‘‘(1) IN GENERAL.—The Secretary shall estab-
lish procedures for making payments to an eligible
entity under a contract consistent with this sub-
section.
‘‘(2) RISK REQUIREMENT.—A portion of pay-
ments made to an eligible entity under this section
shall be based on performance goals established by
the Secretary, including the following:
‘‘(A) QUALITY SERVICE.—The entity pro-
vides eligible beneficiaries enrolled in the plan
that is covered by the contract under this part
with quality services, as measured by such fac-
tors as—
‘‘(i) sustained pharmacy network ac-
cess;
‘‘(ii) timeliness and accuracy of serv-
ice delivery in claims processing and card
production;
‘‘(iii) pharmacy and member service
support access;
‘‘(iv) response time in mail delivery
service; and
‘‘(v) timely action with regard to ap-
peals and current beneficiary service sur-
veys.
‘‘(B) QUALITY CLINICAL CARE.—The enti-
ty provides such beneficiaries with quality clin-
ical care, as measured by such factors as
providing—
‘‘(i) notification to such beneficiaries
and to providers in order to prevent ad-
verse drug reactions; and
‘‘(ii) specific clinical suggestions to
improve health and patient and prescriber
education as appropriate.
‘‘(C) CONTROL OF MEDICARE COSTS.—The
entity contains costs to the Federal Supple-
mentary Medical Insurance Trust Fund as
measured by generic substitution rates, price
discounts, and other factors determined appro-
priate by the Secretary that do not reduce the
access of beneficiaries to medically necessary
covered outpatient drugs.
‘‘(3) PERCENTAGE
OF
PAYMENT
TIED
TO
RISK.—
‘‘(A) IN
GENERAL.—The Secretary shall
determine the percentage of the administrative
payments to an eligible entity that will be tied
to the performance goals.
‘‘(B) LIMITATION
ON
RISK
TO
ENSURE
PROGRAM STABILITY.—In order to provide for
program stability, the Secretary may not estab-
lish a percentage to be adjusted under this sub-
section at a level that jeopardizes the ability of
an eligible entity to administer and deliver the
benefits under this part or administer and de-
liver such benefits in a quality manner.
‘‘(g) COST-SHARING.—
‘‘(1) ANNUAL
DEDUCTIBLE.—Benefits under
this section shall not begin in a year until the eligi-
ble beneficiary has met a $250 deductible.
‘‘(2) COPAYMENT.—
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B), the eligible beneficiary shall be re-
sponsible for making payments in an amount
not greater than 20 percent of the cost (as stat-
ed in the contract) of any covered outpatient
drug that is provided to the beneficiary. Pursu-
ant to subsection (a)(4)(B), an eligible entity
may reduce the payment amount that an eligi-
ble beneficiary is responsible for making to the
entity.
‘‘(B) NO
COPAYMENT
FOR
GENERICS.—
The copayment amount under subparagraph
(A) shall be zero in the case of a covered out-
patient drug that is a drug approved under sec-
tion 505(j) of the Federal Food Drug and Cos-
metic Act.
‘‘(h) CONDITIONS FOR AWARDING CONTRACT.—The
Secretary shall not award a contract to an eligible entity
under subsection (a) unless the Secretary finds that the
eligible entity is in compliance with such terms and condi-
tions as the Secretary shall specify, including the fol-
lowing:
‘‘(1) QUALITY AND FINANCIAL STANDARDS.—
The eligible entity meets quality and financial stand-
ards specified by the Secretary.
‘‘(2) INFORMATION.—The eligible entity pro-
vides the Secretary with information that the Sec-
retary determines is necessary in order to carry out
the bidding process under this section, including
data needed to implement subsection (a)(6) and data
regarding utilization, expenditures, and costs.
‘‘(3) EDUCATION.—The eligible entity estab-
lishes educational programs that meet the criteria
established by the Secretary pursuant to subsection
(i)(1).
