Currently, the Marketing Guidelines 
allow agent compensation to vary based on the level of effort and the 
plan product type.
    Agents selling MA and PDP products play a significant role in 
providing guidance and advice to beneficiaries when selecting health 
plan options. This unique position allows them to influence beneficiary 
choices. The current compensation structure in the Marketing Guidelines 
has the potential to create a financial incentive for agents to only 
market and enroll beneficiaries in some plan products and not others. 
Based on our experience since the passage of MMA, this compensation 
structure has lead some agents to encourage beneficiaries to enroll in 
products that may not meet the beneficiaries' health needs but pays the 
agents the highest commission. In addition, there is a potential 
financial incentive for agents to encourage beneficiaries to change 
plans each year. Therefore, in order to prevent agents from 
unnecessarily moving beneficiaries from plan to plan and to ensure that 
beneficiaries are receiving the information and counseling necessary to 
select the best plan based on their needs, CMS intends to establish 
guidelines for agent compensation.
    We propose to add Sec. Sec.  422.2274(a)(1) and (a)(2) and 
423.2274(a)(1) and (a)(2) to include these requirements. Specifically 
CMS would require MA organizations and PDP sponsors to adopt a 
commission structure in which:
    <bullet> The commission or other compensation (collectively 
referred to as ``commission'') to an agent or representative in the 
first year may not exceed the commission the agent would receive for 
selling or servicing the policy in all subsequent years.
    <bullet> The commission must be the same for all plans and all plan 
product types offered by the organization's or sponsor's parent. Each 
organization offering MA and MA-PD products must establish a single 
commission that may not vary based on the premium of the plan or any 
other measure and apply this flat fee commission to all products. Each 
sponsor offering PDP products must establish a single commission that 
may not vary based on the premium of the plan or any other measure and 
apply this flat fee commission to all products.
    Additionally, to ensure beneficiaries are getting the information 
necessary to make informed decisions, it is critical that agents are 
trained on Medicare rules, regulations and compliance-related 
information on the plan products they intend to sell. In addition to 
the training, we propose to require that agents pass a written test to 
demonstrate their knowledge of the Medicare program and the plan 
specific products they intend to sell. We expect MA organizations and 
PDP sponsors to develop training modules and written or electronic 
tests based on CMS guidelines. MA organizations and PDP sponsors may 
also use or accept the training modules and written or electronic tests 
of third parties or other MA organizations or PDP sponsors. CMS has 
reviewed sophisticated training and testing software of two major 
entities offering third party testing. The testing software included 
important controls to ensure the integrity of the testing. The testing 
software includes questions developed by test development experts. In 
addition the software has the ability to generate new questions for 
agents that require re-testing. CMS will review the training modules 
and tests during routine or focused monitoring visits. This will ensure 
that agents fully understand the products they are marketing and 
selling, that they are providing accurate plan information and are able 
to provide the best plan recommendations to beneficiaries.

[[Page 28584]]

    We propose to establish guidelines for agent training and testing 
and require, at CMS request, the reporting of marketing related 
information. We propose to include these requirements at Sec. Sec.  
422.2274 and 423.2274. Specifically CMS would--
    <bullet> In 422.2274(b) and 423.2274(b), require MA organizations 
and PDP sponsors to train all agents selling Medicare products on 
Medicare rules, regulations and compliance-related information.
    <bullet> In 422.2274(c) and 423.2274(c), require agents selling 
Medicare products to pass written or electronic tests on Medicare 
rules, regulations and information on the plan products they intend to 
sell.
    <bullet> In 422.2274(d) and 423.2274(d), require MA organizations 
and PDP sponsors to provide to CMS the information designated by CMS as 
necessary to conduct oversight of marketing activities.
    <bullet> In 422.2274(e) and 423.2274(e), require MA organizations 
and PDP sponsors to comply with State requests for information about 
the performance of licensed agents or brokers as part of a State 
investigation into the individual's conduct. CMS will establish and 
maintain a memorandum of understanding (MOU) to share compliance and 
oversight information with States that agree to the MOU.
    We believe these proposed changes would enable beneficiaries to 
receive up-to-date information to help them select the best plan. In 
addition, the proposed changes would ensure that agents receive 
adequate training to market Medicare products, create a standard agent 
compensation structure and eliminate the financial incentives to 
encourage beneficiaries to enroll in a plan that may not be in the 
beneficiaries' best interest.
viii. Employer Group Retiree (Sec. Sec.  422.2276, 423.2276)
    We are making an organizational change for this section consistent 
with our proposal to create a new subpart V of 42 CFR 422 and 423 
specific to marketing regulations. We are removing Sec. Sec.  422.80(f) 
and creating Sec. Sec.  422.2276 and, because the provision applies as 
well to the Part D program, adding new Sec.  423.2276 to Part 423.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

Section 422.4 Types of MA Plans

    Section 422.4(a)(1)(iv)(B) states that MA organizations offering 
disproportionate percentage SNPs must limit new enrollment of non-
special needs members to no more than 10 percent of new enrollees, and 
that at least 90 percent of new enrollees must be special needs 
individuals as defined in Sec.  422.2.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to monitor the percentage of non-
special needs individuals in the SNP and ensure that this level remains 
below the established threshold. It will take one MA organization an 
initial burden of 2 hours to comply with this requirement. Therefore, 
with 176 disproportionate percentage SNPs in the market, the initial 
burden associated with this requirement is 352 hours.
    We estimate it would take one MA organization an additional burden 
of 1 hour/week to comply with this requirement on an ongoing basis for 
a total annual burden of 52 hours/year. We estimate 176 MA 
organizations would be affected annually by this requirement; 
therefore, the total annual burden associated with this requirement is 
9152 hours.

Section 422.52 Eligibility To Elect an MA Plan for Special Needs 
Individuals

    Section 422.52(g) requires a SNP to establish a process to verify 
the Medicaid eligibility and special needs status of an individual 
prior to enrolling the individual in a form and manner specified by 
CMS. This may require collaborative meetings between MA plan staff and 
State Medicaid staff to establish the process. This process could 
include calling the Medicaid eligibility verification system (EVS) and 
reviewing appropriate used to determine an individual's special need.
    The burden associated with this requirement is the time and effort 
put forth by the SNP to establish a process and to verify eligibility. 
We estimate it would take one SNP approximately (4680 minutes/78 hours) 
to comply with this requirement. The total number of respondents 
affected would be 776 SNPs; therefore, the total annual burden is 
estimated to be 60,000 hours.

Section 422.60 Election Process

    Section 422.60(g)(2) requires the organization that receives the 
enrollment to provide notification that describes the costs and 
benefits of the plan and the process for assessing care under the plan. 
The notification must be provided to all potential enrollees prior to 
the enrollment effective date (or as soon as possible after the 
effective date if prior notice is not practical), in a form and manner 
determined by CMS. Providing notification may include mailing a 
brochure or fact sheet with the aforementioned information and 
contacting potential enrollees to respond to any questions regarding 
the mailer.
    The burden associated with this requirement is the time and effort 
put forth by the organization to provide notification that meets the 
requirements specified by CMS. We estimate it would take one MA (30 
minutes/.5 hours) to comply with this requirement. The total number of 
organizations affected is 5; therefore, total annual burden hours 
associated with the requirement is 2.5 hours.

Section 422.101 Requirements Relating to Basic Benefits

    Section 422.101(f)(1) states that MA organizations offering special 
needs plans must have a model of care plan specifying how the plan will 
coordinate and deliver care designed for the plan's enrollees. The 
model of care plan would be developed by the deliberations of the 
appropriate staff of the MA organization and maintained in a written 
document.
    The burden associated with this requirement is the time and effort 
put forth by the special needs plans to establish a model that meets 
the requirements specified under Section 422.101(f)(1). We estimate it 
would take one special needs plan 24 hours for six months to meet this 
requirement. We estimate 335 special needs plans would be affected by 
this requirement annually; therefore, the total annual burden 
associated with the requirement is 8,040 hours.

[[Page 28585]]

Section 422.103 Benefits Under an MA MSA Plan

    Section 422.103(e) requires all MA organizations offering MSA plans 
to provide enrollees with available information on the cost and quality 
of services in their service area, and to submit to CMS for approval a 
proposed approach to providing such information. The burden associated 
with this requirement is the time and effort put forth by the MA 
organization offering MSA plans to provide information to enrollees and 
to submit the proposed approach to providing such information to CMS. 
About 3,300 Medicare beneficiaries are enrolled in Medicare MSA plans 
in 2008.
    We expect that the burden upon health plans to develop cost and 
quality data for use by MSA enrollees would depend upon what data is 
available in their area. As stated in the preamble, we expect that 
organizations that already have mechanisms in place in connection with 
their commercial lines of business for providing their beneficiaries 
with cost or quality information could offer similar services to 
Medicare beneficiaries. We estimate that 20 MA plans may wish to 
participate as MSAs in 2009, which would be double the number 
participating in 2008.
    We estimate the burden associated with this requirement in term of 
time and effort necessary for the plan to develop the information and 
to submit this information to CMS as a start-up cost of 100 hours per 
plan to develop this information for a total of 2,000 hours in the 
first year the plan participates as an MSA plan, with half of that cost 
occurring in subsequent years for plans to maintain and update this 
information. In addition, expected additional entry by plans in future 
years would add start-up costs in the initial year that plans enter.

Section 422.107 Special Needs Plans and Dual Eligibles: Arrangements 
With States

    Section 422.107(a) states that an MA organization seeking to offer 
or currently offering a special needs plan primarily serving 
beneficiaries eligible for both Medicare and Medicaid (dual eligible 
SNPs) must have a documented relationship with the State Medicaid 
agency for the State in which the SNP is operating. At a minimum, 
documented arrangements must include the means to (1) verify enrollees' 
eligibility for both Medicare and Medicaid, identify and share 
information on Medicaid provider participation, and (3) identify 
Medicaid benefits which are not covered by Medicare. Medicare Advantage 
organizations and the respective states may choose to document their 
relationship in a variety of ways, such as a memorandum of agreement 
(MOA), a memorandum of understanding (MOU), or a contract.
    The burden associated with this requirement is the time and effort 
put forth by each special needs plan to have a documented relationship. 
We estimate it would take one special needs plan 18 hours for 6 months 
to comply with this requirement. We estimate 460 special needs plans 
would be affected annually by this requirement; therefore, the total 
annual burden associated with this requirement is 8,280 hours.

Section 422.504 Contract Provisions

    Section 422.504(g)(1) states that each MA organization must adopt 
and maintain arrangements satisfactory to CMS to protect its enrollees 
from incurring liability for payment of fees that are the legal 
obligation of the MA organization. This may be done by the 
establishment of identified liaison staff of the MA plan and the State 
Medicaid agency, and by conducting regular meetings for the purpose of 
enrollee review.
    The burden associated with this requirement is the time and effort 
put forth by the MA plan to adopt and maintain arrangements. We 
estimate it would take one MA plan 208 hours to comply with this 
requirement. We estimate 3400 plans would be affected annually by this 
requirement; therefore, the total annual burden associated with this 
requirement is 707,200 hours.

Section 422.2260 Definitions

    Section 422.2260 defines the marketing materials that an MA 
organization must provide to Medicare beneficiaries. While there is 
burden associated with this requirement, we feel the burden associated 
with these requirements is exempt from the requirements of the 
Paperwork Reduction Act of 1995 (PRA) as defined in 5 CFR 1320.3(b)(2) 
because the time, effort, and financial resources necessary to comply 
with the requirement would be incurred by persons in the normal course 
of their activities.

422.2262 Review and Distribution of Marketing Materials

    Section 422.2262(a)(1)(i) states that at least 45 days before the 
date of distribution the MA organization submits the material or form 
to CMS for review under guidelines in Section 422.2264 of this Part. 
This may require the development of written marketing materials used to 
promote an organization, provide enrollment information, and explain 
benefits, rules or various membership operational policies.
    The burden associated with this is the time and effort put forth by 
the MA organization to submit the material to CMS for review. We 
estimate it would take one MA organization 720 minutes/12 hours to 
comply with this requirement. We estimate 670 MA organizations would be 
affected annually by this requirement; therefore, the total annual 
burden associated with this requirement is 8,040 hours.
    Section 422.2262(b) requires the MA organization to certify that in 
the case of these certain marketing materials designated by CMS, it 
followed all applicable marketing guidelines when applicable or used 
model language specified by CMS without modification.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to provide such certification. While 
there is burden associated with this requirement, we feel the burden 
associated with these requirements is exempt from the requirements of 
the Paperwork Reduction Act of 1995 (PRA) as defined in 5 CFR 
1320.3(h)(1).

Section 422.2264 Guidelines for CMS Review and Notification

    Section 422.2264 states that in reviewing marketing material or 
election forms under Sec.  422.2262 of this Part, CMS determines that 
the marketing materials provide, in a format (and, where appropriate, 
print size), and using standard terminology that may be specified by 
CMS, the following information to Medicare beneficiaries interested in 
enrolling:
    (a) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (b) Adequate written description of any supplemental benefits and 
services.
    (c) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (d) Any other information necessary to enable beneficiaries to make 
an informed decision about enrollment.
    (e) Notify the general Public of its enrollment period in an 
appropriate manner, through appropriate media, throughout its service 
and if applicable, continuation areas.
    (f) Includes in the written materials notice that the MA 
organization is authorized by law to refuse to renew its contract with 
CMS, that CMS also may

[[Page 28586]]

refuse to renew the contract, and that termination or non-renewal may 
result in termination of the beneficiary's enrollment in the plan.
    (g) Are not materially inaccurate or misleading or otherwise make 
material misrepresentations.
    (h) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.
    The burden with these guidelines is the time and effort put forth 
by the MA organization to provide adequate written descriptions of 
rules, of any supplemental benefits and services, explanation of the 
grievance and appeals process, and any other information necessary to 
enable beneficiaries to make an informed decision about enrollment. It 
also requires the MA organization to notify the general public of its 
enrollment period in an appropriate manner and include in the written 
materials notice that the MA organization is authorized by law to 
refuse to renew its contract with CMS. While there is burden associated 
with this requirement, we feel the burden associated with these 
requirements is exempt from the requirements of the Paperwork Reduction 
Act of 1995 (PRA) as defined in 5 CFR 1320.3(b)(2) because the time, 
effort, and financial resources necessary to comply with the 
requirement would be incurred by persons in the normal course of their 
activities.

Section 422.2268 Standards for MA Organization Marketing

    Section 422.2268(g) states MA organizations cannot market any 
health care related product during a marketing appointment beyond the 
scope agreed upon by the beneficiary, and documented by the plan, prior 
to the appointment.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to document a beneficiary's signed 
acknowledgement confirming the specific types of choices that the 
marketing representative is authorized to discuss. While there is 
burden associated with this requirement, we feel the burden associated 
with these requirements is exempt from the requirements of the 
Paperwork Reduction Act of 1995 (PRA) as defined in 5 CFR 1320.3(b)(2) 
because the time, effort, and financial resources necessary to comply 
with the requirement would be incurred by persons in the normal course 
of their activities.

