priate for operation of such program by an enti-
ty other than a State).
‘‘(B) CLINICAL QUALITY.—Have in place
clinical quality systems consistent with sub-
section (b)(3)(C).
‘‘(C) FRAUD AND ABUSE CONTROL.—Ac-
tivities to control fraud, abuse, and waste.
‘‘(5) EDUCATION
AND
INFORMATION
ACTIVI-
TIES.—Have in place mechanisms for disseminating
educational and informational materials to enrolled
individuals and health care providers designed to en-
courage effective and cost-effective use of prescrip-
tion drug benefits and to ensure that enrolled indi-
viduals understand their rights and obligations
under the program.
‘‘(6) BENEFICIARY PROTECTIONS.—Have in ef-
fect beneficiary protections consistent with para-
graph (2)(D)(i).
‘‘(7) RECORDS, REPORTS, AND AUDITS OF BEN-
EFIT MANAGERS.—
‘‘(A) RECORDS
AND
AUDITS.—Maintain
adequate records, and afford the Director ac-
cess to such records (including for audit pur-
poses).
‘‘(B) REPORTS.—Make such reports and
submissions of financial and utilization data as
the Director may require taking into account
standard commercial practices.
‘‘(8) PROPOSAL FOR REDUCED BENEFICARY CO-
INSURANCE.—At the benefit manager’s election, pro-
vide a proposal for increased Federal cost sharing
percentage (and a reduction in beneficiary cost shar-
ing percentage) for generic prescription drugs, pre-
scription drugs on the benefit manager’s formulary,
or prescription drugs obtained through mail order
pharmacies, which includes evidence that such in-
creased Federal cost sharing percentage would not
result in an increase in aggregate costs to the Ac-
count.
‘‘(9) OTHER REQUIREMENTS.—Meet such other
requirements as the Director may specify.
‘‘(d) PHARMACY PARTICIPATION AGREEMENTS.—
‘‘(1) IN GENERAL.—A pharmacy that meets the
requirements of this subsection shall be eligible to
enter an agreement with a benefit manager to fur-
nish covered prescription drugs to enrolled individ-
uals. The benefit manager may offer preferential fi-
nancial terms to pharmacies that agree to be in-
cluded for the purposes of the initial bid.
‘‘(2) TERMS OF AGREEMENT.—An agreement
under this subsection shall include the following
terms and requirements:
‘‘(A) LICENSING.—The pharmacy shall
meet (and throughout the contract period will
continue to meet) all applicable State and local
licensing requirements.
‘‘(B) ACCESS AND QUALITY STANDARDS.—
The pharmacy shall comply with such standards
as the Director and the benefit manager shall
establish concerning the quality of, and enrolled
individuals’ access to, pharmacy services under
this part.
‘‘(C) 
ADHERENCE
TO
ESTABLISHED
PRICES.—The total charge for each drug dis-
pensed to an enrolled individual, without regard
to whether such individual is financially respon-
sible for any or all of such charge, shall not ex-
ceed the price for the drug, as established
under subsection (c)(1)(A).
‘‘(D) MANAGEMENT SYSTEMS AND PROCE-
DURES.—The pharmacy shall—
‘‘(i) have in effect management sys-
tems (including electronic systems) and
procedures for carrying out functions
under the agreement; and
‘‘(ii) maintain adequate records, af-
ford the benefit manager access to such
records for audit purposes, and make such
reports as the benefit manager may require
to meet its responsibilities under this sec-
tion.
‘‘(E) COST
AND
UTILIZATION
MANAGE-
MENT; QUALITY
ASSURANCE.—The pharmacy
shall implement effective measures for quality
assurance, cost management, and reduction of
medical errors with respect to drugs dispensed
under the agreement, including maintenance of
utilization records and participation in the drug
utilization review program described in sub-
section (d)(4)(A).
‘‘(F) CONFIDENTIALITY
PROTECTIONS.—
The pharmacy shall have in effect systems to
ensure compliance with the confidentiality
standards 
applicable 
under 
subsection
(b)(2)(D)(i).
‘‘(G) OTHER REQUIREMENTS.—The phar-
macy shall meet such other requirements as the
Director may impose.