‘‘(4) PROCEDURES TO ENSURE PROPER UTILI-
ZATION
AND
TO
AVOID
ADVERSE
DRUG
REAC-
TIONS.—The eligible entity has in place procedures
to ensure the—
‘‘(A) appropriate utilization by eligible
beneficiaries of the benefits to be provided
under the contract; and
‘‘(B) the avoidance of adverse drug reac-
tions among such beneficiaries, including prob-
lems due to therapeutic duplication, drug-dis-
ease contraindications, drug-drug interactions
(including serious interactions with nonprescrip-
tion or over-the-counter drugs), incorrect drug
dosage or duration of drug treatment, drug-al-
lergy interactions, and clinical abuse and mis-
use.
‘‘(5) PATIENT PROTECTIONS.—
‘‘(A) ACCESS.—The eligible entity ensures
that the covered outpatient drugs are accessible
and convenient to eligible beneficiaries covered
under the contract, including by offering the
services in the following manner:
‘‘(i) 
SERVICES
DURING
EMER-
GENCIES.—The offering of services 24
hours a day and 7 days a week for emer-
gencies.
‘‘(ii) CONTRACTS WITH RETAIL PHAR-
MACIES.—The offering of services—
‘‘(I) at a sufficient (as deter-
mined by the Secretary) number of re-
tail pharmacies; and
‘‘(II) to the extent feasible, at re-
tail pharmacies located throughout
the eligible entity’s service area.
‘‘(B) ENSURING THAT BENEFICIARIES ARE
NOT
OVERCHARGED.—The eligible entity has
procedures in place to ensure that—
‘‘(i) the total charge for each covered
outpatient drug dispensed to an eligible
beneficiary enrolled in the plan covered by
the contract does not exceed the negotiated
price for the drug; and
‘‘(ii) the retail pharmacy dispensing
the drug does not charge (or collect from)
such beneficiary an amount that exceeds
the beneficiary’s obligation (as determined
in accordance with the provisions of this
part) of the negotiated price.
‘‘(C) RETAIL PHARMACY MEETS MINIMUM
QUALITY AND TECHNOLOGY STANDARDS.—The
eligible entity ensures that any retail pharmacy
that it contracts with to deliver benefits under
this part meets minimum quality and tech-
nology standards (as established by the Sec-
retary).
‘‘(6) RULES RELATING TO PROVISION OF BENE-
FITS.—
‘‘(A) PROVISION
OF
BENEFITS.—In pro-
viding benefits under a contract under this sec-
tion, an eligible entity may—
‘‘(i) employ mechanisms to provide
benefits economically, including the use
of—
‘‘(I) formularies (pursuant to
subparagraph (B));
‘‘(II) alternative methods of dis-
tribution; and
‘‘(III) generic drug substitution;
and
‘‘(ii) use incentives to encourage eligi-
ble beneficiaries to select less costly means
of receiving drugs.
‘‘(B) FORMULARIES.—If an eligible entity
uses a formulary to contain costs under this
Act—
‘‘(i) the eligible entity shall—
‘‘(I) ensure participation of prac-
ticing physicians and pharmacists in
the development of the formulary;
‘‘(II) include in the formulary at
least 1 drug from each therapeutic
class from the drugs identified under
section 2(b)(2) of the Essential Medi-
cines for Medicare Act of 2002 and
provide at least 1 generic equivalent,
if available;
‘‘(III) provide for coverage of
otherwise 
covered 
non-formulary
drugs when recommended by pre-
scribing providers; and
‘‘(IV) disclose to current and
prospective beneficiaries and to pro-
viders in the service area the nature
of the formulary restrictions, includ-
ing information regarding the drugs
included in the formulary, copayment
amounts, and any difference in the
cost-sharing for different types of
drugs; but
‘‘(ii) nothing shall preclude an entity
from—
‘‘(I) requiring higher cost-sharing
for drugs provided under clause
(i)(III), subject to limits established
in subsection (g)(2)(A), except that an
entity shall provide for coverage of a
nonformulary drug on the same basis
as a drug within the formulary if such
nonformulary drug is determined by
the prescribing provider to be medi-
cally indicated;
‘‘(II) educating prescribing pro-
viders, pharmacists, and beneficiaries
about medical and cost benefits of for-
mulary products; and
‘‘(III) requesting prescribing pro-
viders to consider a formulary product
prior to dispensing of a nonformulary
drug, as long as such request does not
unduly delay the provision of the
drug.