Section 422.2272 Licensing of Marketing Representatives and 
Confirmation of Marketing Resources

    Section 422.2272(b) states that an MA organization must establish 
and maintain a system for confirming that enrolled beneficiaries have, 
in fact, enrolled in the MA plan and understand the rules applicable 
under the plan.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to establish and maintain such a 
system. While there is burden associated with this requirement, we feel 
the burden associated with these requirements is exempt from the 
requirements of the Paperwork Reduction Act of 1995 (PRA) as defined in 
5 CFR 1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with the requirement would be incurred by persons 
in the normal course of their activities.

Section 422.2274 Broker and Agent Commissions and Training of Sales 
Agents

    Section 422.2274(b) states that if a MA organization markets 
through independent brokers or agents, they must train and test agents 
selling Medicare products concerning Medicare rules and regulations 
specific to the plan products they intend to sell.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to provide training and test agents. 
While there is burden associated with this requirement, we feel the 
burden associated with these requirements is exempt from the 
requirements of the Paperwork Reduction Act of 1995 (PRA) as defined in 
5 CFR 1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with the requirement would be incurred by persons 
in the normal course of their activities.
    Section 422.2274(d) states that upon CMS's request, the MA 
organization must provide CMS the information necessary for it to 
conduct oversight of marketing activities. This may require producing 
information for CMS on marketing materials submitted for review or file 
and use of training and testing modules.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to produce the information requested 
by CMS. We estimate it would take one MA organization (480 minutes/8 
hours) to comply with this requirement. We estimate 670 MA 
organizations would be affected annually by this requirement; 
therefore, the total annual burden associated with this requirement is 
5,360 hours.
    Section 422.2274(e) states that MA organizations must comply with 
State requests for information about the performance of a licensed 
agent or broker as part of a state investigation into the individual's 
conduct.
    The burden associated with this requirement is the time and effort 
put forth by the MA organization to comply with the State requests for 
information. While there is burden associated with this requirement, we 
feel the burden associated with these requirements is exempt from the 
requirements of the Paperwork Reduction Act of 1995 (PRA) as defined in 
5 CFR 1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with the requirement would be incurred by persons 
in the normal course of their activities.

Section 423.34 Enrollment of Full-benefit Dual Eligible Individuals

    Section 423.34(g)(2) states that the organization that receives the 
enrollment must provide notification that describes the costs and 
benefits of the new plan and the process for accessing care under the 
plan and their ability to decline the enrollment or choose another 
plan. Such notification must be provided to all potential enrollees 
prior to the enrollment effective date, in a form and manner determined 
by CMS.
    The burden associated with this requirement is the time and effort 
put forth by the organization to provide such notification. We estimate 
it would take one organization 207 hours to comply with this 
requirement. We estimate 42 organizations would be affected annually by 
this requirement; therefore, the total annual burden associated with 
this requirement is 8700 hours.

Section 423.46 Late Enrollment Penalty

    Section 423.46(b) states that Part D sponsors must obtain 
information on prior creditable coverage from all enrolled or enrolling 
beneficiaries and report this information to CMS in a form and manner 
determined by CMS.
    The burden associated with this requirement is the time and effort 
put forth by the Part D sponsor to obtain the required information. To 
comply with this requirement, Part D sponsors would expend 15 minutes 
per new Part D enrollee. We estimate that there will be approximately 
500,000 new Part D enrollees. Therefore the total annual burden 
associated with this requirement

[[Page 28587]]

will be 125,000 hours/7,500,000 minutes for all enrollees.
    Section 423.46(d) requires the Part D plan sponsor to retain all 
information collected concerning a credible coverage period 
determination in accordance with the enrollment records retention 
requirements described in subpart K, Sec.  423.505(e)(1)(iii).
    The burden associated with this requirement is the time and effort 
put forth by the Part D plan sponsor to retain the required 
information. To comply with this requirement, Part D sponsors would 
expend 5 minutes per new Part D enrollee. There are approximately 
500,000 enrollees. We estimate the total annual burden associated with 
this requirement will be 41,667 hours/2,500,000 minutes for all new 
Part D enrollees.

Section 423.505 Contract Provisions

    Section 423.505(k)(5) states that the Chief Executive Officer, 
Chief Financial Officer, or an individual delegated the authority to 
sign on behalf of one of these officers, and who reports directly to 
the officer, must certify that the information provided is accurate, 
complete, and truthful and fully conforms to the requirements in 
Sec. Sec.  423.336 and 423.343 and acknowledge that this information 
will be used for the purposes of obtaining Federal reimbursement. While 
there is burden associated with this requirement, we feel the burden 
associated with these requirements is exempt from the requirements of 
the Paperwork Reduction Act of 1995 (PRA) as defined in 5 CFR 
1320.3(h)(1).

Section 423.580 Right to a Redetermination

    Section 423.580 provides information on the ways for an enrollee to 
seek a redetermination. The burden associated with a reconsideration is 
exempt from the PRA as stipulated under 5 CFR 1320.4.

Section 423.2262 Review and Distribution of Marketing Materials

    Section 423.2262(a)(1)(i) requires the Part D sponsor to submit the 
marketing material or form to CMS for review under the guidelines in 
Sec.  423.2264. This may require the development of written marketing 
materials used to promote an organization, provide enrollment 
information, and explain benefits, rules or various membership 
operational policies.
    The burden associated with these requirements is the time and 
effort put forth by the Part D sponsor to submit the marketing 
materials to CMS and to provide certification. We estimate it would 
take one Part D sponsor (720 minutes/12 hours) to comply with this 
requirement. We estimate 87 Part D sponsors would be affected annually 
by this requirement; therefore, the total annual burden associated with 
this requirement is 1044 hours.

Section 423.2264 Guidelines for CMS Review and Notification

    Section 423.2264 reads that in reviewing marketing material or 
enrollment forms under Sec.  423.2262, CMS determines (unless otherwise 
specified in additional guidance) that the marketing materials provide, 
in a format (and, where appropriate, print size), and using standard 
terminology that may be specified by CMS, the following information to 
Medicare beneficiaries interested in enrolling must consist of:
    (a) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (b) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (c) Any other information necessary to enable beneficiaries to make 
an informed decision about enrollment.
    (d) Notify the general public of its enrollment period in an 
appropriate manner, through appropriate media, throughout its service 
area.
    (e) Include in the written materials notice that the Part D plan is 
authorized by law to refuse to renew its contract with CMS, that CMS 
also may refuse to renew the contract, and that termination or non-
renewal may result in termination of the beneficiary's enrollment in 
the Part D plan. In addition, the Part D plan may reduce its service 
area and no longer be offered in the area where a beneficiary resides.
    (f) Are not materially inaccurate or misleading or otherwise make 
material misrepresentations.
    (g) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.
    The burden with these guidelines is the time and effort put forth 
by the Part D plan to provide adequate written descriptions of rules, 
of the grievance and appeals process, and any other information 
necessary to enable beneficiaries to make an informed decision about 
enrollment. It also requires the Part D plan to notify the general 
public of its enrollment period in an appropriate manner and include in 
the written materials notice that the Part D plan is authorized by law 
to refuse to renew its contract with CMS. While there is burden 
associated with this requirement, we feel the burden associated with 
these requirements is exempt from the requirements of the Paperwork 
Reduction Act of 1995 (PRA) as defined in 5 CFR 1320.3(b)(2) because 
the time, effort, and financial resources necessary to comply with the 
requirement would be incurred by persons in the normal course of their 
activities.

Section 423.2272 Licensing of Marketing Representatives and 
Confirmation of Marketing Resources

    Section 423.2272(b) requires the Part D organization to establish 
and maintain a system for confirming that enrolled beneficiaries have 
in fact enrolled in the PDP and understand the rules applicable under 
the plan.
    The burden associated with this requirement is the time and effort 
put forth by the Part D sponsor to establish and maintain such a 
system. While there is burden associated with this requirement, we feel 
the burden associated with these requirements is exempt from the 
requirements of the Paperwork Reduction Act of 1995 (PRA) as defined in 
5 CFR 1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with the requirement would be incurred by persons 
in the normal course of their activities.

Section 423.2268 Standards for Part D Marketing

    Section 423.2268(g) states Part D organizations cannot market any 
health care related product during a marketing appointment beyond the 
scope agreed upon by the beneficiary, and documented by the plan, prior 
to the appointment.
    The burden associated with this requirement is the time and effort 
put forth by the Part D organization to document a beneficiary's signed 
acknowledgement confirming the specific types of choices that the 
marketing representative is authorized to discuss. While there is 
burden associated with this requirement, we feel the burden associated 
with these requirements is exempt from the requirements of the 
Paperwork Reduction Act of 1995 (PRA) as defined in 5 CFR 1320.3(b)(2) 
because the time, effort, and financial resources necessary to comply 
with the requirement would be incurred by persons in the normal course 
of their activities.

[[Page 28588]]

Section 423.2274 Broker and Agent Commissions and Training of Sales 
Agents

    Section 423.2274(b) requires the Part D sponsor to train and test 
agents selling Medicare products concerning Medicare rules and 
regulations specific to the plan products they intend to sell.
    The burden associated with this requirement is the time and effort 
put forth by the Part D sponsor to provide training and test agents. 
While there is burden associated with this requirement, we feel the 
burden associated with these requirements is exempt from the 
requirements of the Paperwork Reduction Act of 1995 (PRA) as defined in 
5 CFR 1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with the requirement would be incurred by persons 
in the normal course of their activities.
    Section 423.2274(d) states that upon CMS's request, the Part D 
sponsor must provide CMS the information necessary for it to conduct 
oversight of marketing activities. This may require producing 
information for CMS on marketing materials submitted for review or file 
and use and training and testing modules.
    The burden associated with this requirement is the time and effort 
put forth by the Part D sponsor to produce the information requested by 
CMS. We estimate it would take one Part D sponsor (480 minutes/8 hours) 
to comply with this requirement. We estimate 87 Part D sponsors would 
be affected annually by this requirement; therefore, the total annual 
burden associated with this requirement is 696 hours.
    Section 423.2274(e) states that Part D organizations must comply 
with State requests for information about the performance of a licensed 
agent or broker as part of a state investigation into the individual's 
conduct.
    The burden associated with this requirement is the time and effort 
put forth by the Part D organization to comply with the State requests 
for information. While there is burden associated with this 
requirement, we feel the burden associated with these requirements is 
exempt from the requirements of the Paperwork Reduction Act of 1995 
(PRA) as defined in 5 CFR 1320.3(b)(2) because the time, effort, and 
financial resources necessary to comply with the requirement would be 
incurred by persons in the normal course of their activities.
    Please note, CMS will revise the currently OMB approved PRA 
packages that contain Part 422--Medicare Advantage Program and Part 
423--Voluntary Medicare Prescription Drug Benefit to include any new 
and/or revised burden requirements. The OMB approval numbers for those 
PRA packages are 0938-0753 and 0938-0964.
    As reflected in the table that follows, the aggregate annual burden 
associated with the collection of information section for this proposed 
rule totals 985,527.5 hours.

----------------------------------------------------------------------------------------------------------------
                                                                                                   Total annual
                OMB No.                       Requirements           Number of     Burden hours     burden (in
                                                                    respondents                       hours)
----------------------------------------------------------------------------------------------------------------
                                        422.4(a)................             176              54           9,504
0938-0753.............................  422.52(g)...............             776              78          60,000
0938-0753.............................  422.60(g)(2)............               5              .5             2.5
0938-0753.............................  422.101(f)(1)...........             335              24           8,040
0938-0753.............................  422.103(e)..............              20             100           2,000
0938-0753.............................  422.107(a)..............             460              18           8,280
0938-0753.............................  422.504(g)(1)...........            3400             208         707,200
None/Exempt...........................  422.2260................             N/A             N/A             N/A
0938-0753.............................  422.2262(a)(1)(i).......             670              12           8,040
0938-0753.............................  422.2262(b).............             N/A             N/A             N/A
0938-0753.............................  422.2264(a-e)...........             N/A             N/A             N/A
0938-0753.............................  422.2268(g).............             N/A             N/A             N/A
0938-0753.............................  422.2272(b).............             N/A             N/A             N/A
0938-0753.............................  422.2274(b)(e)..........             N/A             N/A             N/A
0938-0753.............................  422.2274(d).............             670               8           5,360
0938-0964.............................  423.34(g)(2)............              42             207           8,694
0938-0964.............................  423.46(b)...............         500,000         (\1\)15         125,000
0938-0964.............................  423.46(d)...............         500,000          (\1\)5          41,667
None/Exempt...........................  423.505(k)(5)...........             N/A             N/A             N/A
None/Exempt...........................  423.580.................             N/A             N/A             N/A
0938-0964.............................  423.2262(a)(1)(i).......              87              12           1,044
0938-0964.............................  423.2264(a-e)...........             N/A             N/A             N/A
0938-0964.............................  423.2268(g).............             N/A             N/A             N/A
0938-0964.............................  423.2272(b).............             N/A             N/A             N/A
0938-0964.............................  423.2274(b)(e)..........             N/A             N/A             N/A
0938-0964.............................  423.2274(d).............              87               8             696
                                       -------------------------------------------------------------------------
    Total aggregate burden............  ........................  ..............  ..............       985,527.5
----------------------------------------------------------------------------------------------------------------
\1\ In minutes.

    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Mail copies to the address specified in the ADDRESSES section of 
this proposed rule and to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503, Attn: Carolyn Lovett, CMS Desk 
Officer, CMS-4131-P <a href="/cdn-cgi/l/email-protection#9cfffdeef3f0e5f2c3f0f3eaf9e8e8dcf3f1feb2f9f3ecb2fbf3ea"><span class="__cf_email__" data-cfemail="086b697a676471665764677e6d7c7c4867656a266d6778266f677e">[email protected]</span></a>. Fax (202) 395-6974.

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all

[[Page 28589]]

comments we receive by the date and time specified in the DATES section 
of this preamble, and, when we proceed with a subsequent document, we 
will respond to the comments in the preamble to that document.