‘‘(3) CONSTRUCTION.—Nothing in this section
shall be construed as requiring a benefit manager to
pay a particular level of dispensing fees to partici-
pating pharmacies or as guaranteeing such a level as
would provide for the participation by all phar-
macies.
‘‘(e) LIMITATION OF LIABILITY.—The provisions of
section 1157(b) shall apply with respect to activities of
benefit managers and their officers, employees, and agents
under a contract under this section.
‘‘(f) INCENTIVES FOR COST AND UTILIZATION MAN-
AGEMENT AND QUALITY IMPROVEMENT.—
‘‘(1) CONTRACT PROVISIONS.—The Director is
authorized to include in a contract awarded under
subsection (c) such incentives for cost and utilization
management and quality improvement as the Direc-
tor may deem appropriate, including—
‘‘(A) bonus and penalty incentives to en-
courage administrative efficiency;
‘‘(B) incentives under which benefit man-
agers share in any benefit savings achieved;
‘‘(C) risk sharing arrangements related to
benefit payments; and
‘‘(D) any other incentive that the Director
deems appropriate and likely to be effective in
managing costs or utilization.
‘‘(2) ESTABLISHMENT OF A SECONDARY INSUR-
ANCE MARKET FOR RISK.—Insofar as the Director
provides for a risk sharing arrangement in contracts
under subsection (c), the Director shall enter into or
promote arrangements (including the establishment
of a secondary insurance market or pooling mecha-
nism) for the appropriate distribution of excess risk
among entities offering such contracts.
‘‘(3) CONSTRUCTION.—Nothing in this part
shall be construed as limiting the ability of a benefit
manager, subject to provisions of the contract under
subsection (c), to utilize such cost containment and
utilization management strategies as necessary, in-
cluding generic substitution, formulary limits, dif-
ferential copayment structures, and mail order pre-
scription services, or as limiting the ability of benefit
managers to offer to enrolled individuals multiple
products offering different formulary and copayment
structures.
‘‘(g) FLEXIBILITY IN ASSIGNING WORKLOAD AMONG
BENEFIT MANAGERS.—During the period after the Direc-
tor has given notice of intent to terminate a contract
under subsection (c), the Director may transfer respon-
sibilities of the benefit manager under such contract to
another benefit manager.
‘‘(h) NONINTERFERENCE.—Nothing in this section
or in this part shall be construed as authorizing the Direc-
tor or the Secretary to authorize a particular formulary
or to institute a price structure for benefits, or to other-
wise interfere with the competitive nature of providing a
prescription drug benefit through benefit managers.
‘‘(i) ANTI-SELECTION CRITERIA.—The Director shall
design provisions to exclude bids designed to exploit ad-
verse selection, including the definition of a minimum geo-
graphical service area.
‘‘SEC. 1860H. EMPLOYER INCENTIVE PROGRAM FOR EM-
PLOYMENT-BASED 
RETIREE 
DRUG 
COV-
ERAGE.
‘‘(a) PROGRAM AUTHORITY.—The Director is author-
ized to develop and implement a program under this sec-
tion called the Employer Incentive Program that encour-
ages employers and other sponsors of employment-based
health care coverage to provide adequate prescription drug
benefits to retired individuals by subsidizing, in part, the
sponsor’s cost of providing coverage under qualifying
plans.
‘‘(b) SPONSOR REQUIREMENTS.—In order to be eligi-
ble to receive an incentive payment under this section with
respect to coverage of an individual under a qualified re-
tiree prescription drug plan (as defined in subsection
(f)(3)), a sponsor shall meet the following requirements:
‘‘(1) ASSURANCES.—The sponsor shall—
‘‘(A) annually attest, and provide such as-
surances as the Director may require, that the
coverage offered by the sponsor is a qualified
retiree prescription drug plan, and will remain
such a plan for the duration of the sponsor’s
participation in the program under this section;
and
‘‘(B) guarantee that it will give notice to
the Director and covered retirees—
‘‘(i) at least 120 days before termi-
nating its plan, and
‘‘(ii) immediately upon determining
that the actuarial value of the prescription
drug benefit under the plan falls below the
actuarial value of the benefit under this
part.