‘‘(7) PROCEDURES
TO
COMPENSATE
PHAR-
MACISTS FOR COUNSELING.—The eligible entity shall
compensate pharmacists for providing the counseling
described in subsection (i)(2)(B).
‘‘(8) CLINICAL OUTCOMES.—
‘‘(A) REQUIREMENT.—The eligible entity
shall comply with clinical quality standards as
determined by the Secretary.
‘‘(B) DEVELOPMENT
OF
STANDARDS.—
The Secretary, in consultation with appropriate
medical specialty societies, shall develop clinical
quality standards that are applicable to eligible
entities. Such standards shall be based on cur-
rent standards of care.
‘‘(9) PROCEDURES
REGARDING
DENIALS
OF
CARE.—The eligible entity has in place procedures to
ensure—
‘‘(A) the timely review and resolution of
denials of care and complaints (including those
regarding the use of formularies under para-
graph (6)) by enrollees, or providers, phar-
macists, and other individuals acting on behalf
of such individual (with the individual’s con-
sent) in accordance with requirements (as es-
tablished by the Secretary) that are comparable
to such requirements for Medicare+Choice or-
ganizations under part C;
‘‘(B) that beneficiaries are provided with
information regarding the appeals procedures
under this section at the time of enrollment;
and
‘‘(C) that providers receive information on
the entity’s procedures for coverage of otherwise
covered non-formulary and alternative prescrip-
tion drugs for treatment of certain chronic con-
ditions.
‘‘(i) EDUCATIONAL REQUIREMENTS TO ENSURE AP-
PROPRIATE UTILIZATION.—
‘‘(1) 
ESTABLISHMENT
OF
PROGRAM
CRI-
TERIA.—The Secretary shall establish a model for
comprehensive educational programs in order to as-
sure the appropriate—
‘‘(A) prescribing and dispensing of covered
outpatient drugs under this section; and
‘‘(B) use of such drugs by eligible bene-
ficiaries.
‘‘(2) ELEMENTS OF MODEL.—The model estab-
lished under paragraph (1) shall include the fol-
lowing elements:
‘‘(A) On-line prospective review available
24 hours a day and 7 days a week in order to
evaluate each prescription for drug therapy
problems due to duplication, interaction, or in-
correct dosage or duration of therapy.
‘‘(B) Consistent with State law, guidelines
for counseling eligible beneficiaries enrolled
under a contract under this section regarding—
‘‘(i) the proper use of prescribed cov-
ered outpatient drugs; and
‘‘(ii) interactions and contra-indica-
tions.
‘‘(C) Methods to identify and educate pro-
viders, pharmacists, and eligible beneficiaries
regarding—
‘‘(i) instances or patterns concerning
the unnecessary or inappropriate pre-
scribing or dispensing of covered out-
patient drugs;
‘‘(ii) instances or patterns of sub-
standard care;
‘‘(iii) potential adverse reactions to
covered outpatient drugs;
‘‘(iv) inappropriate use of antibiotics;
‘‘(v) appropriate use of generic prod-
ucts; and
‘‘(vi) the importance of using covered
outpatient drugs in accordance with the in-
struction of prescribing providers.
‘‘(j) PROTECTION OF PATIENT CONFIDENTIALITY.—
Insofar as an eligible organization maintains individually
identifiable medical records or other health information re-
garding enrollees under a contract entered into under this
section, the organization shall—
‘‘(1) safeguard the privacy of any individually
identifiable enrollee information;
‘‘(2) maintain such records and information in
a manner that is accurate and timely;
‘‘(3) assure timely access of such enrollees to
such records and information; and
‘‘(4) otherwise comply with applicable laws re-
lating to patient confidentiality.