V. Regulatory Impact Analysis

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on 
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as amended) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
We estimate that this proposed rule is ``economically significant'' as 
measured by the $100 million threshold, and hence a major rule under 
the Congressional Review Act. Accordingly, we have prepared a 
Regulatory Impact Analysis. The provisions in this proposed rule would 
require MA organizations and Part D sponsors to spend a total of 
approximately 985,527.5 additional hours on the functions addressed, 
reflecting a cost of $45,940,906. In addition, the provisions 
associated with our proposed revision to the beneficiary cost sharing 
and reinsurance subsidy payments are estimated to cost $30 million for 
FY 2010 and $530 million for FYs 2010 through 2018. The provisions 
impacting which drug costs are reported to CMS under the Retiree Drug 
Subsidy (RDS) program and used as the basis for calculating RDS 
payments to RDS plan sponsors would result in estimated savings of $30 
million for FY 2010 and $510 million for FYs 2010 through 2018. We 
solicit public comment on the regulatory impact analysis of this 
proposed rule.
    We use, as appropriate, the figures of $14.68 (based on the United 
States Department of Labor (DOL) statistics for the hourly wages of 
word processors and typists) and $37.15 (based on DOL statistics for a 
management analyst) \3\ plus the added OMB figures of 12 percent for 
overhead and 36 percent for benefits, respectively, to represent 
average costs to plans, sponsors and downstream entities for the 
provisions discussed in this proposed rule with comment period. (Note 
that the wages cited for the provisions below include the hourly wage + 
an additional 48 percent to reflect overhead, benefit costs for total 
wages of $21.73 and $54.98, respectively). Using these figures the 
total net cost of our proposals would be approximately $45,940,906. 
This cost would be spread more or less evenly across participating 
plans, and hence would impose negligible burden on any plan in relation 
to existing administrative costs.
---------------------------------------------------------------------------

    \3\ The hourly rates for the burden requirement were developed 
using the Department of Labor, Bureau of Labor Statistics for May 
2006 (National Occupational Employment and Wage Estimates).
---------------------------------------------------------------------------

    In the Regulatory Impact Analysis of the January 28, 2005 final 
rule (70 FR 4695) revising the Medicare Advantage program, we noted 
that costs associated with the MA program would be approximately $18.3 
billion from 2004 through 2009, 10 percent of which we estimated would 
be administrative costs. The rule establishing the prescription drug 
benefit program published on January 28, 2005 (70 FR 4194) made a 
similar calculation in its Regulatory Impact Statement. Accordingly, 
the estimated cost of this proposed rule adds negligibly to the total 
administrative costs of the MA or Part D programs.
    With respect to economic benefits, we have no reliable basis for 
estimating the effects of these proposals. Many of the proposed changes 
clarify or codify existing policies though such clarification could 
contribute to greater plan efficiency and compliance with program 
regulations. Accordingly, we estimate that while there could be 
economic benefits associated with these proposals, they are difficult 
to gauge at this time.
    Because there are costs to plans and sponsors associated with 
several provisions of this proposed rule, however, we indicate general 
areas affected and specify the costs associated with these. For 
specific burden associated with the proposed requirements and the bases 
for our estimates, see section III, Collection of Information 
Requirements, of this rule. Note that we discuss separately, at the end 
of this section, provisions associated with our proposed revision to 
the Part D definitions (discussed in section II.B.3 of this proposed 
rule).

Special Needs Plans

    Several of our proposed provisions concern special needs plans and 
strengthening coordination between plans and States to better 
coordinate care, verify that individuals in dual eligible SNPs are 
eligible for Medicare, and to ensure that enrollees are not charged for 
costs that are the responsibility of the State. In addition, we are 
proposing that MA plans develop models of care that are specifically 
targeted to the special needs individuals served by their plans. We 
estimate the total cost of these provisions as $2,718,104. Costs for 
each provision are as follows:
    <bullet> Verification of Medicaid eligibility or SNP status prior 
to beneficiary enrolling ($21.73 x 60,000 hours = $1,303,800).
    <bullet> Developing models of care ($54.98 x 8,040 hours = 
$442,039).
    <bullet> Documenting arrangements with States ($54.98 x 8,280 hours 
= $455,234).
    <bullet> Monitoring enrollment to meet disproportionate share 
thresholds ($54.98 x 9,404 hours = $517,031).

Medicare Medical Savings Accounts (MSAs)

    Costs associated with this proposed provision are for reporting 
cost and quality information about the plans to enrollees. We estimate 
the total cost of these provisions as $109,960 ($54.98 x 2,000 hours) 
for the first year a plan provides such information, and half that cost 
in subsequent years to maintain and update the information.

Enrollment

    We are proposing requirements concerning Part D sponsor 
notification of full benefit dual eligible beneficiaries about 
enrollment options in addition to automatic enrollment, and would 
require that Part D sponsors obtain from Part D plan enrollees or those 
considering enrolling information concerning prior creditable coverage, 
and retain information collected concerning creditable coverage period 
determinations. We estimate the total cost of these provisions as 
$42,692,449. The costs for specific provisions are as follows:
    <bullet> Notifying dual eligible beneficiaries of enrollment 
options in addition to automatic enrollment ($21.73 x 8,694 hours = 
$188,920).
    <bullet> Obtaining prior creditable coverage information ($21.73 x 
125,000 hours = $2,716,250).
    <bullet> Retaining prior creditable coverage information ($21.73 x 
41,667 hours = $905,423).

[[Page 28590]]

    <bullet> Ensuring through provider contracts that dual eligible 
beneficiaries are not held liable for costs that are not their 
responsibility ($54.98 x 707,200 hours = $38,881,856).

Marketing

    We are proposing several marketing provisions that would enhance 
our efforts to ensure that plans comply with all marketing 
requirements. The proposed provisions include requiring plans to submit 
marketing materials to CMS for review, and provide, for CMS oversight 
purpose, information to CMS concerning marketing activities. We 
estimate the total costs (MA and Part D programs) of these provisions 
as $530,353. Costs for each provision, in the context of each program, 
are as follows:
    <bullet> Submission of marketing materials, MA program ($21.73 x 
8,040 hours = $174,709).
    <bullet> Training and testing of agents selling Medicare products, 
MA program ($54.98 x 5,360 hours = $294,692).
    <bullet> Submission of marketing materials, Part D ($21.73 x 1,044 
hours = $22,686).
    <bullet> Training and testing of agents selling Medicare products, 
Part D ($54.98 x 696 hours = $38,266).
    The RFA requires that we discuss any alternatives considered. Many 
of the proposed provisions would clarify or codify current policy which 
we discuss in section II, Provisions of the Proposed Regulations. As 
such, we considered whether or not the cost to codify these policies 
outweighed the need to do so. With one possible exception, we 
determined that the cost to plans and sponsors to clarify and codify 
our policies would be minimal and outweighed the minimal costs to 
implement these.
    With respect to our proposed provisions concerning Medicare medical 
savings account plans, we considered the costs to plans of providing 
cost and quality information. As we discuss in more detail in section 
II, we believe that such information is readily available to most MSA 
plans and that, as a result, it would not be an undue burden on plans 
to provide such information. We would like more information on this 
subject, however, and have specifically asked for comments on this 
proposed provision.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6.5 million to $31.5 million in any 1 year. Individuals and States are 
not included in the definition of a small entity. MA organizations and 
Part D sponsors, the only entities that would be affected by the 
proposed provisions, are not generally considered small business 
entities. They must follow minimum enrollment requirements (5,000 in 
urban areas and 1,500 in non-urban areas) and because of the revenue 
from such enrollments generally are above the revenue threshold 
required for analysis. While a very small rural plan could fall below 
the threshold, we do not believe that there are more than a handful of 
such plans.
    A fraction of MA organizations and sponsors are considered small 
businesses because of their non-profit status. For an analysis to be 
necessary, however, 3-5 percent of their revenue would have to be 
affected by the proposed provisions. We do not believe that any of 
these provisions rise to that threshold. Many of the provisions we are 
proposing, for example, are clarifications of existing policy or 
require minimal costs. Because MA organizations and Part D sponsors are 
the only entities that would be affected by the proposed provisions and 
because of the minimal costs necessary to implement the proposed 
provisions, we are not preparing an analysis for the RFA because we 
have determined, and the Secretary certifies, that this proposed rule 
would not have a significant economic impact on a substantial number of 
small entities.
    With respect to the proposed revision to the Part D definitions, we 
do not expect a significant impact on small businesses, such as small 
pharmacies, as a result of changes to the definitions under Part D of 
negotiated prices, gross covered drug costs, and allowable risk 
corridor costs in this proposed rule. These changes would primarily 
impact which drug costs are reported to us and how plans calculate 
beneficiary cost sharing. Moreover, we assume they would require 
minimal, if any, changes in health plan, PBM and pharmacy operational 
systems. We solicit comments on this assumption. Even with the changes 
to the way in which beneficiary cost sharing is calculated resulting 
from these definition changes, health plans will still be required to 
ensure that pharmacies receive their contracted rate. We believe that 
health plans would account for any additional costs associated with the 
change in the way beneficiary costs are calculated in their Part D 
bids. As a result, we expect that these changes would increase Part D 
bids and Federal Government payments such that the total impact for FY 
2010 through 2018 is $530 million. However, we do not expect these 
changes to significantly increase health plan costs. Table 1 presents 
the costs associated with the change in the beneficiary costs for FYs 
2010-2018.

                                                 Table 1.--Increase in Subsidy Payments for FY 2010-2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                   FYs
                                                                FY 2010  FY 2011  FY 2012  FY 2013  FY 2014  FY 2015  FY 2016  FY 2017  FY 2018  2010-18
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in Subsidy Payments (millions).......................      $30      $40      $50      $50      $60      $60      $70      $80      $90     $530
--------------------------------------------------------------------------------------------------------------------------------------------------------

    With respect to the proposed changes impacting which drug costs are 
reported to CMS and how Part D plans calculate beneficiary cost-
sharing, we believe that the impact on pharmacies would be minimal, as 
the total compensation received by pharmacies should remain unaffected. 
However, Part D plans would need to include administrative costs paid 
to PBMs, which were previously included as drug costs, as 
administrative cost in their bids. They would also need to factor 
reductions in beneficiary cost sharing and reinsurance subsidy payments 
into their bids. The reductions in beneficiary cost sharing are 
expected to outweigh the estimated increase in costs to the Federal 
Government. The changes in beneficiary cost sharing and reinsurance 
subsidy payments are expected to increase Part D bids due to increased 
plan liability and therefore, would increase the direct subsidy 
payments made by the Federal Government to health plans. The proposed 
changes regarding which the reporting of drug costs are also expected 
to reduce the reinsurance payments and low-income cost sharing subsidy 
payments made by the Federal Government. We estimate the net cost of 
these changes to be $30 million for FY 2010 and $530 million for FYs 
2010

[[Page 28591]]

through 2018. These estimated costs reflect an increase in the direct 
subsidy payments made by the Federal Government and are net reductions 
in Federal reinsurance payments and low-income cost sharing subsidy 
payments. These estimated costs are based on the assumption that 
overall program costs would remain the same. They do not include any 
potential reductions in plan administrative costs due to the ability of 
plan sponsors to negotiate lower administrative fees with PBMs as a 
result of increased transparency in drug prices.
    In addition, we expect that the proposed clarifications may require 
a small number of Part D sponsors to renegotiate their contracts with 
their PBMs to account for system changes to reflect the appropriate 
beneficiary cost sharing. We believe that most PBMs would be unaffected 
by the changes in the reporting drug costs reported and the calculation 
of beneficiary cost sharing. Thus, we expect that the financial impact 
of the proposed rule on PBMs would be minimal.
    With respect to the proposed changes impacting which drug costs are 
reported to CMS under the Retiree Drug Subsidy (RDS) program and used 
as the basis for calculating RDS payments to RDS plan sponsors, this 
will result in savings to the RDS program since gross costs and 
allowable retiree costs may, until this proposed regulation becomes 
effective, include amounts paid by the plan to a PBM for Part D drugs 
that differ from the amounts paid by the PBM to pharmacies for these 
drugs (typically called a ``risk premium'' or ``PBM spread''). The 
proposed revised definitions of administrative costs, gross retiree 
costs and allowable retiree costs would exclude these risk premium 
payments from the calculation of RDS payments.
    The estimated impact of applying the proposed changes is a savings 
of $510 million for fiscal years 2010 through 2018, as detailed in 
Table 2. To calculate these savings estimates, we multiplied our 
assumption for the number of affected beneficiaries in RDS by an 
estimated per capita drug cost impact and the statutorily-required 28 
percent RDS subsidy percentage. Our estimate for the number of affected 
beneficiaries in RDS is based on the number of RDS beneficiaries 
assumed to be enrolled in affected RDS plans. In addition, this 
estimate assumes that only those RDS beneficiaries with drug spending 
between the cost threshold and the cost limit would be impacted by the 
proposed change. The proposed change would not affect Plan Sponsors 
with regard to those individuals below the threshold. With regard to 
those above the cost limit, a Plan Sponsor generally is eligible for a 
set amount of subsidy based on the amount of drug costs between the 
threshold and the limit, regardless of how much above the limit the 
individual's drug costs are, and regardless of whether pass through or 
lock in is used. Therefore, the proposed change generally would not 
affect Plan Sponsors with regard to individuals above the cost limit. 
We estimated the drug cost impact of switching from lock-in pricing to 
pass through pricing based on current estimates for 2006 Part D plans. 
We used the estimated impact for Part D plans because RDS specific 
information is not currently available to develop this estimate. We 
welcome comments on the assumptions used to develop the savings 
estimates from applying the revised definitions to the RDS program. In 
addition, we expect that the proposed rule's clarifications may result 
in some plan sponsors incurring nominal additional administrative costs 
in revising cost reporting methods.

                                                   Table 2.--Decrease in RDS Payments for FY 2010-2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               FYs 2010-
                                                              FY 2010  FY 2011  FY 2012  FY 2013  FY 2014  FY 2015  FY 2016  FY 2017  FY 2018     2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
Decrease in RDS Payments by the Federal Government (in            $30      $40      $50      $50      $60      $60      $70      $70      $80      $510
 millions)..................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. We are not preparing an 
analysis for section 1102(b) of the Act because we have determined, and 
the Secretary certifies, that this proposed rule would not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year by 
State, local or tribal governments, in the aggregate, or by the private 
sector of $100 million in 1995 dollars, updated annually for inflation. 
That threshold level is currently approximately $130 million. This rule 
would have no consequential effect on State, local, or tribal 
governments or on the private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This rule would not have a substantial direct effect on 
State or local governments, preempt States, or otherwise have a 
Federalism implication.

Alternatives Considered

    As discussed earlier, many of the proposed provisions would clarify 
or codify current policy which we discuss in section II, Provisions of 
the Proposed Regulations. As such, we considered whether or not the 
cost to codify these policies outweighed the need to do so. With one 
possible exception, we determined that the cost to plans and sponsors 
to clarify and codify our policies would be minimal and outweighed the 
minimal costs to implement these provisions.
    With respect to our proposed provisions concerning Medicare medical 
savings account plans, we considered the costs to plans of providing 
cost and quality information. As we discuss in more detail in section 
II, we believe that the information is readily available to most MSA 
plans and that, as a result, it would not be an undue burden on plans 
to provide the information. We would like more information on this 
subject, however, and have specifically asked for comments on this 
proposed provision.