‘‘(2) BENEFICIARY INFORMATION.—The spon-
sor shall report to the Director, for each calendar
quarter for which it seeks an incentive payment
under this section the names and social security
numbers of all retirees (and their spouses and de-
pendents) covered under such plan during such
quarter and the dates (if less than the full quarter)
during which each such individual was covered.
‘‘(3) AUDITS.—The sponsor and the employ-
ment-based retiree health coverage plan seeking in-
centive payments under this section shall agree to
maintain, and to afford the Director access to, such
records as the Director may require for purposes of
audits and other oversight activities necessary to en-
sure the adequacy of prescription drug coverage, the
accuracy of incentive payments made, and such
other matters as may be appropriate.
‘‘(4) OTHER
REQUIREMENTS.—The sponsor
shall provide such other information, and comply
with such other requirements, as the Director may
find necessary to administer the program under this
section.
‘‘(c) INCENTIVE PAYMENT.—
‘‘(1) IN GENERAL.—A sponsor that meets the
requirements of subsection (b) with respect to a
quarter in a calendar year shall be entitled to have
payment made on a quarterly basis (to the sponsor
or, at the sponsor’s direction, to the appropriate em-
ployment-based health plan) of an incentive pay-
ment, in the amount determined as described in
paragraph (2), for each retired individual (or
spouse) who—
‘‘(A) was covered under the sponsor’s
qualified retiree prescription drug plan during
such quarter; and
‘‘(B) was eligible for but was not enrolled
in the program under this part.
‘‘(2) AMOUNT
OF
INCENTIVE.—The payment
under this section with respect to each individual de-
scribed in paragraph (1) for a month shall be equal
to two-thirds of the monthly premium amount pay-
able by an enrolled individual, as set for the cal-
endar year pursuant to section 1860D(a)(2).
‘‘(3) PAYMENT
DATE.—The incentive under
this section with respect to a calendar quarter shall
be payable as of the end of the next succeeding cal-
endar quarter.
‘‘(d) CIVIL MONEY PENALTIES.—A sponsor, health
plan, or other entity that the Director determines has, di-
rectly or through its agent, provided information in con-
nection with a request for an incentive payment under this
section that the entity knew or should have known to be
false shall be subject to a civil monetary penalty in an
amount up to three times the total incentive amounts
under subsection (c) that were paid (or would have been
payable) on the basis of such information.
‘‘(e) PART D ENROLLMENT FOR CERTAIN INDIVID-
UALS
COVERED
BY
EMPLOYMENT-BASED
RETIREE
HEALTH COVERAGE PLANS.—
‘‘(1) ELIGIBLE
INDIVIDUALS.—An individual
shall be given the opportunity to enroll in the pro-
gram under this part during the period specified in
paragraph (2) if—
‘‘(A) the individual declined enrollment in
the program under this part at the time the in-
dividual first satisfied section 1860C(a);
‘‘(B) at that time, the individual was cov-
ered under a qualified retiree prescription drug
plan for which an incentive payment was paid
under this section; and
‘‘(C)(i) the sponsor subsequently ceased to
offer such plan; or
‘‘(ii) the value of prescription drug cov-
erage under such plan became less than the
value of the coverage under the program under
this part.
‘‘(2) SPECIAL ENROLLMENT PERIOD.—An indi-
vidual described in paragraph (1) shall be eligible to
enroll in the program under this part during the six-
month period beginning on the first day of the
month in which—
‘‘(A) the individual receives a notice that
coverage under such plan has terminated (in
the 
circumstance 
described 
in 
paragraph
(1)(C)(i)) or notice that a claim has been de-
nied because of such a termination; or
‘‘(B) the individual received notice of the
change in benefits (in the circumstance de-
scribed in subparagraph (1)(C)(ii)).
‘‘(f) DEFINITIONS.—As used in this section, terms
have the following meanings:
‘‘(1) EMPLOYMENT-BASED
RETIREE
HEALTH
COVERAGE.—The term ‘employment-based retiree
health coverage’ means health insurance or other
coverage of health care costs for retired individuals
(or for such individuals and their spouses and de-
pendents) based on their status as former employees
or labor union members.
‘‘(2) EMPLOYER.—The term ‘employer’ has the
meaning given such term by section 3(5) of the Em-
ployee Retirement Income Security Act of 1974 (ex-
cept that such term shall include only employers of
two or more employees).