‘‘(k) DEFINITIONS.—In this section:
‘‘(1) COVERED OUTPATIENT DRUG.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), the term ‘covered outpatient
drug’ means prescription drugs for treatment of
certain chronic conditions (as defined in section
1861(uu)(1)).
‘‘(B) EXCLUSION.—The term ‘covered out-
patient drug’ does not include any product—
‘‘(i) which may be distributed to indi-
viduals without a prescription;
‘‘(ii) when furnished as part of, or as
incident to, a diagnostic service or any
other item or service for which payment
may be made under this title;
‘‘(iii) that was covered under this title
on the day before the date of enactment of
the Essential Medicines for Medicare Act
of 2002; or
‘‘(iv) that is a therapeutically equiva-
lent replacement for a product described in
clause (ii) or (iii), as determined by the
Secretary.
‘‘(2) ELIGIBLE BENEFICIARY.—The term ‘eligi-
ble beneficiary’ means an individual that is enrolled
under part B of this title.
‘‘(3) ELIGIBLE ENTITY.—The term ‘eligible en-
tity’ means any entity that the Secretary determines
to be appropriate, including—
‘‘(A) pharmaceutical benefit management
companies;
‘‘(B) wholesale and retail pharmacist deliv-
ery systems;
‘‘(C) insurers;
‘‘(D) other entities; or
‘‘(E) any combination of the entities de-
scribed in subparagraphs (A) through (D).’’.
(2) NO APPLICATION TO REGULAR PART B DE-
DUCTIBLE.—Section 1833(b) of such Act (42 U.S.C.
1395l(b)) is amended—
(A) in paragraph (1), by inserting ‘‘or for
prescription drugs for treatment of certain
chronic 
conditions’’ 
after 
‘‘section
1861(s)(10)(A)’’; and
(B) in paragraph (2), by inserting ‘‘and
shall not apply with respect to prescription
drugs for treatment of certain chronic condi-
tions’ after ‘‘section 1861(kk)))’’.
(3) PAYMENT CONFORMING AMENDMENT.—Sec-
tion 1832(a) of such Act (42 U.S.C. 1395k(a)) is
amended—
(A) in paragraph (2)(A), by striking ‘‘and
(I)’’ and inserting ‘‘(I), and (K)’’;
(B) by striking ‘‘and’’ at the end of para-
graph (8);
(C) by striking the period at the end of
subparagraph (9) and inserting ‘‘; and’’; and
(D) by adding at the end the following new
paragraph:
‘‘(10) with respect to prescription drugs for
treatment of certain chronic conditions, the amounts
provided under section 1849;’’.
(d) ANALYSIS OF BENEFIT.—
(1) IN GENERAL.—The Secretary of Health and
Human Services shall enter into an arrangement
with the Institute of Medicine of the National Acad-
emy of Sciences under which the Institute on an on-
going basis collects and analyzes data, and submits
annual reports to the Secretary and Congress, on—
(A) the effectiveness of the benefits pro-
vided under the amendments made by this sec-
tion in reducing demand for acute medical serv-
ices;
(B) the annual cost of the benefits and the
annual savings in acute medical services; and
(C) additional diagnoses, and additional
prescription drugs, for which such benefits
should be provided, using the criteria described
in section 2(b)(2)(A) of this Act.
(2) CONSULTATION.—In carrying out para-
graph (1)(C), the Secretary shall establish a process
through which health care providers, advocacy
groups, and other interested parties may submit evi-
dence to the Institute of Medicine and the Institute
shall consider such evidence.
(3) CONSIDERATIONS.—Analyses under this
subsection shall consider both the short term and
long term benefits, and costs to the medicare pro-
gram of any change in benefits.
(4) SECRETARIAL
RECOMMENDATIONS.—The
Secretary, taking into account the annual reports
submitted under this subsection, may submit to Con-
gress recommendations regarding changes in the
chronic conditions for which prescription drug cov-
erage is available under the medicare program.