[[Page 28592]]

    With respect to the proposed changes to the drug cost-related 
definitions in the Part D and Retiree Drug Subsidy (RDS) programs, we 
have discussed the two alternatives at length in the preamble section. 
The two alternatives are (1) the current approach of allowing both 
pass-through and lock-in prices, and (2) the proposed approach of 
permitting only pass-through prices as the basis for Part D and RDS 
costs. As we discuss in section II.B, we believe there may be 
significant negative impacts on beneficiaries, market competition, 
pharmacies, and government expenditures associated with maintaining the 
current dual pricing approach and, therefore, we propose to allow only 
the single ``pass-through'' pricing approach as originally intended in 
the final rule establishing the Part D prescription drug benefit.

Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/index.html), in Table D1 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this final rule. This 
table provides our best estimate of the increase in costs as a result 
of the proposed changes. The costs are classified as either transfers 
by the Federal Government to Part D plans, or transfers from RDS 
sponsors to the Federal Government.

                    Table 3.--Accounting Statement: Classification of Estimated Expenditures
----------------------------------------------------------------------------------------------------------------
                  Category                                          Transfers ($ millions)
----------------------------------------------------------------------------------------------------------------
                                   Increase in Federal Payments, FYs 2010-2018
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers Using 7%        $55.8.
 Discount Rate.
Annualized Monetized Transfers Using 3%        $57.5.
 Discount Rate.
From Whom to Whom...........................  Federal Government to Part D Plans.
----------------------------------------------------------------------------------------------------------------
                                    Decrease in RDS Payments for FY 2010-2018
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers Using 7%        $54.1.
 Discount Rate.
Annualized Monetized Transfers Using 3%        $55.5.
 Discount Rate.
From Whom to Whom...........................  RDS Sponsors to Federal Government.
----------------------------------------------------------------------------------------------------------------
                 Cost for all Other Provisions Not Related to the Part D Definitions for FY 2010
----------------------------------------------------------------------------------------------------------------
Undiscounted Annualized Monetized Transfers.  $45.94.
Who Is Affected.............................  MAOs/Part D Sponsors.
----------------------------------------------------------------------------------------------------------------

Conclusion
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 422

    Administrative practice and procedure, Health facilities, Health 
maintenance organizations (HMO), Medicare, Penalties, Privacy, 
Reporting and recordkeeping requirements

42 CFR Part 423

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Medicare, 
Penalties, Privacy, Reporting and recordkeeping.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

PART 422--MEDICARE ADVANTAGE PROGRAM

    1. The authority citation for part 422 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

Subpart A--General Provisions

    2. Amend Sec.  422.4 by revising paragraph (a)(1)(iv)(B) to read as 
follows:


Sec.  422.4  Types of MA plans.

    (a) * * *
    (1) * * *
    (iv) * * *
    (B) Enrolls plan membership that consists of 90 percent or more 
special needs individuals as defined in Sec.  422.2.
    (1) For purposes of meeting the 90 percent threshold, the plan may 
not disenroll a member who does not meet the special needs individual 
definition in Sec.  422.2 of this part.
    (2) Those enrollees deemed continuously eligible per Sec.  
422.52(d) of this part, are considered special needs individuals for 
the purpose of determining the 90 percent threshold.
* * * * *

Subpart B--Eligibility, Election, and Enrollment

    3. Amend Sec.  422.52 by adding paragraph (g) to read as follows:


Sec.  422.52  Eligibility to elect an MA plan for special needs 
individuals.

* * * * *
    (g) Establishing eligibility prior to enrollment. A SNP must employ 
a process approved by CMS to verify the Medicaid eligibility or special 
needs status of an individual prior to enrolling the individual.
    4. Amend Sec.  422.60 by adding paragraph (g) to read as follows:


Sec.  422.60  Election process.

* * * * *
    (g) Passive enrollment by CMS. In situations involving either 
immediate terminations as provided in Sec.  422.510(a)(5) or other 
situations in which CMS determines that remaining enrolled in a plan 
poses potential harm to the members, CMS may implement passive 
enrollment procedures.
    (1) Passive enrollment procedures. Individuals will be considered 
to have elected the plan selected by CMS unless they:
    (i) Decline the plan selected by CMS, in a form and manner 
determined by CMS, or
    (ii) Request enrollment in another plan.
    (2) Beneficiary notification. The organization that receives the 
enrollment must provide notification that describes the costs and 
benefits of the plan and the process for accessing care under the plan 
and clearly explains their ability to decline the enrollment or choose 
another plan. Such notification must be provided to all potential

[[Page 28593]]

enrollees prior to the enrollment effective date (or as soon as 
possible after the effective date if prior notice is not practical), in 
a form and manner determined by CMS.
    (3) Special election period. All individuals will be provided with 
a special election period, as described in Sec.  422.62(b)(4).
    5. Amend Sec.  422.74 by revising paragraph (d)(1) introductory 
text and adding paragraph (d)(1)(iv) to read as follows:


Sec.  422.74  Disenrollment by the MA organization.

* * * * *
    (d) * * *
    (1) Except as specified in paragraph (d)(1)(iv) of this section, an 
MA organization may disenroll an individual from the MA plan for 
failure to pay basic and supplementary premiums under the following 
circumstances:
* * * * *
    (iv) An MA organization may not disenroll an individual who has 
requested to have monthly premiums withheld per Sec.  422.262(f)(1) or 
who is in premium withhold status.
* * * * *
    6. Remove Sec.  422.80.

Subpart C--Benefits and Beneficiary Protections

    7. Amend Sec.  422.101 by adding paragraph (f) to read as follows:


Sec.  422.101  Requirements relating to basic benefits.

* * * * *
    (f) Special needs plan model of care (1) MA organizations offering 
special needs plans must have a model of care plan specifying how the 
plan will coordinate and deliver care designed for the plan's 
enrollees. The model of care plan must provide for the following:
    (i) Coordinate care for eligible beneficiaries.
    (ii) Include a network of providers/services having relevant 
clinical expertise.
    (iii) Target a special needs population.
    (iv) Deliver care based on appropriate protocol for the target 
enrollees.
    (v) Deliver care to frail/disabled enrollees.
    (vi) Deliver care to enrollees who are at the end of life.
    (vii) Apply performance measures to evaluate processes and outcomes 
of the model.
    (2) [Reserved]
    8. Amend Sec.  422.103 by adding new paragraph (e) to read as 
follows:


Sec.  422.103  Benefits under an MA MSA plan.

* * * * *
    (e) All MA organizations offering MSA plans must provide enrollees 
with available information on the cost and quality of services in their 
service area, and submit to CMS for approval a proposed approach to 
providing such information.
    9. Add new Sec.  422.107 to read as follows:


Sec.  422.107  Special needs plans and dual eligibles: arrangements 
with States.

    (a) General rule. An MA organization seeking to offer or currently 
offering a special needs plan primarily serving beneficiaries eligible 
for both Medicare and Medicaid (dual eligible SNPs) must have a 
documented relationship with the State Medicaid agency for the State in 
which the SNP is operating. At a minimum, documented arrangements must 
include the means to--
    (1) Verify enrollees' eligibility for both Medicare and Medicaid,
    (2) Identify and share information on Medicaid provider 
participation, and
    (3) Identify Medicaid benefits which are not covered by Medicare.
    (b) Date of Compliance. Current SNPs must be in compliance with 
Sec.  422.107(a) within 3 years after the effective date of the final 
rule.
    10. Amend Sec.  422.111 by revising paragraph (a)(3) to read as 
follows:


Sec.  422.111  Disclosure requirements.

    (a) * * *
    (3) At the time of enrollment and at least annually thereafter, 15 
days before the annual coordinated election period.
* * * * *

Subpart F--Submission of Bids, Premiums, and Related Information 
and Plan Approval

    11. Amend Sec.  422.262 by--
    A. Adding paragraph (g).
    B. Adding paragraph (h).
    The additions read as follows:


Sec.  422.262  Beneficiary premiums.

* * * * *
    (g) Prohibition on improper billing of premiums. MA organizations 
shall not bill an enrollee for a premium payment period if the enrollee 
has requested that premiums be withheld from his or her Social Security 
benefit.
    (h) Retroactive collection of premiums. In circumstances where 
retroactive collection of premium amounts is necessary and the enrollee 
is without fault in creating the premium arrearage, the Medicare 
Advantage organization shall offer the enrollee the option of payment 
either by lump sum or by equal monthly installment spread out over at 
least the same period for which the premiums were due. That is, if 7 
months of premiums are due, the member would have at least 7 months to 
repay.

Subpart K--Application Procedures and Contracts for Medicare 
Advantage Organizations

    12. Subpart K heading is revised to read as set forth above.
    13. Amend Sec.  422.504 by revising paragraph (g)(1) to read as 
follows:


Sec.  422.504  Contract provisions.

* * * * *
    (g) * * *
    (1) Each MA organization must adopt and maintain arrangements 
satisfactory to CMS to protect its enrollees from incurring liability 
(for example, as a result of an organization's insolvency or other 
financial difficulties) for payment of any fees that are the legal 
obligation of the MA organization. To meet this requirement, the MA 
organization must--
    (i) Ensure that all contractual or other written arrangements with 
providers prohibit the organization's providers from holding any 
enrollee liable for payment of any such fees;
    (ii) Indemnify the enrollee for payment of any fees that are the 
legal obligation of the MA organization for services furnished by 
providers that do not contract, or that have not otherwise entered into 
an agreement with the MA organization, to provide services to the 
organization's enrollees; and
    (iii) For all MA organizations with enrollees eligible for both 
Medicare and Medicaid, specify in contracts with providers that such 
enrollees will not be held liable for Medicare Part A and B cost 
sharing when the State is responsible for paying such amounts, and 
inform providers of Medicare and Medicaid benefits, and rules for 
enrollees eligible for Medicare and Medicaid. The contracts must state 
that providers will--
    (A) Accept the MA plan payment as payment in full, or
    (B) Bill the appropriate State source.
* * * * *
    14. Amend Sec.  422.506 by--
    A. Revising paragraph (a)(2)(ii) and (a)(2)(iii).
    B. Revising paragraph (b)(2)(ii) and (b)(2)(iii).
    The revisions read as follows:


Sec.  422.506  Non-renewal of contract.

    (a) * * *
    (2) * * *
    (ii) Each Medicare enrollee by mail at least 60 days before the 
date on which the non-renewal is effective. This notice must include a 
written description of

[[Page 28594]]

alternatives available for obtaining Medicare services within the 
service area, including alternative MA plans, Medigap options, and 
original Medicare and must receive CMS approval prior to issuance; and,
    (iii) The general public, at least 60 days before the date on which 
the non-renewal is effective, by publishing a notice in one or more 
newspapers of general circulation in each community or county located 
in the MA organization's service area.
* * * * *
    (b) * * *
    (2) * * *
    (ii) To each of the MA organization's Medicare enrollees by mail at 
least 60 days before the date on which the non-renewal is effective; 
and,
    (iii) To the general public, at least 60 days before the date on 
which the non-renewal is effective, by publishing a notice in one or 
more newspapers of general circulation in each community or county 
located in the MA organization's service area.
* * * * *

Subpart M--Grievances, Organization Determinations and Appeals

    15. Revise Sec.  422.578 to read as follows:


Sec.  422.578  Right to a reconsideration.

    Any party to an organization determination (including one that has 
been reopened and revised as described in Sec.  422.616) may request 
that the determination be reconsidered under the procedures described 
in Sec.  422.582, which address requests for a standard 
reconsideration. A physician who is providing treatment to an enrollee 
may, upon providing notice to the enrollee, request a standard 
reconsideration of a pre-service request for reconsideration on the 
enrollee's behalf as described in Sec.  422.582. An enrollee or 
physician (acting on behalf of an enrollee) may request an expedited 
reconsideration as described in Sec.  422.584.
    16. Revise Sec.  422.582 to read as follows:


Sec.  422.582  Request for a standard reconsideration.

    (a) Method and place for filing a request. A party to an 
organization determination or, upon providing notice to the enrollee, a 
physician who is treating an enrollee and acting on the enrollee's 
behalf, must ask for a reconsideration of the determination by making a 
written request to the MA organization that made the organization 
determination. The MA organization may adopt a policy for accepting 
oral requests.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a request for reconsideration must be filed within 
60 calendar days from the date of the notice of the organization 
determination.
    (c) Extending the time for filing a request--(1) General rule. If a 
party or physician acting on behalf of an enrollee shows good cause, 
the MA organization may extend the timeframe for filing a request for 
reconsideration.
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for reconsideration has expired, a party to 
the organization determination or a physician acting on behalf of an 
enrollee may file a request for reconsideration with the MA 
organization. The request for reconsideration and to extend the 
timeframe must--
    (i) Be in writing; and
    (ii) State why the request for reconsideration was not filed on 
time.
    (d) Parties to the reconsideration. The parties to the 
reconsideration are the parties to the organization determination, as 
described in Sec.  422.574, and any other provider or entity (other 
than the MA organization) whose rights with respect to the organization 
determination may be affected by the reconsideration, as determined by 
the entity that conducts the reconsideration.
    (e) Withdrawing a request. The party or physician acting on behalf 
of an enrollee who files a request for reconsideration may withdraw it 
by filing a written request for withdrawal at one of the places listed 
in paragraph (a) of this section.

Subpart O--Intermediate Sanctions

    17. Amend Sec.  422.760 by--
    A. Redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(3) 
and (b)(4), respectively.
    B. Adding new paragraph (b)(2) to read as follows:


Sec.  422.760  Determinations regarding the amount of civil money 
penalties and assessment imposed by CMS.

* * * * *
    (b) * * *
    (2) If the deficiency on which the determination is based has 
directly adversely affected (or has the substantial likelihood of 
adversely affecting) one or more MA enrollees, CMS may calculate a CMP 
of up to $25,000 for each MA enrollee directly adversely affected (or 
with the substantial likelihood of being adversely affected) by a 
deficiency.
* * * * *

Subpart U--[Added and Reserved]

    18. Subpart U is added and reserved.
    19. New subpart V is added to read as follows:
Subpart V--Medicare Advantage Marketing Requirements
Sec.
422.2260 Definitions concerning marketing materials.
422.2262 Review and distribution of marketing materials.
422.2264 Guidelines for CMS review.
422.2266 Deemed approval.
422.2268 Standards for MA organization marketing.
422.2272 Licensing of marketing representatives and confirmation of 
marketing resources.
422.2274 Broker and agent commissions.
422.2276 Employer group retiree marketing.

Subpart V--Medicare Advantage Marketing Requirements


Sec.  422.2260  Definitions concerning marketing materials.