(5) HEARINGS.—The Committee on Ways and
Means and the Committee on Commerce of the
House of Representatives and the Committee on Fi-
nance of the Senate shall conduct hearings to con-
sider the reports and recommendations submitted
under this subsection before making any change in
covered prescription drug benefits under the medi-
care program.
(6) FUNDING.—From funds appropriated to the
Department of Health and Human Services for each
fiscal year (beginning with fiscal year 2004), the
Secretary shall provide for such funding as the Sec-
retary determines necessary for the conduct of the
analyses conducted under this subsection.
(e) EFFECTIVE DATE.—Benefits shall first be made
available under the amendments made by this section for
prescription drugs furnished on or after January 1, 2004.
SEC. 3. MEDICAID COVERAGE OF MEDICARE PRESCRIP-
TION DRUG COST SHARING FOR SLMBS.
Section 1902(a)(10)(E)(iii) of the Social Security Act
(42 U.S.C. 1396a(a)(10)(E)(iii)) by inserting ‘‘and medi-
care cost-sharing described in subparagraphs (B) and (C)
of section 1905(p)(3) with respect to the deductible and
copayment described in section 1849(g)’’ after ‘‘section
1905(p)(4),’’.
SEC. 4. DISEASE MANAGEMENT SERVICES.
Title XVIII of the Social Security Act is amended by
inserting after section 1866B the following new section:
‘‘DISEASE MANAGEMENT SERVICES
‘‘SEC. 1866C. (a) IN GENERAL.—
‘‘(1) PROGRAM
AUTHORITY.—The Secretary,
beginning January 1, 2003, may implement a pro-
gram (in this section referred to as the ‘program’)
in accordance with the provisions of this section
under which certain eligible individuals may, in ap-
propriate circumstances, receive disease management
services from entities designated by the Secretary
with respect to diagnoses that the Secretary deter-
mines are amenable to such management.
‘‘(2) ADMINISTRATION BY CONTRACT.—Except
as otherwise specifically provided, the Secretary may
administer the program under this section in accord-
ance with section 1866B, including subsection (b)(2)
of such section (relating to the discretion of the Sec-
retary as to the scope of the program).
‘‘(b) INDIVIDUALS WHO MAY RECEIVE DISEASE
MANAGEMENT SERVICES.—No individual shall be eligible
for enrollment in a disease management program under
this section unless the Secretary finds the following with
respect to the individual:
‘‘(1) DIAGNOSIS AND RELATED CHARACTERIS-
TICS.—
‘‘(A) IN
GENERAL.—The individual has
been diagnosed with congestive heart failure,
chronic obstructive pulmonary disease, diabetes,
hypertension, rheumatoid arthritis, or major de-
pression.
‘‘(B) ADDITIONAL
FACTORS.—Where re-
quired by the Secretary, the individual also has
certain clinical characteristics or conditions, ex-
hibits certain patterns of utilization, or mani-
fests other factors indicating the need for and
potential effectiveness of disease management.
‘‘(2) REFERRAL BY QUALIFIED INDIVIDUAL OR
ENTITY.—The individual has been referred for con-
sideration for such services by an individual or entity
furnishing health care items or services, or by an en-
tity administering benefits under this act.
‘‘(c) PROCEDURES TO FACILITATE ENROLLMENT.—
The Secretary shall develop and implement procedures de-
signed to facilitate enrollment of eligible individuals in the
program under this section.
‘‘(d) ENROLLMENT OF INDIVIDUALS WITH DISEASE
MANAGEMENT ORGANIZATIONS.—
‘‘(1) EFFECTIVE
DATE
AND
DURATION.—En-
rollment of an individual in the program under this
section shall remain in effect for 1 month (or such
longer period as the Secretary may specify), and
shall be automatically renewed for additional peri-
ods, unless terminated in accordance with such pro-
cedures as the Secretary shall establish by regula-
tion.