    As used in this subpart--
    Marketing materials. (1) Marketing materials include any 
informational materials targeted to Medicare beneficiaries which:
    (i) Promote the MA organization, or any MA plan offered by the MA 
organization.
    (ii) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in, an MA plan offered by the MA organization.
    (iii) Explain the benefits of enrollment in an MA plan, or rules 
that apply to enrollees.
    (iv) Explain how Medicare services are covered under an MA plan, 
including conditions that apply to such coverage.
    (2) Examples of marketing materials include, but are not limited 
to, the following:
    (i) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the Internet.
    (ii) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (iii) Presentation materials such as slides and charts.
    (iv) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (for example, physicians or 
other providers).
    (v) Membership communication materials such as membership rules, 
subscriber agreements, member handbooks and wallet card instructions to 
enrollees.
    (vi) Letters to members about contractual changes; changes in

[[Page 28595]]

providers, premiums, benefits, plan procedures etc.
    (vii) Membership or claims processing activities (for example, 
materials on rules involving non-payment of premiums, confirmation of 
enrollment or disenrollment, or annual notification information).


Sec.  422.2262  Review and distribution of marketing materials.

    (a) CMS review of marketing materials. (1) Except as provided in 
paragraph (b) of this section an MA organization may not distribute any 
marketing materials (as defined in Sec.  422.2260 of this part), or 
election forms, or make such materials or forms available to 
individuals eligible to elect an MA organization unless--
    (i) At least 45 days (or 10 days if using marketing materials that 
use, without modification, proposed model language as specified by CMS) 
before the date of distribution the MA organization has submitted the 
material or form to CMS for review under the guidelines in Sec.  
422.2264 of this Part; and
    (ii) CMS does not disapprove the distribution of new material or 
form.
    (2) [Reserved]
    (b) File and use. The MA organization may distribute certain types 
of marketing materials, designated by CMS, 5 days following their 
submission to CMS if the MA organization certifies that in the case of 
these designated marketing materials it followed all applicable 
marketing guidelines and, when applicable, used model language 
specified by CMS without modification.


Sec.  422.2264  Guidelines for CMS review.

    In reviewing marketing material or election forms under Sec.  
422.2262 of this part, CMS determines that the marketing materials--
    (a) Provide, in a format (and, where appropriate, print size), and 
using standard terminology that may be specified by CMS, the following 
information to Medicare beneficiaries interested in enrolling:
    (1) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (2) Adequate written description of any supplemental benefits and 
services.
    (3) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each and
    (4) Any other information necessary to enable beneficiaries to make 
an informed decision about enrollment.
    (b) Notify the general public of its enrollment period in an 
appropriate manner, through appropriate media, throughout its service 
and if applicable, continuation areas.
    (c) Include in written materials notice that the MA organization is 
authorized by law to refuse to renew its contract with CMS, that CMS 
also may refuse to renew the contract, and that termination or non-
renewal may result in termination of the beneficiary's enrollment in 
the plan.
    (d) Ensure that materials are not materially inaccurate or 
misleading or otherwise make material misrepresentations.
    (e) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.


Sec.  422.2266  Deemed approval.

    If CMS has not disapproved the distribution of marketing materials 
or forms submitted by an MA organization with respect to an MA plan in 
an area, CMS is deemed not to have disapproved the distribution in all 
other areas covered by the MA plan and organization except with regard 
to any portion of the material or form that is specific to the 
particular area.


Sec.  422.2268  Standards for MA organization marketing.

    In conducting marketing activities, MA organizations may not--
    (a) Provide for cash or other monetary rebates as an inducement for 
enrollment or otherwise. This does not prohibit explanation of any 
legitimate benefits the beneficiary might obtain as an enrollee of the 
MA plan, such as eligibility to enroll in a supplemental benefit plan 
that covers deductibles and coinsurance, or preventive services.
    (b) Offer gifts to potential enrollees, unless the gifts are of 
nominal (as defined in the CMS Marketing Guidelines) value, are offered 
to all eligible members without discrimination, and are not in the form 
of cash or other monetary rebates. Providing meals for potential 
enrollees is prohibited, regardless of value.
    (c) Engage in any discriminatory activity such as, for example, 
attempts to recruit Medicare beneficiaries from higher income areas 
without making comparable efforts to enroll Medicare beneficiaries from 
lower income areas.
    (d) Solicit door-to-door for Medicare beneficiaries or through 
other unsolicited means of direct contact, including calling a 
beneficiary without the beneficiary initiating the contact.
    (e) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the MA organization. The MA organization 
may not claim that it is recommended or endorsed by CMS or Medicare or 
that CMS or Medicare recommends that the beneficiary enroll in the MA 
plan. It may, however, explain that the organization is approved for 
participation in Medicare.
    (f) Market non-health care related products to prospective 
enrollees during any MA or Part D sales activity or presentation. This 
is considered cross-selling and is prohibited.
    (g) Market any health care related product during a marketing 
appointment beyond the scope agreed upon by the beneficiary, and 
documented by the plan, prior to the appointment.
    (h) Market additional health related lines of plan business not 
identified prior to an in-home appointment without a separate 
appointment that may not be scheduled until 48 hours after the initial 
appointment.
    (i) Distribute marketing materials for which, before expiration of 
the 45-day period, the MA organization receives from CMS written notice 
of disapproval because it is inaccurate or misleading, or misrepresents 
the MA organization, its marketing representatives, or CMS.
    (j) Use providers or provider groups to distribute printed 
information comparing the benefits of different health plans unless the 
materials have the concurrence of all MA organizations involved.
    (k) Conduct sales presentations or distribute and accept plan 
applications in provider offices or other places where health care is 
delivered.
    (l) Conduct sales presentations or distribute and accept plan 
applications at educational events.
    (m) Employ MA plan names that suggest that a plan is not available 
to all Medicare beneficiaries. This prohibition shall not apply to MA 
plan names in effect on July 31, 2000.
    (n) Display the names and/or logos of co-branded network providers 
on the organization's member identification card. Other marketing 
materials that include names and/or logos of provider co-branding 
partners must clearly indicate that other providers are available in 
the network.
    (o) Engage in any other marketing activity prohibited by CMS in its 
marketing guidance.


Sec.  422.2272   Licensing of marketing representatives and 
confirmation of marketing resources.

    In its marketing the MA organization must--
    (a) Demonstrate to CMS' satisfaction that marketing resources are 
allocated to marketing to disabled Medicare

[[Page 28596]]

population as well as beneficiaries age 65 and over.
    (b) Establish and maintain a system for confirming that enrolled 
beneficiaries have, in fact, enrolled in the MA plan and understand the 
rules applicable under the plan.
    (c) Employ as marketing representatives only individuals who are 
licensed by the State to conduct marketing activities (as defined in 
the Medicare Marketing Guidelines) in that State, and whom the 
organization has informed that State it has appointed, consistent with 
the appointment process provided for under State law, except that any 
fees required under such appointment process do not apply.


Sec.  422.2274   Broker and agent commissions.

    If a Medicare Advantage organization markets through independent 
brokers or agents--
    (a)(1) In paying a commission or other compensation (collectively 
referred to as ``commission'') to such agent or representative, the 
commission the agent would receive for selling or servicing the policy 
in the first year could not exceed the commission the agent receives 
for selling or servicing the policy in all subsequent years.
    (2) The commission must be the same for all plans and plan product 
types offered by the MA plan's parent organization.
    (b) It must ensure agents selling Medicare products are trained on 
Medicare rules and regulations specific to the plan products they 
intend to sell.
    (c) It must ensure agents selling Medicare products are tested, as 
specified in CMS guidance.
    (d) Upon CMS's request, the organization must provide to CMS the 
information necessary for it to conduct oversight of marketing 
activities.
    (e) It must comply with State requests for information about the 
performance of a licensed agent or broker as part of a state 
investigation into the individual's conduct. CMS will establish and 
maintain a memorandum of understanding (MOU) to share compliance and 
oversight information with States that agree to the MOU.


Sec.  422.2276   Employer group retiree marketing.

    MA organizations may develop marketing materials designed for 
members of an employer group who are eligible for employer-sponsored 
benefits through the MA organization, and furnish these materials only 
to the group members. These materials are not subject to CMS prior 
review and approval.

PART 423--VOLUNTARY MEDICARE PRESCRIPTION DRUG BENEFIT

    20. The authority citation for part 423 continues to read as 
follows:

    Authority: Secs. 1102, 1860D-1 through 1860D-42, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, 
and 1395hh).

Subpart B--Eligibility and Enrollment

    21. Amend Sec.  423.32 by adding paragraph (g) to read as follows:


Sec.  423.32   Enrollment process.

* * * * *
    (g) Passive enrollment by CMS. In situations involving either 
immediate terminations as provided in Sec.  423.509(a)(5) or Sec.  
422.510(a)(5), or other situations in which CMS determines that 
remaining enrolled in a plan poses potential harm to plan members, CMS 
may implement passive enrollment procedures.
    (1) Passive enrollment procedures. Individuals will be considered 
to have enrolled in the plan selected by CMS unless individuals--
    (i) Decline the plan selected by CMS, in a form and manner 
determined by CMS, or
    (ii) Request enrollment in another plan.
    (2) Beneficiary notification. The organization that receives the 
enrollment must provide notification that describes the costs and 
benefits of the new plan and the process for accessing care under the 
plan and the beneficiary's ability to decline the enrollment or choose 
another plan. Such notification must be provided to all potential 
enrollees prior to the enrollment effective date (or as soon as 
possible after the effective date if prior notice is not practical), in 
a form and manner determined by CMS.
    (3) Special election period. All individuals will be provided with 
a special enrollment period, as described in Sec.  423.38(c)(8)(ii).
    22. Amend Sec.  423.34 by--
    A. Revising paragraph (d)(1).
    B. Adding paragraph (d)(3).
    The revision and addition reads as follows:


Sec.  423.34   Enrollment of full-benefit dual eligible individuals.

* * * * *
    (d) Automatic enrollment rules--(1) General rule. Except for full-
benefit dual eligible individuals who are qualifying covered retirees 
as specified in paragraph (d)(3) of this section, CMS automatically 
enrolls full-benefit dual eligible individuals who fail to enroll in a 
Part D plan into a PDP offering basic prescription drug coverage in the 
area where the individual resides that has a monthly beneficiary 
premium amount (as defined in Sec.  423.780(b)). In the event that 
there is more than one PDP in an area with a monthly beneficiary 
premium at or below the low-income premium subsidy amount, individuals 
are enrolled in such PDPs on a random basis.
* * * * *
    (3) Exception for full-benefit dual eligible individuals who are 
qualifying covered retirees. Full-benefit dual eligible individuals who 
are qualifying covered retirees as defined in Sec.  423.882 also are 
automatically enrolled in a part D plan, consistent with this 
paragraph, unless they elect to decline that enrollment. Before 
effectuating such an enrollment, however, CMS will provide notice to 
such individuals of their choices and advise them to discuss the 
potential impact of Medicare Part D coverage on their group health plan 
coverage. This notice informs such individuals that they will be deemed 
to have declined to enroll in Part D unless they affirmatively enroll 
in a Part D plan or contact CMS and confirm that they wish to be auto-
enrolled in a PDP. Individuals who elect not to be auto-enrolled, may 
enroll in Medicare Part D at a later time if they choose to do so.
* * * * *
    23. Amend Sec.  423.44 by revising paragraph (d)(1) introductory 
text and adding paragraph (d)(1)(iv) as follows:


Sec.  423.44   Involuntary disenrollment by the PDP.

* * * * *
    (d) * * *
    (1) Except as specified in paragraph (d)(1)(iv) of this section, a 
PDP sponsor may disenroll an individual from the PDP for failure to pay 
any monthly premium under the following circumstances:
* * * * *
    (iv) A PDP sponsor may not disenroll an individual who has 
requested to have monthly premiums withheld per Sec.  423.293(a) or who 
is in premium withhold status, as defined by CMS.
* * * * *
    24. Amend Sec.  423.46 by adding paragraph (b) through (d) to read 
as follows:


Sec.  423.46   Late enrollment penalty.

* * * * *
    (b) Role of Part D plan in determination of the penalty. Part D 
sponsors must obtain information on prior creditable coverage from all 
enrolled or enrolling beneficiaries and report this information to CMS 
in a form and manner determined by CMS.

[[Page 28597]]

    (c) Reconsideration. Individuals determined to be subject to a late 
enrollment penalty may request reconsideration of this determination, 
consistent with Sec.  423.56(g). Such review will be conducted by CMS, 
or an independent review entity contracted by CMS, in accordance with 
guidance issued by CMS. Decisions made through this review are not 
subject to appeal, but may be reviewed and revised at the discretion of 
CMS.
    (d) Record retention. Part D plan sponsors must retain all 
information collected concerning a creditable coverage period 
determination in accordance with the enrollment records retention 
requirements described in subpart K, Sec.  423.505(e)(1)(iii).


Sec.  423.50   [Removed]

    25. Remove Sec.  423.50.

Subpart C--Benefits and Beneficiary Protections

    26. Section 423.100 is amended by--
    A. Revising the definition of ``incurred costs.''
    B. Revising the definition of ``negotiated prices.''
    The revision reads as follows:


Sec.  423.100   Definitions.

* * * * *
    Incurred costs means costs incurred by a Part D enrollee for--
    (1)(i) Covered Part D drugs that are not paid for under the Part D 
plan as a result of application of any annual deductible or other cost-
sharing rules for covered Part D drugs prior to the Part D enrollee 
satisfying the out-of-pocket threshold under Sec.  423.104(d)(5)(iii), 
including any price differential for which the Part D enrollee is 
responsible under Sec.  423.124(b); or
    (ii) Nominal cost-sharing paid by or on behalf of an enrollee, 
which is associated with drugs that would otherwise be covered Part D 
drugs, as defined in Sec.  423.100, but are instead paid for, with the 
exception of said nominal cost-sharing, by a patient assistance program 
providing assistance outside the Part D benefit, provided that 
documentation of such nominal cost-sharing has been submitted to the 
Part D plan consistent with the plan processes and instructions for the 
submission of such information; and
    (2) That are paid for--
    (i) By the Part D enrollee or on behalf of the Part D enrollee by 
another person, and the Part D enrollee (or person paying on behalf of 
the Part D enrollee) is not reimbursed through insurance or otherwise, 
a group health plan, or other third party payment arrangement, or the 
person paying on behalf of the Part D enrollee is not paying under 
insurance or otherwise, a group health plan, or third party payment 
arrangement;
    (ii) Under a State Pharmaceutical Assistance Program (as defined in 
Sec.  423.454 of this part); or
    (iii) Under Sec.  423.782 of this part.
* * * * *
    Negotiated prices means prices for covered Part D drugs that--
    (1) The Part D sponsor (or other intermediary contracting 
organization) and the network dispensing pharmacy or other network 
dispensing provider have negotiated as the amount such network entity 
will receive, in total, for a particular drug;
    (2) Are reduced by those discounts, direct or indirect subsidies, 
rebates, other price concessions, and direct or indirect remuneration 
that the Part D sponsor has elected to pass through to Part D enrollees 
at the point of sale; and
    (3) Includes any dispensing fees.
* * * * *
    27. Amend Sec.  423.104 by revising paragraph (g)(1) to read as 
follows:


Sec.  423.104   Requirements related to qualified prescription drug 
coverage.

* * * * *
    (g) * * *
    (1) Access to negotiated prices. A Part D sponsor is required to 
provide its Part D enrollees with access to negotiated prices for 
covered Part D drugs included in its Part D plan's formulary. 
Negotiated prices must be provided even if no benefits are payable to 
the beneficiary for covered Part D drugs because of the application of 
any deductible or 100 percent coinsurance requirement following 
satisfaction of any initial coverage limit. Negotiated prices must be 
provided when the negotiated price for a covered Part D drug under a 
Part D sponsor's benefit package is less than the applicable cost-
sharing before the application of any deductible, before any initial 
coverage limit, before the annual out-of-pocket threshold, and after 
the annual out-of-pocket threshold.
* * * * *
    28. Amend Sec.  423.128 as follows:
    A. Revise paragraph (a)(3).
    B. Revise paragraph (e)(6).


Sec.  423.128   Dissemination of Part D Plan information.

    (a) * * *
    (3) At the time of enrollment and at least annually thereafter, 15 
days before the annual coordinated election period.
* * * * *
    (e) * * *
    (6) Be provided no later than the end of the month following any 
month when prescription drug benefits are provided under this part, 
including the covered Part D spending between the initial coverage 
limit described in Sec.  423.104(d)(3) and the out-of-pocket threshold 
described in Sec.  423.104(d)(5)(iii).

Subpart F--Submission of Bids and Monthly Beneficiary Premiums; 
Plan Approval

    29. Amend Sec.  423.293 by--
    A. Revising paragraph (a).
    B. Adding paragraph (e).
    The revision and addition read as follows:


Sec.  423.293   Collection of monthly beneficiary premium.

    (a) General rule. Part D sponsors must charge enrollees a 
consolidated monthly Part D premium equal to the sum of the Part D 
monthly premium for basic prescription drug coverage (if any) and the 
premium for supplemental coverage (if any and if the beneficiary has 
enrolled in such supplemental coverage). Part D sponsors must also 
permit each enrollee, at the enrollee's option, to make payment of 
premiums (if any) under this part to the sponsor using any of the 
methods listed in Sec.  422.262(f) of this chapter. In circumstances 
where retroactive collection of premium is necessary and where the 
member is without fault in creating the premium arrearage, the Part D 
sponsor shall offer the member the option of payment either by lump sum 
or by equal monthly installment spread out over the same period for 
which the premiums were due, that is, if 7 months of premiums are due, 
the member would have at least 7 months to repay.
* * * * *
    (e) Prohibition on improper billing of premiums. Part D plan 
sponsors shall not bill an enrollee for a premium payment period if the 
enrollee has requested that premiums be withheld from his or her Social 
Security benefit.

Subpart G--Payments to Part D Plan Sponsors for Qualified 
Prescription Drug Coverage

    30. Section 423.308 is amended by--
    A. Revising the definition of ``actually paid.''
    B. Adding the definition of ``administrative costs.''
    C. Revising the definition of ``allowable risk corridor costs.''
    D. Revising the definition of ``gross covered prescription drug 
costs.''
    E. Revising the definition of ``target amount.''
    The addition and revisions read as follows:

[[Page 28598]]

Sec.  423.308   Definitions and terminology.

* * * * *
    Actually paid means that the costs must be actually incurred by the 
Part D sponsor and must be net of any direct or indirect remuneration 
(including discounts, chargebacks or rebates, cash discounts, free 
goods contingent on a purchase agreement, up-front payments, coupons, 
goods in kind, free or reduced-price services, grants, or other price 
concessions or similar benefits offered to some or all purchasers) from 
any source (including manufacturers, pharmacies, enrollees, or any 
other person) that would serve to decrease the costs incurred under the 
Part D plan. Direct and indirect remuneration includes discounts, 
chargebacks or rebates, cash discounts, free goods contingent on a 
purchase agreement, up-front payments, coupons, goods in kind, free or 
reduced-price services, grants, or other price concessions or similar 
benefits from manufacturers, pharmacies or similar entities obtained by 
an intermediary contracting organization with which the Part D plan 
sponsor has contracted for administrative services, regardless of 
whether the intermediary contracting organization retains all or a 
portion of the direct and indirect remuneration or passes the entire 
direct and indirect remuneration to the Part D plan sponsor and 
regardless of the terms of the contract between the plan sponsor and 
the intermediary contracting organization.
    Administrative costs means costs incurred by a Part D sponsor in 
complying with the requirements of this Part for a coverage year and 
that are not drug costs incurred to purchase or reimburse the purchase 
of Part D drugs. Administrative costs include amounts paid by the Part 
D sponsor to an intermediary contracting organization for covered Part 
D drugs dispensed to enrollees in the sponsor's Part D plan that differ 
from the amount paid by the intermediary contracting organization to a 
pharmacy or other entity that is the final dispenser of the covered 
Part D drugs. For example, any profit or loss retained by an 
intermediary contracting organization (through discounts, rebates, or 
other direct or indirect price concessions) when negotiating prices 
with dispensing entities is considered an administrative cost.
* * * * *
    Allowable risk corridor costs means--
    (1) The subset of costs incurred under a Part D plan (not including 
administrative costs, but including dispensing fees) that are 
attributable to basic prescription drug coverage only and that are 
incurred and actually paid by the Part D sponsor to--
    (i) A dispensing pharmacy or other dispensing provider (whether 
directly or through an intermediary contracting organization) under the 
Part D plan;
    (ii) The parties listed in Sec.  423.464(f)(1) with which the Part 
D sponsor must coordinate benefits, including other Part D plans, as 
the result of any reconciliation process developed by CMS under Sec.  
423.464 of this part; or
    (iii) An enrollee (or third party paying on behalf of the enrollee) 
to indemnify the enrollee when the reimbursement is associated with 
obtaining drugs under the Part D plan; and
    (2) These costs must be based upon imposition of the maximum amount 
of copayments permitted under Sec.  423.782 of this part. The costs for 
any Part D plan offering enhanced alternative coverage must be adjusted 
not only to exclude any costs attributable to benefits beyond basic 
prescription drug coverage, but also to exclude any prescription drug 
coverage costs determined to be attributable to increased utilization 
over standard prescription drug coverage as the result of the insurance 
effect of enhanced alternative coverage in accordance with CMS 
guidelines on actuarial valuation.
* * * * *
    Gross covered prescription drug costs mean those actually paid 
costs incurred under a Part D plan, excluding administrative costs, but 
including dispensing fees, during the coverage year. They equal the sum 
of the following--
    (1) The share of negotiated prices (as defined by Sec.  423.100 of 
this chapter) actually paid by the Part D plan that is received as 
reimbursement by the pharmacy or other dispensing entity, reimbursement 
paid to indemnify an enrollee when the reimbursement is associated with 
an enrollee obtaining covered Part D drugs under the Part D plan, or 
payments made by the Part D sponsor to other parties listed in Sec.  
423.464(f)(1) with which the Part D sponsor must coordinate benefits, 
including other Part D plans, or as the result of any reconciliation 
process developed by CMS under Sec.  423.464 of this chapter.
    (2) Nominal cost-sharing paid by or on behalf of an enrollee which 
is associated with drugs that would otherwise be covered Part D drugs, 
as defined in Sec.  423.100, but are instead paid for, with the 
exception of said nominal cost-sharing, by a patient assistance program 
providing assistance outside the Part D benefit, provided that 
documentation of such nominal cost-sharing has been submitted to the 
Part D plan consistent with the plan processes and instructions for the 
submission of such information.
    (3) All amounts paid under the Part D plan by or on behalf of an 
enrollee (such as the deductible, coinsurance, cost sharing, or amounts 
between the initial coverage limit and the out-of-pocket threshold) in 
order to obtain Part D drugs that are covered under the Part D plan. If 
an enrollee who is paying 100 percent cost sharing (as a result of 
paying a deductible or because the enrollee is between the initial 
coverage limit and the out-of-pocket threshold) obtains a covered Part 
D drug at a lower cost than is available under the Part D plan, such 
cost-sharing will be considered an amount paid under the plan by or on 
behalf of an enrollee under the previous sentence of this definition, 
if the enrollee's costs are incurred costs as defined under Sec.  
423.100 of this part and documentation of the incurred costs has been 
submitted to the Part D plan consistent with plan processes and 
instructions for the submission of such information. These costs are 
determined regardless of whether the coverage under the plan exceeds 
basic prescription drug coverage.
    Target amount means the total amount of payments (from both CMS and 
by or on behalf of enrollees) to a Part D plan for the coverage year 
for all standardized bid amounts as risk adjusted under Sec.  
423.329(b)(1), less the administrative expenses (including return on 
investment) assumed in the standardized bids.
    31. Amend Sec.  423.329 by revising paragraph (d)(2)(i) to read as 
follows:


Sec.  423.329   Determination of payments.

* * * * *
    (d) * * *
    (2) * * *
    (i) Interim payments. CMS establishes a payment method by which 
interim payments of amounts under this section are made during a year 
based on the low-income cost-sharing assumptions submitted with plan 
bids under Sec.  423.265(d)(2)(iv) and negotiated and approved under 
Sec.  423.272, or by an alternative method that CMS determines.
* * * * *

Subpart K--Application Procedures and Contracts With Part D Plan 
Sponsors

    32. Amend Sec.  423.505 by revising paragraph (k)(5) to read as 
follows:


Sec.  423.505  Contract provisions.

* * * * *

[[Page 28599]]

    (k) * * *
    (5) Certification of allowable costs for risk corridor and 
reinsurance information. The Chief Executive Officer, Chief Financial 
Officer, or an individual delegated the authority to sign on behalf of 
one of these officers, and who reports directly to the officer, must 
certify (based on best knowledge, information, and belief) that the 
information provided for purposes of supporting allowable costs as 
defined in Sec.  423.308, including data submitted to CMS regarding 
direct or indirect remuneration (DIR) that serves to reduce the costs 
incurred by the Part D sponsor for Part D drugs, is accurate, complete, 
and truthful and fully conforms to the requirements in Sec.  423.336 
and Sec.  423.343 and acknowledge that this information will be used 
for the purposes of obtaining Federal reimbursement.
* * * * *
    33. Amend Sec.  423.507 by--
    A. Revising paragraphs (a)(2)(ii) and (a)(2)(iii).
    B. Revising paragraphs (b)(2)(ii) and (b)(2)(iii).
    The revisions read as follows:


Sec.  423.507  Non-renewal of contract.

    (a) * * *
    (2) * * *
    (ii) Each Medicare enrollee by mail at least 60 days before the 
date on which the non-renewal is effective. This notice must include a 
written description of alternatives available for obtaining qualified 
prescription drug coverage within the PDP region, including MA-PD 
plans, and other PDPs, and must receive CMS approval prior to issuance; 
and,
    (iii) The general public, at least 60 days before the date on which 
the non-renewal is effective, by publishing a notice in one or more 
newspapers of general circulation in each community or county located 
in the Part D plan sponsor's service area.
* * * * *
    (b) * * *
    (2) * * *
    (ii) To each of the Part D plan sponsor's Medicare enrollees by 
mail at least 60 days before the date on which the non-renewal is 
effective; and,
    (iii) To the general public, at least 60 days before the date on 
which the non-renewal is effective, by publishing a notice in one or 
more newspapers of general circulation in each community or county 
located in the Part D plan sponsor's service area.
* * * * *

Subpart L--Effect of Change of Ownership or Leasing of Facilities 
During Term of Contract

    34. Amend Sec.  423.551 by adding paragraph (g) to read as follows:


Sec.  423.551  General provisions.

* * * * *
    (g) Sale of beneficiaries not permitted: CMS will not recognize as 
a sale or transfer of a PDP line of business (qualifying as a change of 
ownership) a transaction that consists solely of the sale or transfer 
of individual beneficiaries or groups of beneficiaries enrolled in a 
pharmacy benefit package offered by a PDP sponsor.

Subpart M--Grievances, Coverage Determinations, and Appeals

    35. Amend Sec.  423.560 by adding, in alphabetical order, the 
definition for ``Other prescriber'' as follows--


Sec.  423.560  Definitions.

* * * * *
    Other prescriber means a health care professional other than a 
physician who is authorized under State law or other applicable law to 
write prescriptions.
* * * * *
    36. Amend Sec.  423.566 by revising paragraph (c)(3) to read as 
follows:


Sec.  423.566  Coverage determinations.

* * * * *
    (c) * * *
    (3) The prescribing physician or other prescriber, on behalf of the 
enrollee.
    37. Amend Sec.  423.568 by revising paragraph (a) to read as 
follows:


Sec.  423.568  Standard timeframe and notice requirements for coverage 
determinations.

    (a) Timeframe for requests for drug benefits. When a party makes a 
request for a drug benefit, the Part D plan sponsor must notify the 
enrollee (and the prescribing physician or other prescriber involved, 
as appropriate) of its determination as expeditiously as the enrollee's 
health condition requires, but no later than 72 hours after receipt of 
the request, or, for an exceptions request, the physician's or other 
prescriber's supporting statement.
* * * * *
    38. Amend Sec.  423.570 by--
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    C. Revising paragraph (c)(1).
    D. Revising paragraph (c)(3) introductory text.
    E. Revising paragraph (c)(3)(ii).
    F. Republishing paragraph (d) introductory text.
    G. Revising paragraph (d)(1).
    H. Revising paragraph (d)(2) introductory text.
    I. Revising paragraph (d)(2)(iii).
    The revisions read as follows:


Sec.  423.570  Expediting certain coverage determinations.