‘‘(2) LIMITATION
ON
REENROLLMENT.—The
Secretary may establish limits on an individual’s eli-
gibility to reenroll in the program under this section
if the individual has disenrolled from the program
more than once during a specified time period.
‘‘(e) DISEASE MANAGEMENT REQUIREMENT.—Not-
withstanding any other provision of this title, the Sec-
retary may provide that an individual enrolled in the pro-
gram under this section may be entitled to payment under
this title for any specified health care items or services
only if the items or services have been furnished by the
disease management organization, or coordinated through
the disease management services program. Under such
provision, the Secretary shall prescribe exceptions for
emergency medical services as described in section
1852(d)(3), and other exceptions determined by the Sec-
retary for the delivery of timely and needed care.
‘‘(f) DISEASE MANAGEMENT SERVICES.—
‘‘(1) IN GENERAL.—Subject to the cost-effec-
tiveness criteria specified in subsection (b)(1), dis-
ease management services provided to an individual
under this section may include—
‘‘(A) initial and periodic health screening
and assessment;
‘‘(B) management (including coordination
with other providers) of, and referral for, med-
ical and other health services related to the
managed diagnosis (which may include referral
for provision of such services by the disease
management organization);
‘‘(C) monitoring and control of medications
(including coordination with the whatever entity
may be managing prescription drug benefit for
the individual under this title);
‘‘(D) patient education and counseling;
‘‘(E) nursing or other health professional
home visits, as appropriate;
‘‘(F) providing access for consultations by
telephone with physicians or other appropriate
medical professionals, including 24-hour avail-
ability for emergency consultations;
‘‘(G) managing and facilitating the transi-
tion to other care arrangements in preparation
for termination of the disease management en-
rollment; and
‘‘(H) such other services for which pay-
ment would not otherwise be made under this
title as the Secretary shall determine to be ap-
propriate.
‘‘(2) VARIATIONS IN SERVICE PACKAGES.—The
types and combinations of disease management serv-
ices furnished under agreements under this section
may vary (as permitted or required by the Sec-
retary) according to the types of diagnoses, condi-
tions, patient profiles being managed, expertise of
the disease management organization, and other fac-
tors the Secretary finds appropriate.
‘‘(3) REDUCTION
OR
ELIMINATION
OF
COST-
SHARING.—Notwithstanding any other provision of
law, subject to the cost-effectiveness criteria speci-
fied in subsection (b)(1), the Secretary may provide
for the reduction or elimination of beneficiary cost-
sharing (such as deductibles, copayments, and coin-
surance) with respect to any of the items or services
furnished under this title (other than those fur-
nished under a service package developed under
paragraph (2)), and may limit such reduction or
elimination to particular service areas.
‘‘(g) AGREEMENTS WITH DISEASE MANAGEMENT
ORGANIZATIONS.—
‘‘(1) ENTITIES ELIGIBLE.—Entities qualified to
enter into agreements with the Secretary for the
provision of disease management services under this
section include entities that have demonstrated the
ability to meet the performance standards and other
criteria established by the Secretary with respect
to—
‘‘(A) the management of each diagnosis
and condition with respect to which the entity,
if designated, would furnish disease manage-
ment services under this section; and
‘‘(B) the implementation of each disease
management approach that the entity, if des-
ignated, would implement under this section.
‘‘(2) CONDITIONS OF PARTICIPATION.—In order
to be eligible to provide disease management services
under this section, an entity shall—
‘‘(A) have in effect an agreement with the
Secretary setting forth such obligations of the
entity as a disease management organization
under this section as the Secretary shall pre-
scribe;
‘‘(B) meet the standards established by the
Secretary under subsection (h); and
‘‘(C) meet such other conditions as the
Secretary may establish.
‘‘(3) SECRETARY’S OPTION FOR NONCOMPETI-
TIVE DESIGNATION.—The Secretary may designate
an entity to provide disease management services
under this section without regard to the require-
ments of section 5 of title 41, United States Code.
‘‘(h) STANDARDS.—