    (a) Request for expedited determination. An enrollee or an 
enrollee's prescribing physician or other prescriber may request that a 
Part D plan sponsor expedite a coverage determination involving issues 
described in Sec.  423.566(b). This does not include requests for 
payment of Part D drugs already furnished.
    (b) How to make a request. (1) To ask for an expedited 
determination, an enrollee or an enrollee's prescribing physician or 
other prescriber on behalf of the enrollee must submit an oral or 
written request directly to the Part D plan sponsor or, if applicable, 
to the entity responsible for making the determination, as directed by 
the Part D plan sponsor.
    (2) A prescribing physician or other prescriber may provide oral or 
written support for an enrollee's request for an expedited 
determination.
    (c) * * *
    (1) An efficient and convenient means for accepting oral or written 
requests submitted by enrollees, prescribing physicians, or other 
prescribers.
* * * * *
    (3) A means for issuing prompt decisions on expediting a 
determination, based on the following requirements:
* * * * *
    (ii) For a request made or supported by an enrollee's prescribing 
physician or other prescriber, provide an expedited determination if 
the physician or other prescriber indicates that applying the standard 
timeframe for making a determination may seriously jeopardize the life 
or health of the enrollee or the enrollee's ability to regain maximum 
function.
    (d) Actions following denial. If a Part D plan sponsor denies a 
request for expedited determination, it must take the following 
actions:
    (1) Make the determination within the 72-hour timeframe established 
in Sec.  423.568(a) for a standard determination. The 72-hour period 
begins on the day the Part D plan sponsor receives the request for 
expedited determination, or, for an exceptions request, the physician's 
or other prescriber's supporting statement.
    (2) Give the enrollee and prescribing physician or other prescriber 
prompt oral notice of the denial that--
* * * * *
    (iii) Informs the enrollee of the right to resubmit a request for 
an expedited

[[Page 28600]]

determination with the prescribing physician's or other prescriber's 
support and
* * * * *
    39. Amend Sec.  423.572 by revising paragraph (a) to read as 
follows:


Sec.  423.572  Timeframes and notice requirements for expedited 
coverage determinations.

    (a) Timeframe for determination and notification. Except as 
provided in paragraph (b) of this section, a Part D plan sponsor that 
approves a request for expedited determination must make its 
determination and notify the enrollee (and the prescribing physician or 
other prescriber involved, as appropriate) of its decision, whether 
adverse or favorable, as expeditiously as the enrollee's health 
condition requires, but no later than 24 hours after receiving the 
request, or, for an exceptions request, the physician's or other 
prescriber's supporting statement.
* * * * *
    40. Amend Sec.  423.578 by--
    A. Revising paragraph (a) introductory text.
    B. Revising paragraph (a)(2) introductory text.
    C. Revising paragraph (a)(2)(i).
    D. Revising paragraph (a)(3).
    E. Revising paragraph (a)(4) introductory text.
    F. Revising paragraph (a)(5).
    G. Revising paragraph (b) introductory text.
    H. Revising paragraph (b)(2) introductory text.
    I. Revising paragraph (b)(2)(i), (b)(4), (b)(5) introductory text, 
and (b)(6).
    J. Revising paragraph (c)(3)(i), (c)(4)(i) introductory text, and 
(c)(4)(i)(A).
    K. Revising paragraph (f).
    The revisions read as follows:


Sec.  423.578  Exceptions process.

    (a) Request for exceptions to a plan's tiered cost-sharing 
structure. Each Part D plan sponsor that provides prescription drug 
benefits for Part D drugs and manages this benefit through the use of a 
tiered formulary must establish and maintain reasonable and complete 
exceptions procedures subject to CMS' approval for this type of 
coverage determination. The Part D plan sponsor grants an exception 
whenever it determines that the non-preferred drug for treatment of the 
enrollee's condition is medically necessary, consistent with the 
physician's or other prescriber's statement under paragraph (a)(4) of 
this section.
* * * * *
    (2) The exceptions criteria of a Part D plan sponsor must include, 
but are not limited to--
    (i) A description of the criteria a Part D plan sponsor uses to 
evaluate a determination made by the enrollee's prescribing physician 
or other prescriber under paragraph (a)(4) of this section.
* * * * *
    (3) An enrollee or the enrollee's prescribing physician or other 
prescriber may file a request for an exception.
    (4) A prescribing physician or other prescriber must provide an 
oral or written supporting statement that the preferred drug for the 
treatment of the enrollee's conditions--

* * * * *
    (5) If the physician or other prescriber provides an oral 
supporting statement, the Part D plan sponsor may require the physician 
or other prescriber to subsequently provide a written supporting 
statement to demonstrate the medical necessity of the drug. The Part D 
plan sponsor may require the prescribing physician or other prescriber 
to provide additional supporting medical documentation as part of the 
written follow-up.
* * * * *
    (b) Request for exceptions involving a non-formulary Part D drug. 
Each Part D plan sponsor that provides prescription drug benefits for 
Part D drugs and manages this benefit through the use of a formulary 
must establish and maintain exceptions procedures subject to CMS' 
approval for receipt of an off-formulary drug. The Part D plan sponsor 
must grant an exception whenever it determines that the drug is 
medically necessary, consistent with the physician's or other 
prescriber's statement under paragraph (b)(5) of this section, and that 
the drug would be covered but for the fact that it is an off-formulary 
drug. Formulary use includes the application of cost utilization tools, 
such as a dose restriction, including the dosage form, that causes a 
particular Part D drug not to be covered for the number of doses 
prescribed or a step therapy requirement that causes a particular Part 
D drug not to be covered until the requirements of the plan's coverage 
policy are met, or a therapeutic substitution requirement.
* * * * *
    (2) The exception criteria of a Part D plan sponsor must include, 
but are not limited to--
    (i) A description of the criteria a Part D plan sponsor uses to 
evaluate a prescribing physician's or other prescriber's determination 
made under paragraph (b)(5) of this section;
* * * * *
    (4) An enrollee, the enrollee's appointed representative, or the 
prescribing physician or other prescriber (on behalf of the enrollee) 
may file a request for an exception.
    (5) A prescribing physician or other prescriber must provide an 
oral or written supporting statement that the requested prescription 
drug is medically necessary to treat the enrollee's disease or medical 
condition because--
* * * * *
    (6) If the physician or other prescriber provides an oral 
supporting statement, the Part D plan sponsor may require the physician 
or other prescriber to subsequently provide a written supporting 
statement. The Part D plan sponsor may require the prescribing 
physician or other prescriber to provide additional supporting medical 
documentation as part of the written follow-up.
    (c) * * *
    (3) * * *
    (i) The enrollee's prescribing physician or other prescriber 
continues to prescribe the drug.
* * * * *
    (4) * * *
    (i) The Part D plan sponsor may not require the enrollee to request 
approval for a refill, or a new prescription to continue using the Part 
D prescription drug after the refills for the initial prescription are 
exhausted, as long as--
    (A) The enrollee's prescribing physician or other prescriber 
continues to prescribe the drug;
* * * * *
    (f) Implication of the physician's or other prescriber's supporting 
statement. Nothing in this section should be construed to mean that the 
physician's or other prescriber's supporting statement required for an 
exceptions request will result in an automatic favorable decision.
    41. Revise Sec.  423.580 to read as follows:


Sec.  423.580  Right to a redetermination.

    An enrollee who has received a coverage determination (including 
one that is reopened and revised as described in Sec.  423.634) may 
request that it be redetermined under the procedures described in Sec.  
423.582, which address requests for a standard redetermination. The 
prescribing physician or other prescriber (acting on behalf of an 
enrollee), upon providing notice to the enrollee, may request a 
standard redetermination under the procedures described in Sec.  
423.582. An enrollee or an enrollee's prescribing physician or other 
prescriber (acting on behalf of an enrollee) may request an expedited

[[Page 28601]]

redetermination as specified in Sec.  423.584.
    42. Revise Sec.  423.582 to read as follows:


Sec.  423.582  Request for a standard redetermination.

    (a) Method and place for filing a request. An enrollee or an 
enrollee's prescribing physician or other prescriber (acting on behalf 
of the enrollee) must ask for a redetermination by making a written 
request with the Part D plan sponsor that made the coverage 
determination. The Part D plan sponsor may adopt a policy for accepting 
oral requests.
    (b) Timeframe for filing a request. Except as provided in paragraph 
(c) of this section, a request for a redetermination must be filed 
within 60 calendar days from the date of the notice of the coverage 
determination.
    (c) Extending the time for filing a request--(1) General rule. If 
an enrollee or prescribing physician or other prescriber acting on 
behalf of an enrollee shows good cause, the Part D plan sponsor may 
extend the timeframe for filing a request for redetermination.
    (2) How to request an extension of timeframe. If the 60-day period 
in which to file a request for a redetermination has expired, an 
enrollee or a prescribing physician or other prescriber acting on 
behalf of an enrollee may file a request for redetermination and 
extension of timeframe with the Part D plan sponsor. The request for 
redetermination and to extend the timeframe must--
    (i) Be in writing; and
    (ii) State why the request for redetermination was not filed on 
time.
    (d) Withdrawing a request. The person who files a request for 
redetermination may withdraw it by filing a written request with the 
Part D sponsor.
    43. Amend Sec.  423.584 by--
    A. Revising paragraph (a).
    B. Revising paragraph (b).
    C. Revising paragraph (c)(2)(ii).
    D. Revising paragraph (d)(2)(iii).
    The revisions read as follows:


Sec.  423.584  Expediting certain redeterminations.

    (a) Who may request an expedited redetermination. An enrollee or an 
enrollee's prescribing physician or other prescriber may request that a 
Part D plan sponsor expedite a redetermination that involves the issues 
specified in Sec.  423.566(b). (This does not include requests for 
payment of drugs already furnished.)
    (b) How to make a request. (1) To ask for an expedited 
redetermination, an enrollee or a prescribing physician or other 
prescriber acting on behalf of an enrollee must submit an oral or 
written request directly to the Part D plan sponsor or, if applicable, 
to the entity responsible for making the redetermination, as directed 
by the Part D plan sponsor.
    (2) A prescribing physician or other prescriber may provide oral or 
written support for an enrollee's request for an expedited 
redetermination.
    (c) * * *
    (2) * * *
    (ii) For a request made or supported by a prescribing physician or 
other prescriber, the Part D plan sponsor must provide an expedited 
redetermination if the physician or other prescriber indicates that 
applying the standard timeframe for conducting a redetermination may 
seriously jeopardize the life or health of the enrollee or the 
enrollee's ability to regain maximum function.
    (d) * * *
    (2) * * *
    (iii) Informs the enrollee of the right to resubmit a request for 
an expedited redetermination with the prescribing physician's or other 
prescriber's support; and
* * * * *
    44. Revise Sec.  423.586 to read as follows:


Sec.  423.586  Opportunity to submit evidence.

    The Part D plan sponsor must provide the enrollee or the 
prescribing physician or other prescriber, as appropriate, with a 
reasonable opportunity to present evidence and allegations of fact or 
law, related to the issue in dispute, in person as well as in writing. 
In the case of an expedited redetermination, the opportunity to present 
evidence is limited by the short timeframe for making a decision. 
Therefore, the Part D plan sponsor must inform the enrollee or the 
prescribing physician or other prescriber of the conditions for 
submitting the evidence.
    45. Amend Sec.  423.590 by revising paragraphs (d)(1), (e), and 
(f)(2) to read as follows:


Sec.  423.590  Timeframes and responsibility for making 
redeterminations.

* * * * *
    (d) Expedited redetermination--(1) Timeframe. A Part D plan sponsor 
that approves a request for expedited redetermination must complete its 
redetermination and give the enrollee (and the prescribing physician or 
other prescriber involved, as appropriate), notice of its decision as 
expeditiously as the enrollee's health condition requires but no later 
than 72 hours after receiving the request.
* * * * *
    (e) Failure to meet timeframe for expedited redetermination. If the 
Part D plan sponsor fails to provide the enrollee or the prescribing 
physician or other prescriber, as appropriate, with the results of its 
expedited redetermination within the timeframe described in paragraph 
(d) of this section, the failure constitutes an adverse redetermination 
decision, and the Part D plan sponsor must forward the enrollee's 
request to the IRE within 24 hours of the expiration of the 
adjudication timeframe.
    (f) * * *
    (2) When the issue is the denial of coverage based on a lack of 
medical necessity (or any substantively equivalent term used to 
describe the concept of medical necessity), the redetermination must be 
made by a physician with expertise in the field of medicine that is 
appropriate for the services at issue. The physician making the 
redetermination need not, in all cases, be of the same specialty or 
subspecialty as the prescribing physician or other prescriber.
* * * * *
    46. Amend Sec.  423.600 by revising paragraphs (b), (c), and (e) to 
read as follows:


Sec.  423.600  Reconsideration by an independent review entity (IRE).

* * * * *
    (b) When an enrollee files an appeal, the IRE is required to 
solicit the views of the prescribing physician or other prescriber. The 
IRE may solicit the views of the prescribing physician or other 
prescriber orally or in writing. A written account of the prescribing 
physician's or other prescriber's views (prepared by either the 
prescribing physician, other prescriber, or IRE, as appropriate) must 
be contained in the IRE's record.
    (c) In order for an enrollee to request an IRE reconsideration of a 
determination by a Part D plan sponsor not to provide for a Part D drug 
that is not on the formulary, the prescribing physician or other 
prescriber must determine that all covered Part D drugs on any tier of 
the formulary for treatment of the same condition would not be as 
effective for the individual as the non-formulary drug, would have 
adverse effects for the individual, or both.
* * * * *
    (e) When the issue is the denial of coverage based on a lack of 
medical necessity (or any substantively equivalent term used to 
describe the concept of medical necessity), the reconsideration must be 
made by a physician with expertise in the field of

[[Page 28602]]

medicine that is appropriate for the services at issue. The physician 
making the reconsideration need not, in all cases, be of the same 
specialty or subspecialty as the prescribing physician or other 
prescriber.

Subpart O--Intermediate Sanctions

    47. Amend Sec.  423.760 by--
    A. Redesignating paragraphs (b)(2) and (b)(3) as paragraphs (b)(3) 
and (b)(4), respectively.
    B. Adding new paragraph (b)(2) to read as follows:


Sec.  423.760  Determinations regarding the amount of civil money 
penalties and assessment imposed by CMS.

* * * * *
    (b) * * *
    (2) If the deficiency on which the determination is based has 
directly adversely affected (or has the substantial likelihood of 
adversely affecting) one or more Part D enrollees, CMS may calculate a 
CMP of up to $25,000 for each Part D enrollee directly adversely 
affected (or with a substantial likelihood of being adversely affected) 
by a deficiency.
* * * * *

Subpart P--Premiums and Cost-Sharing Subsidies for Low-Income 
Individuals

    48. Amend Sec.  423.772 by adding the definition for ``Best 
available evidence'', in alphabetical order, to read as follows:


Sec.  423.772  Definitions.

* * * * *
    Best available evidence means evidence recognized by CMS as 
documentation or other information that is directly tied to 
authoritative sources that confirm an individual's low-income subsidy 
eligibility status, and that must be accepted and used by the Part D 
sponsor to change low-income subsidy status.
* * * * *
    49. Amend Sec.  423.782 by adding new paragraph (c) to read as 
follows:


Sec.  423.782  Cost-sharing subsidy.

* * * * *
    (c) When the out-of-pocket cost for a covered Part D drug under a 
Part D sponsor's plan benefit package is less than the maximum 
allowable copayment, coinsurance or deductible amounts under paragraphs 
(a) and (b) of this section, the Part D sponsor may only charge the 
lower benefit package amount.
    50. Amend Sec.  423.800 by revising paragraph (b) and adding a new 
paragraph (d) to read as follows:


Sec.  423.800  Administration of subsidy program.

* * * * *
    (b) Reduction of premium or cost-sharing by PDP sponsor or 
organization. Based on information provided by CMS under paragraph (a) 
of this section, or obtained under paragraph (d) of this section, the 
Part D sponsor offering the Part D plan, in which a subsidy eligible 
individual is enrolled must reduce the individual's premiums and cost-
sharing as applicable, and provide information to CMS on the amount of 
those reductions, in a manner determined by CMS. The Part D sponsor 
must track the application of the subsidies under this subpart to be 
applied to the out-of-pocket threshold.
* * * * *
    (d) Use of the best available evidence process to establish cost-
sharing. Part D sponsors must accept best available evidence as defined 
in Sec.  423.772 of this part, and update the subsidy eligible 
individual's LIS status in accordance with a process established by 
CMS, and within a reasonable timeframe as determined by CMS.

Subpart R--Payment to Sponsors of Retiree Prescription Drug Plans

    51. Section 423.882 is amended by--
    A. Adding the definition of ``actually paid''.
    B. Adding the definition of ``administrative costs''.
    C. Revising the definition of ``allowable retiree costs''.
    D. Revising the definition of ``gross covered retiree plan-related 
prescription drug costs'', or ``gross retiree costs''.
    E. Adding the definition of ``negotiated prices''.
    The additions and revisions read as follows:


Sec.  423.882  Definitions.

* * * * *
    Actually paid means that the costs must be actually incurred by the 
qualified retiree prescription drug plan and must be net of any direct 
or indirect remuneration (including discounts, chargebacks or rebates, 
cash discounts, free goods contingent on a purchase agreement, up-front 
payments, coupons, goods in kind, free or reduced-price services, 
grants, or other price concessions or similar benefits offered to some 
or all purchasers) from any source (including manufacturers, 
pharmacies, qualifying covered retirees, or any other person) that 
would serve to decrease the costs incurred under the qualified retiree 
prescription drug plan. Direct and indirect remuneration includes 
discounts, chargebacks or rebates, cash discounts, free goods 
contingent on a purchase agreement, up-front payments, coupons, goods 
in kind, free or reduced-price services, grants, or other price 
concessions or similar benefits from manufacturers, pharmacies or 
similar entities obtained by an intermediary contracting organization 
with which the sponsor of the qualified retiree prescription drug plan 
has contracted for administrative services, regardless of whether the 
intermediary contracting organization retains all or a portion of the 
direct and indirect remuneration or passes the entire direct and 
indirect remuneration to the sponsor of the qualified retiree 
prescription drug plan and regardless of the terms of the contract 
between the plan sponsor and the intermediary contracting organization.
    Administrative costs means costs incurred by a qualified retiree 
prescription drug plan that are not drug costs incurred to purchase or 
reimburse the purchase of Part D drugs. Administrative costs include 
amounts paid by the sponsor of a qualified retiree prescription drug 
plan to an intermediary contracting organization for Part D drugs 
dispensed to qualifying covered retirees in the sponsor's plan that 
differ from the amount paid by the intermediary contracting 
organization to a pharmacy or other entity that is the final dispenser 
of the Part D drugs. For example, any profit or loss retained by an 
intermediary contracting organization (through discounts, rebates, or 
other direct or indirect price concessions) when negotiating prices 
with dispensing entities is considered an administrative cost.
    Allowable retiree costs means the subset of gross covered retiree 
plan-related prescription drug costs actually paid by the sponsor of 
the qualified retiree prescription drug plan or by (or on behalf of) a 
qualifying covered retiree under the plan.
* * * * *
    Gross covered retiree plan-related prescription drug costs, or 
gross retiree costs, means those actually paid Part D drug costs 
incurred under a qualified retiree prescription drug plan, excluding 
administrative costs, but including dispensing fees, during the 
coverage year. They equal the sum of the following:
    (1) The share of negotiated prices (as defined in this section) 
actually paid by the qualified retiree prescription drug plan that is 
received as reimbursement by the pharmacy or other dispensing entity, 
and reimbursement paid to indemnify a qualifying covered retiree when 
the reimbursement is associated

[[Page 28603]]

with a qualifying covered retiree obtaining Part D drugs under the 
qualified retiree prescription drug plan.
    (2) All amounts paid under the qualified retiree prescription drug 
plan by or on behalf of a qualifying covered retiree (such as the 
deductible, coinsurance, or cost sharing) in order to obtain Part D 
drugs that are covered under the qualified retiree prescription drug 
plan.
* * * * *
    Negotiated prices means prices for Part D drugs that--
    (1) The qualified retiree prescription drug plan (or other 
intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount such network entity will receive, in total, for a particular 
drug;
    (2) Are reduced by those discounts, direct or indirect subsidies, 
rebates, other price concessions, and direct or indirect remuneration 
that the qualified retiree prescription drug plan has elected to pass 
through to qualifying covered retirees at the point of sale; and
    (3) Includes any dispensing fees.
* * * * *
    52. Add new subpart V to read as follows:
Subpart V--Part D Marketing Requirements
Sec.
423.2260 Definitions concerning marketing materials.
423.2262 Review and distribution of marketing materials.
423.2264 Guidelines for CMS review.
423.2266 Deemed approval.
423.2268 Standards for Part D marketing.
423.2272 Licensing of marketing representatives and confirmation of 
marketing resources.
423.2274 Broker and agent commissions.
423.2276 Employer group retiree marketing.

Subpart V--Part D Marketing Requirements


Sec.  423.2260  Definitions concerning marketing materials.

    As used in this subpart--
    Marketing Materials. (1) Marketing Materials include any 
informational materials targeted to Medicare beneficiaries which--
    (i) Promote the Part D plan.
    (ii) Inform Medicare beneficiaries that they may enroll, or remain 
enrolled in a Part D plan.
    (iii) Explain the benefits of enrollment in a Part D plan, or rules 
that apply to enrollees.
    (iv) Explain how Medicare services are covered under a Part D plan, 
including conditions that apply to such coverage.
    (2) Examples of marketing materials include, but are not limited 
to--
    (i) General audience materials such as general circulation 
brochures, newspapers, magazines, television, radio, billboards, yellow 
pages, or the Internet.
    (ii) Marketing representative materials such as scripts or outlines 
for telemarketing or other presentations.
    (iii) Presentation materials such as slides and charts.
    (iv) Promotional materials such as brochures or leaflets, including 
materials for circulation by third parties (for example, physicians or 
other providers).
    (v) Membership communication materials such as membership rules, 
subscriber agreements, member handbooks and wallet card instructions to 
enrollees.
    (vi) Letters to members about contractual changes; changes in 
providers, premiums, benefits, plan procedures etc.
    (vii) Membership or claims processing activities.


Sec.  423.2262  Review and distribution of marketing materials.

    (a) CMS review of marketing materials. (1) Except as provided in 
paragraph (a)(2) of this section a Part D plan may not distribute any 
marketing materials (as defined in Sec.  423.2260 of this Part), or 
enrollment forms, or make such materials or forms available to Part D 
eligible individuals unless--
    (i) At least 45 days (or 10 days if using certain types of 
marketing materials that use, without modification, proposed model 
language as specified by CMS) before the date of distribution, the Part 
D sponsor submits the material or form to CMS for review under the 
guidelines in Sec.  423.2264; and
    (ii) CMS does not disapprove the distribution of new material or 
form.
    (2) [Reserved]
    (b) File and use. The Part D sponsor may distribute certain types 
of marketing materials, designated by CMS, 5 days following their 
submission to CMS if the Part D sponsor certifies that in the case of 
these marketing materials, it followed all applicable marketing 
guidelines and, when applicable, used model language specified by CMS 
without modification.


Sec.  423.2264  Guidelines for CMS review.

    In reviewing marketing material or enrollment forms under Sec.  
423.2262, CMS determines (unless otherwise specified in additional 
guidance) that the marketing materials--
    (a) Provide, in a format (and, where appropriate, print size), and 
using standard terminology that may be specified by CMS, the following 
information to Medicare beneficiaries interested in enrolling must 
consist of:
    (1) Adequate written description of rules (including any 
limitations on the providers from whom services can be obtained), 
procedures, basic benefits and services, and fees and other charges.
    (2) Adequate written explanation of the grievance and appeals 
process, including differences between the two, and when it is 
appropriate to use each.
    (3) Any other information necessary to enable beneficiaries to make 
an informed decision about enrollment.
    (b) Notify the general public of its enrollment period in an 
appropriate manner, through appropriate media, throughout its service 
area.
    (c) Include in the written materials notice that the Part D plan is 
authorized by law to refuse to renew its contract with CMS, that CMS 
also may refuse to renew the contract, and that termination or non-
renewal may result in termination of the beneficiary's enrollment in 
the Part D plan. In addition, the Part D plan may reduce its service 
area and no longer be offered in the area where a beneficiary resides.
    (d) Ensure that materials are not materially inaccurate or 
misleading or otherwise make material misrepresentations.
    (e) For markets with a significant non-English speaking population, 
provide materials in the language of these individuals.


Sec.  423.2266  Deemed approval.

    If CMS has not disapproved the distribution of marketing materials 
or a form submitted by a Part D sponsor for a Part D plan in a Part D 
region, CMS is deemed to not have disapproved the distribution of the 
marketing material or form in all other Part D regions covered by the 
Part D plan, with the exception of any portion of the material or form 
that is specific to the Part D region.


Sec.  423.2268  Standards for Part D marketing.

    In conducting marketing activities, a Part D plan may not--
    (a) Provide for cash or other remuneration as an inducement for 
enrollment or otherwise. This does not prohibit explanation of any 
legitimate benefits the beneficiary might obtain as an enrollee of the 
Part D plan.
    (b) Offer gifts to potential enrollees, unless the gifts are of 
nominal (as defined in the CMS Marketing Guidelines) value, are offered 
to all eligible members without discrimination, and are not in the form 
of cash or other monetary rebates. Providing meals for potential 
enrollees is prohibited, regardless of value.

[[Page 28604]]

    (c) Engage in any discriminatory activity such as, including 
targeted marketing to Medicare beneficiaries from higher income areas 
without making comparable efforts to enroll Medicare beneficiaries from 
lower income areas.
    (d) Solicit door-to-door for Medicare beneficiaries or through 
other unsolicited means of direct contact, including calling a 
beneficiary without the beneficiary initiating the contact.
    (e) Engage in activities that could mislead or confuse Medicare 
beneficiaries, or misrepresent the Part D sponsor or its Part D plan. 
The Part D organization may not claim that it is recommended or 
endorsed by CMS or Medicare or the Department of Health and Human 
Services or that CMS or Medicare or the Department of Health and Human 
Services recommends that the beneficiary enroll in the Part D plan. The 
Part D organization may explain that the organization is approved for 
participation in Medicare.
    (f) Market non-health care related products to prospective 
enrollees during any Part D sales activity or presentation. This is 
considered cross-selling and is prohibited.
    (g) Market any health care related product during a marketing 
appointment beyond the scope agreed upon by the beneficiary, and 
documented by the plan, prior to the appointment.
    (h) Market additional health related lines of plan business not 
identified prior to an in-home appointment without a separate 
appointment that may not be scheduled until 48 hours after the initial 
appointment.
    (i) Distribute marketing materials for which, before expiration of 
the 45-day period, the PDP Sponsor receives from CMS written notice of 
disapproval because it is inaccurate or misleading, or misrepresents 
the PDP Sponsor, its marketing representatives, or CMS.
    (j) Use providers, provider groups, or pharmacies to distribute 
printed information comparing the benefits of different Part D plans 
unless providers, provider groups or pharmacies accept and display 
materials from all Part D plan sponsors.
    (k) Conduct sales presentations or distribute and accept Part D 
plan enrollment forms in provider offices, pharmacies or other places 
where health care is delivered.
    (l) Conduct sales presentations or distribute and accept plan 
applications at educational events.
    (m) Employ Part D plan names that suggest that a plan is not 
available to all Medicare beneficiaries.
    (n) Display the names and/or logos of co-branded network providers 
on the organization's member identification card. Other marketing 
materials that include names and/or logos of provider co-branding 
partners must clearly indicate that other providers are available in 
the network.
    (o) Engage in any other marketing activity prohibited by CMS in its 
marketing guidance.


Sec.  423.2272  Licensing of marketing representatives and confirmation 
of marketing resources.

    In its marketing, the Part D organization must--
    (a) Demonstrate to CMS's satisfaction that marketing resources are 
allocated to marketing to the disabled Medicare population as well as 
beneficiaries age 65 and over.
    (b) Establish and maintain a system for confirming that enrolled 
beneficiaries have in fact enrolled in the PDP and understand the rules 
applicable under the plan.
    (c) Employ as marketing representatives only individuals who are 
licensed by the State to conduct direct marketing activities (as 
defined in the Medicare Marketing Guidelines) in that State, and whom 
the sponsor has informed that State it has appointed, consistent with 
the appointment process provided for under State law, except that any 
fees required under such appointment process do not apply.


Sec.  423.2274  Broker and agent commissions.

    If a Part D sponsor markets through independent brokers or agents--
    (a)(1) In paying a commission or other compensation (collectively 
referred to as ``commission'') to such agent or representative, the 
commission the agent would receive for selling or servicing the policy 
in the first year could not exceed the commission the agent receives 
for selling or servicing the policy in all subsequent years.
    (2) The commission must be the same for all plans and all plan 
product types offered by the sponsor's parent organization.
    (b) It must ensure agents selling Medicare products are trained on 
Medicare rules and regulations specific to the plan products they 
intend to sell.
    (c) It must ensure agents selling Medicare products are tested, as 
specified in CMS guidance.
    (d) Upon CMS's request, a sponsor must provide to CMS the 
information necessary for it to conduct oversight of marketing 
activities.
    (e) It must comply with State requests for information about the 
performance of a licensed agent or broker as part of a state 
investigation into the individual's conduct. CMS will establish and 
maintain a memorandum of understanding (MOU) to share compliance and 
oversight information with States that agree to the MOU.


Sec.  423.2276  Employer group retiree marketing.

    Part D sponsors may develop marketing materials designed for 
members of an employer group who are eligible for employer-sponsored 
benefits through the Part D sponsor, and furnish these materials only 
to the group members. These materials are not subject to CMS prior 
review and approval.

    Authority: (Catalog of Federal Domestic Assistance Program No. 
93.778, Medical Assistance Program)

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: January 17, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 19, 2008.
Michael O. Leavitt,
Secretary.
[FR Doc. 08-1244 Filed 5-8-08; 8:45 am]
BILLING CODE 4120-01-P


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